Calm No More: Beyond Dead Calm
Janet Tavakoli retorts to the posting by Merrill's RateLab with an earlier letter she wrote.
Calm No More: Beyond Dead Calm
By Janet Tavakoli, president of Tavakoli Structured Finance, Inc. – September 20, 2008
I received a self-serving piece of “research” from Merrill Lynch US Rates Strategy. It seems Merrill Lynch would like to give us all a lecture in “value concepts,” and they do a nice job of pointing the finger at everyone else as they use the Capra Defense to explain why an even bigger bailout is necessary (see attached “RateLab Die Once” – September 18, 2008). Merrill Lynch has a lot of bloody nerve. It is waving bull at a red flag. On page one we are told in bold we have a trust problem. Yet they omit the reasons that they (and a few other investment banks) have lost our trust, so allow me to refresh their memories (see also attached “Dead Calm: No One Trusts You” – July 30, 2008). “It is one thing to have documents that disclose risks—many of the documents of death spiral collateralized debt obligations disclosed eye-popping risks—it is quite another to bring deals to market that you knew or should have known were overrated and deeply troubled the day the deal closed.”
Nowhere in this “research” does Merrill Lynch call for heavy regulation of investment banks, banks that purchase investment banks, or a potential return to Glass Steagall (not that it is the answer). Nowhere does it call for consequences for past actions.
Fed bailouts deserve scrutiny. If AIG cannot make a margin call, AIG has less of a problem than its counterparties (Goldman, European banks and others) who cannot get cash (and therefore possibly have liquidity problems of their own). Perhaps a proactive solution would have been to get credit derivatives counterparties together to agree on emergency terms, particularly since like the problem the monolines faced, those buying protection were sometimes architects of the underlying deals getting marked down in value. The main beneficiaries of the AIG bailout seem to be its counterparties. While the outcome may have been the same, when the government looks to AIG’s counterparties for advice, it is not arms-length dispassionate advice, and I could have written every page of the script for how this would go down.
One might argue there was no Fed bailout involved with Bank of America’s purchase of Merrill Lynch, but I am not the one to make that argument. Merrill’s purchase by Bank of America at a premium price seems to only make sense with the huge assist of the Fed’s largesse in suddenly agreeing to accept lower quality collateral for its loans.
The main beneficiaries of the Fed bailouts are not the American consumer, albeit the American consumer has been harmed by this mess and it is a good idea to limit that harm (more on that in 10 days or so).
The main beneficiaries are the insiders who have Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke on speed dial. The Fed has undertaken a massive bailout using U.S. taxpayer dollars.
Now let’s have massive consequences for the key architects of this debacle.
What is the Capra Defense?
Frank Capra directed the movie It’s a Wonderful Life, and it is a holiday favorite in the United States. In one scene, there is a run on the savings and loan managed by the hero (played by Jimmy Stewart, who was also a Brigadier General in the U.S. Air Force during WWII). The small bank survives the run because he is much beloved by the community he has served for many years (and there was no fundamental problem) and he is trusted. Later in the film this honest but rather inept money manager (he entrusts funds to his absent minded uncle, and the funds are misplaced) is bailed out by his friends and depositors. The audience goes all warm and fuzzy and life is wonderful—it is Christmas!
This movie seems to be invoked by every troubled bank today, because they wish they could draw some sort of innocuous parallel to the movie, in what I call the Capra Defense. You see, they would have you believe the problem is that skittish consumers are panicked and do not trust fine upstanding fellows—Jimmy Stewart for goodness sake. If the consumers would just stop panicking and cough up some of their hard earned money to bail Jimmy out of this jam, it would be a wonderful life. See, when you bail them out, you are doing yourself a favor.
It would also be wonderful if you ignore the fact that they do not possess Mr. Stewart’s sterling qualities—just look the other way.