Bailout / Smailout

Nice analysis. It does lump commercial banks (e. g. - Citigroup, Bank of America, JPMorgan Chase) with investment banks (e. g. - Lehman Brothers, Bear Stearns, Merrill Lynch). Commercial banks are highly regulated; investment banks were not. I say "were not" as they no longer exist.  

It was the investment banks who created the collateralized derivative obligations - i. e., those investment vehicles that stripped the longstanding relationship between bank and mortgage holder. It was the severance of that relationship that encouraged banks to allow "liar's loans" to come into existence, loans where mortgage brokers created fictional stories to obtain the loans. Banks did not care about the fiction, as they were repackaging the loan and reselling them in those CDOs. So the investment banks who created these new securities - CDO - and were making billions of dollars with them are central to the rationale for this bailout. Bear Stearns was pushed into the loving arms of JPMorganChase; Merrill Lynch into the warm bosom of Bank of America and Lehman Brothers was allowed to fail. Goldman Sachs (and Morgan Stanley) managed to ride above much of the fray and was allowed to convert from an investment bank to a commercial bank - and I think they plan to purchase another bank or perhaps an S&L.  

Regardless, the world of investment banking has come to an end. Banks that bestrode the corridors of power for decades or even centuries, have been tossed onto the ash bin of history. I am not saying that it is all George W. Bush's fault, but many bad things have happened on his watch.  

So the bailout? It needs to also revamp capitalism itself. We need stronger shareholder controls over the board of directors, so that people can raise questions - really ugly and perhaps insulting questions - at board meetings and in proxy statements. As Warren Buffett might say, we cannot wait for the tide to go out to discern just whom is swimming naked.

Sphere: Related Content