In this morning’s NYT column — Lehman’s Last Hours — Andrew Ross Sorkin wrote:

“But what is clear is that the politics of the moment played a factor — or at least was discussed among senior and junior staff — in the decision not to lend to Lehman Brothers, perhaps the greatest mistake of the crisis.

While there is no question that our leaders at the time worked around the clock to find a private market solution for Lehman — and I have praised them in this column for staving off another depression in the wake of the panic that followed Lehman’s collapse — its failure should go down in history as a gigantic misstep. (In truth, though, no one has yet to offer up another option for the government.)”

Andrew’s book does a good job in describing what happened; but I am more interested in Why this happened.

Hence, I disagree with his conclusion. I suspect that the bailing out of Bear Stearns was the worst mistake of the crisis.

Why? It allowed banks to forestall raising capital; Almost as bad, it affirmed to bankers that they would be rescued by Uncle Sam from the results of their own follies (assuming they could create a big enough systemic risk). The Bear rescue created a huge moral hazard. It is likely why Fuld turned down Buffett’s capital offer.

But this is merely my view. Was Lehman the biggest error? Fannie/Freddie Nationalization?  Something else in entirely?

~~~

Crowd Query: What do you think was the biggest error of the crisis?

Category: Bailout Nation, Bailouts, Financial Press, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

81 Responses to “CrowdQuery: Greatest Mistake of the Crisis ?”

  1. msaroff says:

    The biggest mistake of the crisis was not allowing Wall Street to implode, and spending less than half the amount pumped into the bank by the TARP and the Fed to set up a publicly run lending facility to the real economy.

    It would have taken out the mega-banks that strangle our economy, it would redirected resources to productive resources in the economy, and it would have broken the corrupt elites that are still in control.

    Or to quote the Bloodhound Gang, “We don’t need no water, let the motherf***** burn, burn motherf***** burn.”

  2. Shnaps says:

    The repeal Glass-Steagall.

  3. d4winds says:

    Bear Stearns, followed by allowing markets to believe that Lehman might be bailed out, followed by AIG/GS, TARP, then C & BAC “deals” to guarantee their assets, & finally mark-to-make-believe.

  4. FrancoisT says:

    The biggest mistake came right after Bear Stern’s bailout. This event should have triggered an all out tsunami of Audits-From-Hell (the Japanese are consumate experts at that…just ask Yves Smith) thrown at the big banks. The egregious problems would’ve been discovered on time and in all likelihood, the worst of the crisis could have been averted.

    But nooooooooooooo! The cluster of Grand Fucktards at the Fed were too busy schmoozing with the banksters and listen to themselves dissecting the ethereal and vapid nuances of their neoclassical economic theories within their private echo chamber.

    BTW, they still do not understand the very nature of this Great Recession. See Steve Keen (winner of the Paul Revere Award) flame-throwing post about this here:

    http://xrl.in/6adw

  5. call me ahab says:

    While there is no question that our leaders at the time worked around the clock to find a private market solution for Lehman . . .[allowing] its failure should go down in history as a gigantic misstep.

    of course- this all plays into the mindset that all must all continue as before-

    I say fuck that

  6. msaroff says:

    I forgot to add, I agree with Simon Johnson, former IMF Chief Economist, that things won’t be fixed until the corrupt elites which broke the economy get broken themselves.

  7. ben22 says:

    What do you think was the biggest error of the crisis?

    thinking that our potent directors could stop it. (this is ongoing)

  8. ottnott says:

    Biggest mistake at the time was saving the shareholders and creditors instead of just saving the businesses, followed closely by failure to require full financial records data from all companies receiving bailout funds or guarantees (with the understanding that the data could be used for criminal prosecutions and SEC investigations).

    Biggest mistake now is the near total absence of criminal prosecutions, SEC investigations, and shareholder lawsuits to bring people to account for practices that crossed the line – starting with the pay-for-rating crapola at the ratings agencies.

  9. contrabandista13 says:

    “…. Crowd Query: What do you think was the biggest error of the crisis?…?

    Interfering with the natural selection of the market place…..

    There was and still remains a huge overcapacity in the banking sector. It would have been far preferable to have liquidated those banks that could not attain capital from private investors than to keep them on life support and competing with the healthy banks. Sure it would have hurt, however by now we would be well past the hurting. The actions that were taken by the Treasury and the Fed, and the continuation of those policies have irreversibly damaged this nation to the point of turning it into a disabled state.

    Lehman was a fraud and deserved to fail, that I profited handsomely from this failure is not material.

    The real error and failure of the current administration has been not to pursue, capture or kill the men and women who committed this huge fraud on the American Taxpayers. Today, it can only be said that the current administration and congress are coconspirators in the greatest crime in the history of the World.

    Best regards,

    Econolicious

  10. nathanbutnet says:

    Our biggest mistake in this crisis and as a nation has been to get away from our trust-busting roots. We have allowed monopolies to take over in almost every aspect of our national landscape.

  11. nebyarg says:

    Bailing out Bear and AIG.

    AIG was fraudulent under Hank Greenberg (I sold at $61/sh). Why would I want to bail out the counter parties to AIG, namely Goldman et al.

    As a taxpayer I resent the Federal Reserve and US Treasury, Congress and the both Presidents. I longer think government can solve problems because of its conflicts of interest and the actions taken in this crisis.

    Creative destruction should have been allowed for all participants.

  12. John says:

    Believing that

    1) preventing / minimizing painful consequences is good and is a purpose for government

    2) saving the financial system is the same as saving financial companies and their stakeholders

  13. JasRas says:

    The largest mistake was allowing H. Paulson’s emotional dislike for D Fuld to sway his decision-making about Lehman Bros. Had he, or anyone else had an inkling as to the size of Lehman’s positions, etc. then perhaps they would have picked a different fatted calf to sacrifice at the alter of public perception.

    Someone HAD to go down for the perception of “no moral hazard”…Lehman was simply the wrong choice, but the one that Paulson was going after with an axe to grind…

    Perhaps the other mistake was forcing all TBTF banks to take TALF money to confuse or misdirect who was truly “stressed” and who wasn’t. Then, of course, allowing them to pay it back and allow for the “great” earnings in the following quarters… Let’s just throw some lollipop pitches to my son so he can easily crank the ball out of the park…

  14. obsvr-1 says:

    I agree the BS gov’t assisted deal with JPM reinforced the moral hazard by the gov’t stepping in to backstop financial institutions. Since BS was the smallest of ibanks, when the gov’t backstopped the deal they set the motion implicit gov’t support for the other banks moving forward.

    FNM/FRE moving into conservatorship may be one of the best decisions , especially removing the top executives (perhaps the mistake may be in that the gov’t didn’t take action sooner). Conservatorship was the right thing to do as these institutions had failed and there was no other option to consider here. However, the actions taken after conservatorship are may rank as a top mistake in the crisis as private sector RMBS and CMBS were purchased to set up trillions of $$ in backdoor bailouts to the TBTF banks.

    The biggest mistake was not allowing the banks to fail, the gov’t would have prevented a bank run on insured deposits through the FDIC and explicit gov’t guarantees for anything beyond the capacity of the FDIC. This would keep the traditional bank side of the bank operational. The gov’t did provide the liquidity programs to keep the banks alive, this should have been continued to then perform a orderly unwind and resolution of the failing institutions (or their subsidiary failing business units). Since this was not done, then the biggest mistake was not performing a quick and just post crisis remediation to restore confidence to the american public that when a business fails to the degree that the gov’t needs to step in and use taxpayer $$ to support a backstop, guarantee, bailout (call it what you want) that corrective action and behavior modification WILL take place.

    Post Crisis (bailout) remediation should have at least had the following framework:

    #1 – Replace top executive management at all the failing organizations (e.g GM, AIG)
    #2 – disgorgement of compensation and bonuses for the illusory gains (this would be a job stimulus for forensic accountants and assistants – there has to be a huge paper trail for all of this mess).
    #3 – All funds injected via preferred share purchase, secured loans should have been mandated to be repaid via operational cash flow – this would have prevented a quick payback of the TARP using gov’t (taxpayer) $$ through indirect or backdoor cash flows or low interest gov’t subsidized loans.
    #4 – No conversion of preferred to common – This is another of the top mistakes — taxpayer $$ injected should have been at the top (and stayed at the top) of the capital structure (SECURED loan), even the use of preferred shares was a compromise to the best interest of the taxpayer.
    #5 – Charge market rate for gov’t guarantee’s (warrants to purchase stock does not adequately compensate for the value that the gov’t backing provided)
    #6 – investigate, track down and prosecute everyone, start at the top and move through the organization to find those that violated the law or ethics of their position resulting in:
    * debarment from the industry, restriction from holding an executive or director position for any public company
    * disgorgement of ill-gotten gains from bonus and compensation based on illusory revenue
    * jail time for any violation of the law (enforce the Sarbanes-Oxley and securities laws)

  15. Darmah says:

    Allowing them to lever beyond 12-1/

    Allowing i-banks to become commercial banks (though that was after some other bonehead moves).

  16. Broken says:

    @JasRas

    I get the same feeling that there was some personal animosity involved in the Lehman decision. It seemed like an outlier in the way the Fed-Treasury usually works.

  17. franklin411 says:

    Electing Ronald Reagan.

  18. hammerandtong2001 says:

    The biggest mistake?

    Well, I guess it’s pick your own “Mt Everest”…

    IMO —

    Allowing any bank and i-bank and prop tarder who took US Taxpayer money to save themsleves (or otherwise) to keep their current management and top 500 employees and to NOT enforce real compensation changes.

    They all should have been fired en masse and for cause. Period.

    (We heard the talking heads and bank managers drone on about “talent”, irreplaceable, too much knowledge, competition, blah, blah. Gimme a freaking break — these overpaid clowns drove their trucks right into a brick wall, and then got paid to fix the truck they wrecked, and to drive it to the next wall to boot. I just can’t believe that — it’s like a some weird parallel universe where everything that’s bad is good…)

  19. the bankster says:

    The mistake (once the crisis was in motion) was doing nothing after the Bear Stearns failure to decouple the remaining TBTF firms. I worked at a relatively well-run bulge bracket firm in CDS trading where some thought the BSC rescue meant that LEH was backstopped, others figured the Feds had a master plan, and still others didn’t want to even talk about LEH counterparty risk for fear of having their fingerprints on the eventual losses. When the Fed arranged an eleventh-hour emergency netting session that fateful Sunday night it became clear that they had done nothing, and I mean that literally, to prepare for another failure. The British were better prepared for Dunkirk. I sat at my desk saying is a joke, what have they been doing for the last six months, ignored the special trading session, and just braced myself for London to open. Sorkin’s wrong: the story is the nonfeasance over the summer, not the nonfeasance that weekend.

  20. “I forgot to add, I agree with Simon Johnson, former IMF Chief Economist, that things won’t be fixed until the corrupt elites which broke the economy get broken themselves.”–msaroff, above+ the 1st one, earlier

    and, “Our biggest mistake in this crisis and as a nation has been to get away from our trust-busting roots. We have allowed monopolies to take over in almost every aspect of our national landscape.”–from ‘nathanbutnet’
    ~~

    Frederic, could you tell us wtf is afoot?

    “…In fact, it is the same in the science of health, arts, and in that of morals. It often happens, that the sweeter the first fruit of a habit is, the more bitter are the consequences. Take, for example, debauchery, idleness, prodigality. When, therefore, a man absorbed in the effect which is seen has not yet learned to discern those which are not seen, he gives way to fatal habits, not only by inclination, but by calculation…”
    http://bastiat.org/en/twisatwins.html
    ~~

    as an aside, it’s too bad that A.R. Sorkin isn’t, also, an Esquire..

  21. VennData says:

    They saved the guys who fund those “independent” Swift Boat, Birth Certificate, “Obama will take Your Guns,” “He’s a Socialist!,” “Obama bailed out Wall Street – not Bush,” and Tea Party movements.

  22. Shnaps says:

    Meant to write ‘the repeal OF Glass-Steagall’.

    The worst mistake was allowing the problem to grow and risk causing a crisis in the first place.

    But yes, I have to agree w/BR, that once the fertilizer started hitting the ventilator, setting the precident of coming to the aid of BSC was the first crucial mistake we’ve seen yet ‘during’ the crisis.

  23. jjay says:

    It looks like we are all in agreement here.
    The outrage directed at the current Corporate/Political criminal system is coming to a sharper and sharper point.
    Hopefully a highminded leader will arise soon to help us turn things around before it gets any worse.
    There is at least a glimmer of hope for us!

  24. philipat says:

    Bear Stearns was the problem as it created a new mindset. Austrian economics sets forth a better course to leave things alone, allow failure where due (aka avoiding moral hazards) and let everything settle down and work itself out. It should be perfectly clear by now that undue intervention has NOT helped, nor will further intervention.

  25. balanceact says:

    The single most egregious mistake was not putting consequences in the 2008 – 700Billion bailout. When the government gave loans and in essence took a big position in all the failed institutions and the big banks, all top management should have been dismissed. All compensation packages should have been revoked for non-performance. The moral hazard this “free money” inspired has set us up for a second more serious recession all too soon.

    Obsvr -1’s extensive list is excellent.

    The most egregious mistake that Obama has made was continuing to keep all of the greedy fools who helped precipitate the financial bubble as government employees or advisers, Summers, Geithner, Rubin.

  26. and:

    QOTD: “One swallow does not make a summer, neither does one fine day; similarly one day or brief time of happiness does not make a person entirely happy. —Aristotle (384 BC – 322 BC)

    for some add’l co-ordinates
    http://classics.mit.edu/Aristotle/politics.html

    at the very min., more Proof that MIT is not Hartford..

  27. call me ahab says:

    Venndata doesn’t care what goes down as long as Obama is in power-

    tea parties?

    why should anyone disagree with the party in power-

    just genuflect- and accept the edicts from Rome-

    it’s only in out best interests- right?

  28. subscriptionblocker says:

    Wall Street’s *survival* was the neutron bomb which tanked the economy. We are, and have been paying for it ever since.

    Try to imagine through the consequences of 50 million on food stamps, families without a breadwinner, or kids now “uneducatable” due to the parasitic class.

    And the ones still standing are just walking wounded, barely able to fend for themselves – let alone families.

    Think we all know who won the battle here…possibly even the war. Some day perhaps, an author will “imagine” such a story as fiction. It’s that incredible.

  29. Andy T says:

    “ben22 Says:
    September 7th, 2010 at 6:17 pm
    What do you think was the biggest error of the crisis?

    thinking that our potent directors could stop it. (this is ongoing)”

    Indeed! The hubris of believing that the largest credit bubble in the history of mankind could be unwound in an orderly way….

  30. Arequipa01 says:

    “Regrets? I’ve had a few…”

    The Primary Broker Dealers have the US Federal Govt by the short hairs. End of story.

  31. Crabbybill says:

    Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994) the rock that allowed all of the pros to hide while designing what became securitized fraud

  32. mcnet says:

    You’re absolutely right. Rescuing Bear was the great mistake.

    It will be seen as the fin de siecle moment of the 20th century, but not for a while yet. Not until fin de siecle becomes part of the vernacular. That suggests this fiasco won’t be properly unraveled till our grandkids get through college.

    At the time, I was pretty sure GW and Paulson were grateful for their lame duck status (vomitting notwithstanding), and were counting on Timmy’s vanity/ambition to see them through Nov. IBG/YBG was the operative dynamic, and Fuld etc, were no more serious about saving their firms or the system than Jimmy Cayne was.

    I’m grateful to Sorkin for sharing his observations. I don’t think he imagined that his observations would be viewed through a different lens than the one he was looking through. His access and candor is invaluable to those of us who have lived in the world he was reporting on. He should be lauded for his reporting. His conclusions, not so much.

    Lehman’s failure was a cluster**,a sympton, not a cause . The ‘no more Lehman’s” meme is a travesty.
    In a more perfect world, “No more Bear’s” would have caused a hell of a lot less heartache to average, normal folks who don’t have a clue to how they’ve been f****ed..

  33. David Merkel says:

    The Federal Reserve attempting to create permanent prosperity through monetary policy, combined with their lack of oversight over the credit conditions they were creating at the banks with bad underwriting.

  34. Raleighwood says:

    Allowing, tolerating and even encouraging the swamp of incestuous “conflicts of interest” between all parties.

  35. RW says:

    Hard to point to the biggest error — there were so many mistakes — but if I had to choose it would be the initial and ongoing assumption that those who caused the crisis should be given any benefit of the doubt, that the system was okay except for a few bad apples who got bailed out or (re)elected anyway.

    OT: “Venndata doesn’t care what goes down as long as Obama is in power …”

    Ad hominem and insult only add more smoke while decreasing IQ. Just turn it around and it becomes obvious: “Call me ahab” doesn’t care what goes down as long as blah, blah …Don’t know “call me” well enough to know what s/he really cares about and I’m pretty sure s/he doesn’t know Venndata much better than that.

    Hmmmm, maybe that wasn’t really OT; think I had a gestalt moment.

    Biggest mistake of the crisis: Too many people (with too much power) relied upon too little information before making some significant decisions which said lack of information also contributed to their inability to appropriately judge just how big the decision was.

  36. DL says:

    Letting Lehman fail was by far the best decision that Hank Paulson made as Treasury secretary.

    The mistakes were numerous. Among them would be the bailing out of AIG. What I think Paulson could have done in the case of AIG is to inform all their customers that they’ve got just 30 days to find another insurance company. And a fund of, say, $10B could have been set up to smooth things over, if necessary, for individuals who had trouble collecting on their claims, and for those with annuity contracts. Corporations would be left to fend for themselves. I fail to understand what sort of bad things would have happened, had we done that. Yes, it would have been a little inconvenient for some people. But it would have sent a powerful message to financial companies that, in the future, they will have to pay for their mistakes, and not the U.S. government.

    Also, as I posted (here) several times back in Q4 of 2008, the initial TARP should have been much smaller. Perhaps $200B. Give them the money, see what they do with it, then give them more, if it is really true that we were facing Armageddon.

  37. wunsacon says:

    I wish Sorkin were joking or that this was April 1st. Really, letting Lehman go bust was arguably the single event *best* event during the past 2 years. Keeping fraud alive on Wall Street happens at the expense of everyone else and is no way to run a country.

    I don’t read the NYT. I only see a few articles here and there, either “in-band” from the paper or “out-of-band” from its contributors. But, examples like this corroborate my suspicion that I’m not missing anything. Blogs, wikis (e.g., Wikileaks), email, and Bloomberg are doing the job the rest of the MSM does not.

  38. td says:

    The biggest mistake? Too complicated to call and presumes this was all unavoidable in the first place. I will however tell you what I find to be the most subsequently tiresome refrain in all of this and it is from the “we shoulda done nothin’ ” crowd. I will guaran-damn-tee you that if no fix had been attempted the attendant higher unemployment and lower GDP would not be cause for celebration among these same people.

  39. Eye Wall says:

    The passing of the bailout. When it was voted down the first time and Wall Street through its -600 point temper tantrum that day, the President should have went on TV that night and said:

    1. The Federal Reserve will protect your balance in any bank that goes out of business, regardless of the amount of $’s you have in the account. This is important because many banks will fail, their investors will lose money and we plan to prosecute many bank executives. Through it all though, know that your money as a depositor is 100% guaranteed.

    2. Effective immediately, we will be auditing and winding down TBTF banks. In their place we will be offering their assets, along with capital from the Federal Reserve / Treasury to the best regional banks and brokers who managed themselves correctly. This means, for instance, that Jefferies and Raymond James have merged and been given the assets of Bear Stearns along with their show-palace HQ building in midtown (octagonal shaped so you can get 2X the number of ‘corner’ offices) and direct government backing to clean up the mess BS made. We are working on similar arrangements for Lehman Bros. and a few others.

    3. AIG and thus Goldman will both be going out of business. The world will go on for America and Americans and we will be better off without either of these firms. Travelers will be looking into AIG businesses that can be saved. Goldman will just cease to exist – good riddance.

    4. Freddie and Fanny are no longer open for business, these were huge social engineering mistakes and we’ve learned our lessons.

  40. call me ahab says:

    RW-

    first- blow me-

    second- I am about as impartial as you get-

    but Venndata says the same spiel over and over and over and over and over . . .never, ever changes- two years running-

    but- whatever- maybe you don’t read the blog much-

    thanks for the incredible insight though- douche bag

  41. wunsacon says:

    >> Fannie/Freddie Nationalization

    Yes, because of the size. Probably AIG’s CDS unit should appear next on the list.

  42. call me ahab says:

    . . .oh- als0-

    sorry for the ad hominem-

    well- not really

  43. JasRas says:

    Those saying it was a mistake to save these institutions at the time really have no idea what they are saying. You have no idea how interconnected things are and what a huge cluster “letting them all fail” would be. That is not a rabbit hole you want to go down.

    Saving was not necessarily bad. The lack of consequence, the lack of perp walks, the lack of oversite, the lack of change…now that is truly tragic. The system was broke, the system is broke, and there is no one with a spine to remedy it. The mega-institutions need to be dismantled as AT&T was in the 80′s. Banks need to be regionalized and IB should be separate once again from regular banking. And if that makes our institutions non-competitive globally, well,…let’s just wait and see if that is true and whether the mega-eurobanks pull through any better.

    It was a travesty that things got so far off base, but it took years of inept politics to make it happen, both D and R. What we witnessed was a multi-decade effort to dismantle regulation that truly protected us. Thanks Greenspan and the Ayn Rand fanatics.

  44. Jack says:

    Based on the responses to your query, I think a second (or maybe first) question is: When did the “crisis” start? Was it Lehman? Was it Bear? Was it Glass-Steagall? Was it Reagan? Was it FDR?

    What’s a crisis? It depends upon what “is” is?

    Nobody knows nothin’. We have an abundance of hot air.

  45. Tarkus says:

    I do not think the bailout of BS was a catalyst for banks believing they had government backstopping. That trial balloon was floated at least as early as Long-Term Cap Mgmt who proved the more dangerously you are leveraged, the better.
    If BS went bust, would it have just been an earlier version of Lehman? Same problem in that counter-parties are screwed and the incestuous net unravels.
    The biggest mistakes were long before the crisis ripened and they pretty much all involved the usual suspects – though the Justice Dept ignoring the spike in mortgage fraud in 2004 and the Comptroller of the Currency stopping individual states from investigating helped.
    Kind of the way the Justice Dept is ignoring doing financial fraud prosecutions now…

  46. tjmc says:

    Appointing Henry Paulson as treasury secretary.

  47. Cynic_FA says:

    Biggest Mistake: Privatized Gains and Publicized Losses

    All bonuses for 2007 at bailed out banks should have been clawed back as fraudulent accounting. All bonuses (over around $1 million) after Tarp should have been restricted, held in common stock for five years to add to capital. All Tarp money should have gone in as super senior debt, especially the AIG money. Force conversion of preferred and subordinated to common like the partial conversion at CitiGroup. AIG counter parties should have been cut lose or negotiated payment at 30 cents on the dollar; a friend says this would have resulted in default by AIG, good by me.

    Stan O’Neil, Chuck Prince, Robert Rubin, Dick Fuld , Martin Sullivan(AIG), Angelo Mozillo and the other top twenty fraudsters should be prosecuted and bankrupt. Doesn’t anybody go to jail for losing $100 billion anymore?

  48. swag says:

    Biggest mistake: allowing Phil and Wendi Gramm any positions of authority, let alone rudimentary responsibility.

  49. Robespierre says:

    @ JasRas

    Agreed with all you said. However, saying that it was all “inept politics to make it happen” is for sure way off. Look at what these “inept” politicians did (and still do) after leaving government. The problem is not ineptitude it is mostly corruption at very high levels. Why do you think there are no perp. walks? You really want to understand what goes on in America then pick any third world corruption infested politicians and you will find your answer.

  50. Letting Lehman fail was the biggest mistake from who’s perspective? Lehman’s shareholders and creditors? Yes. Lehman’s competitors? No. From your average middle class, 401K contributing taxpayer? Maybe.

    I agree with Cynic_FA’s “Biggest Mistake: Privatized Gains and Publicized Losses”. This is the numero uno source of outrage.

    I’d add that at a bare minimum that the creditors/counterparties of AIG and other bailed out firms should have taken more of a haircut.

  51. blueoysterjoe says:

    I agree with a lot of people that the biggest mistake was mistakenly conflating shareholder / creditor interest with the core function of the banks. I will never fully appreciate how freaked out our leaders must have been when staring into the abyss, but the spineless, feckless, and / or corrupt behavior of both our Republican and Democratic leaders leave me to despair over the future of our country. The bailouts put the lie to the narrative that America is the land of law and hard work. It’s just yet another penny ante oligarchy in the long sad history of the human race.

  52. ToNYC says:

    Allowing the derivative market, the more flaky and over-leveraged part of the market, to escape mark-to-market.
    The underlyings so suffer transparent marks and margin and to that end or rationale, the allowing of bad tickets to be kept in the drawer. No one escapes the fate that only becomes worse with time.

  53. wunsacon says:

    >> You have no idea how interconnected things are and what a huge cluster “letting them all fail” would be.

    The world did not end with Lehman’s bankruptcy. The line should not have been drawn so soon after Lehman. In particular, we have a better social safety net (e.g., food stamp program) than we did in GD1. No one has to die because a bank fails.

    Give bailout money not to the bondholders/shareholders of the corrupt firms but to the FDIC to first make depositors whole. Further, simply by giving away money to the still-bankrupt commoners, we can reflate the economy without giving money to the people and institutions most responsible for the mess.

    In contrast, paying many of our best and brightest youth huge salaries to continue demonstrably bankrupt activities is counterproductive. E.g., possible future medical practitioners will head to Wall Street or real estate because the money continues to look “just too good” or the preparation is less demanding.

    >> What we witnessed was a multi-decade effort to dismantle regulation that truly protected us. Thanks Greenspan and the Ayn Rand fanatics.

    Agree that the lack of regulation contributed to these Ponzi schemes growing to the point they did.

  54. lalaland says:

    keeping legal immigration too low

  55. wunsacon says:

    If “the crisis” is limited to 2008 onwards, then I’ll say “nationalizing FF” was the biggest mistake. If “the crisis” includes periods before 2008, then just starting working backwards chronologically through the list in “Bailout Nation”!

  56. Syd says:

    I am willing to give the Fed and the Treasury the benefit of the doubt on the Bear bailout, but not for their failure to follow that up with immediate, vigorous audits of the other TBTFails, and not for their failure to prepare a plan for dealing with their insolvencies. There should have been some kind of expedited bankruptcy process for them, in which all of the investors in this Ponzi scheme got to lose some or all of their money, as they so richly deserved. Instead the Fed and Treasury bailed them out, with almost no strings attached, and put taxpayers on the hook. It’s almost like the Fed and Treasury were in cahoots with the TBTFails, rather than acting in the interests of taxpayers and the broader economy.

  57. JustinTheSkeptic says:

    It all began one sunny day when someone declared the business cycle dead!

  58. philipat says:

    When is Sorkin making the move to CNBC?

  59. mock turtle says:

    the system was…is… riddled with fraud… so much fraud throughout the FIRE industry, such that it should not have… and indeed can not be, bailed out.

    TARP, and all the Fed windows will not save the system, it is rotten, from the mortgage origination fakery to the off-shored SIVs and lying cheating credit rating agencies.

    i agree with msaroff at the top, the bankstas and casino investment houses should have been allowed to implode…and yes many innocents would…and will suffer terribly because of it……..unavoidable

    protecting, the criminal element within the system has delayed but greatly multiplied the coming conflagration

    the bailout if there were to be one at all, should have been bottom up not top down

  60. MayorQuimby says:

    Biggest mistake? Thinking we can prevent the drunk from vomiting by holding our hand over his mouth.

  61. baychev says:

    the biggest mistake was letting failures stay in power. all those banks that got money kept their management in place, you do not give failed people money to fix their own mess. the only thing that achieved was to strengthen cronyism from which we will suffer for decates going forward.

  62. Oliver Budde says:

    I think that Barry is right about the BSC bailout, with the caveat that the blow up of the 2 BSC funds in 2007 should have prompted the SEC to properly scrutinize all the IB’s at that point; if they had done that effectively (a stretch, I realize) we might have identified the scope of the coming shitstorm that much earlier, done something to mitigate and not have gotten to the point of needing to save BSC in 3/08, and maybe most or all the other catastrophes that followed.

    But I know of another big mistake, just one month after BSC. I went to the SEC on 4/14/08 (and Lehman’s board a day later) and called bullshit on their proxy, wherein among other things Fuld and his brain Tom Russo (now chief legal officer at AIG, being paid by all of us) deliberately understated Fuld’s accumulated RSUs by more than $260 million ($146 million versus a true figure well north of $400 million); Russo’s and the other named executives’ totals were also fictional. ( I worked as an attorney at Lehman from 1998 until Feb 2006, when I resigned on principle because I had concluded I was working for a criminal organization.) I was ignored by the SEC and the board. Had either of them done the right thing and forced Lehman to postpone their annual meeting and fix the proxy, everyone (not already listening to Einhorn) would have been on notice that those fuckers don’t mind lying and a lot of pain and billions in losses could have been avoided.

    I’m the first to admit that understating accumulated comp is orders of magnitude away from fraudulently understating assets (Repo 105) or misrepresenting liquidity, but it nonetheless rendered the proxy out of compliance and therefore–because the proxy is incorporated by reference– the prospectuses used to raise the many billions in equity and debt they were able to con out of the market from March 2008 forward. In other words the SEC (and the board) stood by with full knowledge that Lehman was raising those funds with defective prospectuses. And by the way my understanding is that noncompliance with ANY SEC disclosure requirement is per se material in several of the judicial circuits.

    I talked about this in a Bloomberg BusinessWeek article published back at the end of April and some TV and radio appearances around that time; some of you are perhaps familiar with the story.

    Apologies for tooting my own horn here, but I sincerely believe things would have gone down very differently if the SEC hadn’t ignored my warning.

    And as for those of you wondering where are the perp walks, my best advice to you is to wait just a little longer; I think they are coming soon (and not just because Gasparino has said as much).

  63. DeDude says:

    I think that bailing out the leadership together with the institutions was the biggest mistake. They should have done the same thing with the banks that was later done with the carmakers. Wipe out stock holders, hair-cuts to bond holders and get new management. That way you would have avoided moral hazard without having to let everything collapse and innocent people getting hurt.

  64. montyhigh says:

    The biggest mistake was leaving all those banking executives intact and untouched. The entire management teams of all the “Too Big To Fails” should have, at a minimum, been replaced (and actually should have been jailed).

    A better path than we took would have been to nationalize all the “Too Big To Fail” banks like Sweden did. Then we should have thrown away everything about them except the basic utility function that is what makes them “Too Big To Fail”.

  65. Biggest mistake: Not repealing then filibuster rule.

    Rodger Malcolm Mitchell

  66. steveds says:

    The biggest mistake was the bailout of Freddie and Fannie. Paulson and buddies hoped to be able to stabilize the housing market in advance of the elections. They knew a poor economy would doom the Repub’s. They did not understand how rotten the housing\mortgage securitization market was. They also did not forsee the impact credit default swaps would have on the markets. Once the gov’t took control of Freddie and Fannie, the dominos started falling. Unanticipated consequences. Unlimited hubris.

  67. to those commenting, as ex. ~”…you do not give failed people money to fix their own mess.”/~”…was leaving all those banking executives intact and untouched.”, they should wonder..

    maybe, they should reflect on the ol’ adage: “Keep your Friends close, your Enemies closer..”

    LSS: if you had an Operation that you wanted kept Quiet, the last thing you would be doing is loosing the ‘Operatives’ “into the Wild”…

    or, you know, We can go w/ “No one saw it coming..”, “It was a ‘Once in a thousand years’-'Event’”, “Whocoodanode?”-Style of ‘it was a ‘Coincidence’..

    YMMV/YOMP

  68. wunsacon says:

    >>“Keep your Friends close, your Enemies closer..”
    >> the last thing you would be doing is loosing the ‘Operatives’ “into the Wild”…

    If we put these Enemies/Criminals in jail where they belong, they’ll start a prison library late fee securitization scam. But, other than that, MEH, don’t worry about it.

  69. tt says:

    biggest mistake was turning the country and it’s banks from a republic into an empire where the bankers are the oligarchs and their profits are theirs and the losses are the lumpenproles.

    we are practicing corporatism. aka fascism. simple really.

  70. DeDude says:

    Steveds; look at obsvr-1 @ 6:56PM. Paulson let government take over Freddie and Fannie to be able to force those companies to purchase a lot of sh!t papers from his buddies. The privately owned Fannie and Freddie had refused to purchase the cr@p, so he had to install new leadership. Just as with the AIG bailout the actual bailout was not of the company itself but of the big boys on Wall Street.

  71. louis says:

    “Mr. Vice-President, what do you think of these guys in their tan socks?”

    “I think it is important to point out that house prices are being supported in very large part by very strong fundamentals.”

    A lot can still go wrong, but at least I can see a path that will bring us out of this entire episode relatively intact.”

    “I and others were mistaken early on in saying that the subprime crisis would be contained.”

    How is the “Finger in the Dike” strategy working for you a? Has the economy stalled? Are firms hoarding money? If the whole house was crap it should have been torn down and the foundation re-poured.

    You cannot escape the truth that so much has been given to those that caused it and nothing has been done for those that got caught in it. Ask yourself what was the source of the trouble. And has that source been properly addressed?

    http://www.youtube.com/watch?v=HQ79Pt2GNJo&feature=related

    http://www.youtube.com/watch?v=DV7yx2y3TtY

  72. AHodge says:

    so many choices–you have seen my list earlier–more briefly the biggest starting 2007?

    1) forgetting they had turned banking into securitization, that the investors (credit suppliers) could all run away. No plan B

    2)not fixing accounting and then weeding out the bad apples CITI AIG MER etc in late 2007. basically learning early which were insolvent. So reassuring on the rest.

    3) leaving industry stooges incl congress to run the SEC, housing reg and the Fed

    4) giving no thought to good corporate governance, inc narrow banking comp

    this not touching on the bad rescue and the work undone,
    or preventing the debt and fake asset buildup

  73. destor23 says:

    AIG. I think giving the swaps investors 100 cents on the dollar signaled to the ECB and other foreign banks and regulators that the U.S. taxpayer was going to foot most of the bill for everything. AIG turned this all into a global bailout, funded mostly by U.S. citizens. It wasn’t fair and foreign banks should have been left to go to their own regulators for assistance.

  74. AHodge says:

    sorkin by the way is a smartypants kid who put together a good lehman investigative story.
    of the blow by blow big swearwords (oooh) type.
    and thinks his story was that important.
    because he has almost no clue on what happened big picture

  75. Dokemion says:

    Yeah, the biggest mistake when bear stern was bailed out!

  76. obsvr-1 says:

    @Oliver Budde Says:

    And as for those of you wondering where are the perp walks, my best advice to you is to wait just a little longer; I think they are coming soon (and not just because Gasparino has said as much).

    — Reply

    we can only hope for swift justice and punishment — not the 10 years it took to prosecute the Lucent folks that appeared recently on the SEC website: http://www.sec.gov/litigation/litreleases/2010/lr21639.htm

    BTW – great post, it is good to see info come out from those who had first hand knowledge. As many have said on this thread, it is outrageous that so many of these miscreants are still on the street working on what I can only assume is the next fleecing.

  77. NormanB says:

    1) Government policies that mandated getting underqualified people into homes which was a no-loss to them financing and the winking at crimes of the mortgage companies.

    2) Not taking to heart that when Buffett took over GeneralRE he reported that the value of their derivative contracts were not market values so it took him 2-3 years to liquidate this relatively paultry amount. Thus all derivatives should have been looked at but Greenspan said all was well.

    3) Hard to place all of the blame on one man, but Alan Greenspan was a dunce (BR has written about this). The pols did not question him on this in hearings because it kept the stock market and the housing market going. (I’ll always remember The Maestro saying that inflation was under control because wages weren’t going up and the Dems never questioned why the ordinary citizen wasn’t benefiting from our economic gains. Disgusting.)

  78. DeDude says:

    The idea of just letting things play out “freely” on its own (as if anything left alone will be “free”) – is the ideology of idiots and lazy people. It is so easy to just turn your brain off and claim that if nothing is done everything will turn out for the best.

    From the limited credit freeze we saw, even with a bailout, it should be clear that if government had just said “let free markets be free and sort themselves out”, nobody would have lend any money to anybody for many months. The complete freeze up of credit, in an economy run on credit, would have been a disaster. Perfectly good and sound companies would have had to close for a lack of money to pay workers (yes that happened but on a small scale), and an instant U3 unemployment of 20-30% is a conservative estimate. Loss in aggregate demand would have been huge. The cost of government stepping in was minimal compared to the cost of government doing nothing.

    Government had to step in, but the way they did it was dead wrong.

  79. bman says:

    Hank Paulson.
    That was the mistake of the crisis. Former football player, more likely to try an old familiar play instead of making up a new one. Some passes get dropped, some get intercepted, there were several events that fell into each category.
    Never mind the brain damage, he was leading the charge!