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Back to the future

by henrycopeland
Saturday, September 20th, 2008

When junk bond wheeler dealer Drexel Burnham Lambert went bust in 1990, my buddy Pete and I bought a hundred t-shirts in the company’s liquidation sale. “Back to the future,” they said. Long before eBay, we recognized that those shirts were a keen investment. Now if we could just find them.

Ken Layne sums this week up best. Noting that the stock market ended the week essentially flat — after many finance stocks gyrated up and down by 50%-75% in a day — Ken concludes “A half-trillion in new U.S. debt just doesn’t buy what it used to!”

A few weeks back my banking guru Humphrey, holed up in Geneva minting money at the expense of evil VCs, recommended the book Bailout, by Irvine Sprague. Sprague worked for and ultimately ran the FDIC during four of first, precedent-setting bank bailouts of the 70s and 80s.

In his years of watching bankers beg for public assistance, Sprague became profoundly skeptical of their pleas for special treatment. Too often, even with the strongest of due diligence and regulatory strictures, bankers used public assistance to simply dig themselves deeper holes.

Though the giant bailout that’s now cobbled together in DC and NYC seems to unavoidable — we did seem to be minutes from a meltdown yesterday — our economy will be gravely harmed by the fact that many reckless, idiot, greedy bankers will, thanks to this giant buttress of public assistance, hold on to their jobs to do another decade or two of harm.

While in the best FDIC bailouts, Sprague was able to use the ticking clock to put a gun to bankers’ heads to force them make significant concessions and share risk and upside with the government, it seems the urgency and all-encompassing size of the current bailout puts the gun at the government’s head — bail us out on our terms or watch the US economy melt-down. In retrospect, the AIG deal earlier this week — in which the government gets 80% of the upside — will look incredibly sweet.

No doubt Merrill and AIG and Lehman will soon be sueing to try to retroactively get a piece of the new bailout.

I wish I could see how we’ll get out of this… or even figure out a way to hedge against the idiocy that’s ahead. Right now I can’t. I’d welcome your thoughts.

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