Posts tagged ‘paulson’

The Earmarked Bankruptcy

The normal process for bureaucratic allocation of, say, highway funds, does not always work that well.  Seriously, you don't have to convince this libertarian of that.  But it is at least intended to try to balance priorities and allocate the funds marginally rationally.   Which points out the problem with earmarks -- they are overrides by Congress of the normal allocation and prioritization process for political ends.  By definition, the projects in earmarks would not have normally been funded by the usual operation of the prioritization process.

Which brings me, oddly enough, to AIG  (and to GM).  When companies can no longer meet all of their obligations, they generally file for chapter 11 bankruptcy. This is an extremely well-worn process, both in the courts and the business community, that attempts to save as much value as possible and to allocate that value, based on law and a set of rules everyone understands in advance, to the various stakeholders.   The folks who are involved in this process are pretty hard-headed folks, less out for revenge and retribution as for maintaining value and capturing as much as possible for whatever group one might represent.

Now Congress and the Administration are getting themselves involved in the bankruptcy process, by trying to avert actual chapter 11 filings by AIG and GM.  By doing so, they are effectively overriding the bankruptcy process.  Just as with earmarking, they claim this override is for some good of the country.  But, just as with earmarking, you can assume it is to benefit some politically-favored group.  At GM, the feds are saying that we don't want employees or the equity holders to take a haircut, as they would in Chapter 11, so we will transfer the loss to taxpayers, and perhaps bondholders (could there be any politically less favored group than taxpayers?).  Same at AIG.   Is it any surprise that the number one beneficiary of the Pauslon bailout of AIG was Goldman Sachs?  The Left thought they smelled a rat when the administrations contracted with ex-Cheney-run Haliburton in Iraq, but no one is going to bat an eye when the Treasury department, populated with ex-Wall Street types, is bailing out all its employees' old firms?

On the subject de jour, the AIG executive bonuses, many of these were just as guaranteed, contractually, as were payments on AIG policies and bond guarantees.  I don't know how such obligations are treated in chapter 11 (are they treated as more or less senior than other obligations?) but I do know the decision to keep them or ditch them would be made against a goal of maintaining long-term value, and not public witch-hunting.

This is the real problem, even beyond the taxpayer cost, of this new form of Congressional or Administration-led pseudo-bankruptcy:  Winners and losers are determined by political power and perceptions of short-term political gain, rather than against a goal of maintaining value and following well understood and predictable rule.  This process throws all the old predictable rules and traditions out the window.  Investors and folks with contracts used to know just how senior their obligations were in a corporate failure.  Now, they have no idea, as their position in the bankruptcy may in the future depend more on how much they donated in the last presidential election, or how good their PR agent is.

Maybe Its 1850 Again

In 1850, the hottest topic in politics was slavery.  But an awkwardness developed in the political parties.  The Democrats were pretty clearly the pro-slavery party, or at least the conservative maintain the status quo party.  But the Whigs, their opposition, were internally split on slavery.  What that meant was that there was no obvious home for the voters who were against the expansion of slavery into the territories, or more radically, were for slavery's abolition.  A Free Soil third party emerged, but the US has always seemed to seek out a two-party equilibrium.  In just a few years, the Whigs collapsed, and the anti-slavery wing merged with the Free Soilers to form the Republican party.  In the end, having no real contrast among the two major parties on the major issue of the day was unstable.

The only faint hope from this election for libertarians, particularly those concerned with economic freedom issues, is that it may finally highlight to lack of choice we have on these issues between the two major parties.  A few examples like Jeff Flake notwithstanding, the Republican party under GWB and McCain have become virtually indistinguishable from the Democrats on most economic freedom issues.  While I might have had hope 15 years ago that the Republicans could reinvent themselves as classical liberals, I now think this is demonstrated to be hopeless.  Unfortunately, an 1850's style breakup of the party seems unlikely too.  So I guess I don't have much hope after all.

Postscript: Remember, it was Republicans who did this:

The chief executives of the nine largest banks in the
United States trooped into a gilded conference room at the Treasury
Department at 3 p.m. Monday. To their astonishment, they were each
handed a one-page document that said they agreed to sell shares to the
government, then Treasury Secretary Henry M. Paulson Jr. said they must
sign it before they left.

"They weren't allowed to negotiate.
Mr. Paulson requested that each of them sign. It was for their own good
and the good of the country, he said, according to a person in the

At least one banker objected. "But by 6:30, all nine chief
executives had signed "” setting in motion the largest government
intervention in the American banking system since the Depression."