Incentives matter

As it turn out, the really risks in the system were being created not
by hedge funds but by boring old investment banks and insurance
companies. Sure there have been hedge fund failures but none on the
scale and with the repercussions of the recent failures of Bear
Stearns, Lehman Brothers, and the government sponsored mortgage
companies. Hedge funds might not have had all that many rules governing
their behavior but their incentive pay structure seems to have
regulated their risk far better.

Here is more.  On the other side of the governance fence:

The Wall Street Journal is reporting that the Federal Reserve has asked
Goldman Sachs and J.P. Morgan Chase to help make $70-$75 billion in
loans available to the AIG.

That’s a lot of money to "ask" for.

Comments

No Kidding it is a lot of money, especially when AIG has a market cap of 13 billion. So both companies could come up with 3 times AIG's market cap in loans, but neither is willing to step up and purchase...

Seriously, they would rather loose 35 billion each then actually own the balance sheet...

Simple math: $75 billion / 110 million US households = $681 per household.

Curious that this is about the same order of magnitude as the economic stimulus package checks.

My guess is that AIG is dying. Warren Buffet probably has $13 billion sitting around and certainly knows insurance companies as well as anyone alive. If he saw cheap assets at an acceptable risk level, he'd be on this like lipstick on a pig. [sorry, just had to say that]

Maybe AIG must be kept intact because they have heaviy dealings in China?

"Unregulated hedge funds came out OK but investment banks and insurance companies, subject to more regulation than nearly any sector of the economy-- state, exchange and federal (security and banking-- are tanking and disappearing? You must be wrong because the dominant narrative tells me that lax regulation caused the problems."

Seconded. Move to acknowledge hedge fund industry's clear lack of accountability to anyone.

Simple math: $75 billion / 110 million US households = $681 per household.
Curious that this is about the same order of magnitude as the economic stimulus package checks.

So what? That was Congress and the President (all elected) being stupid together.

the dominant narrative tells me that lax regulation caused the problems.
Agreed. The dominant narrative is "More regulation, that's the ticket."

It's got little to do with manageent incentives. Hedge funds typically are private and have raised money under SEC Rule 144a, which exempts them from various rules applicable to public companies, banks, insurers, etc. So they may not be required to apply FAS 157 (which requires mark-to-market) or may choose to apply FAS 157 Level 3, where one can mark-to-model instead of actual market price of similar securities.

With AIG (see the EDGAR filings) the auditor, PwC, seems to have forced AIG to use FAS 157's Level 1 to value certain securities it holds, even when there is currently effectively no market in those securities (credit default swaps in this case). So basically, this is not a credit crisis, it's an accounting error! Well, at least, a judgeement call by PwC on how to do the math...

FAS 157 came into effect last quarter. No coincidence that the crises hit just now...

meter thinks we're playing favorites.

I think the feds have decided that odd names are an endangered species and need protection.

Bear Stearns: odd name ["Bear" for a Wall St firm?], save.
Fannie Mae: weird name, save.
Freddie Mac: weird name, save.
Indy Mac: weird name, save (FDIC, of course).
WaMu: weird name, probably to be saved (FDIC, of course)
Merrill Lynch: familiar name, on your own
AIG: standard corporate name, on your own
Lehman Brothers: standard corporate name, let go.

OK, I'm not serious with this, but ...

You can buy and gain very cheap mesos.

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