Twofish's Blog

October 19, 2008

How to take over the world

Filed under: china, finance, wall street — Tags: , , — twofish @ 5:41 pm

black swan: The solution is so simple. Instead of having the Fed/Treasury insure the new senior debt of the nine banking institutions that sheltered the architects of our present worldwide solvency crisis, have them insure muni bonds.

Not so simple. If you insure municipal bonds, but don’t insure the banks, then you don’t have anyone to underwrite the issuance of the bonds. What typically happens when a municipality wants to float an municipal bond is that they go to a syndicate of investment banks that buy the bond, and then the bank takes the bond and sells them on the credit markets. If you insure the bonds, but the banks aren’t willing to underwrite them beause they have no cash, then it’s pretty useless, since you have no mechanism to sell the bonds.

black swan: I believe the Treasury is not talking about doing anything like this, because the Treasury is Goldman Sachs (Paulson, Kashkari, Wilson and Forst).

Precisely. They know the securities markets well enough to know that some things just won’t work. This is a big problem that I’m not sure how to deal with. Anyone that really understands the market is heavily involved in it and is going to have connections, left and right, and hence conflicts of interest. Anyone with no conflicts of interest probably doesn’t have the experience needed to do the job. Another problem is that if you need someone to do a job quickly, you find someone you know and trust, but this tends to squeeze out competent people that you don’t know, and the people who Paulson trusts are precisely the people that a lot of voters *don’t* trust.

I’m not that worried about Goldman-Sachs taking over the world, since if Goldman-Sachs starts acting out of line, the other big investment banks will start screaming. Of course, then there is the valid question of what you do when the big investment banks collectively act out of line.

black swan: There isn’t a modicum of evidence to suggest that any of the Treasury’s ‘fixes’ are done to benefit the US taxpayer.

We’ll see in a year. Goldman-Sachs is making one of those “bet the firm” bets that they are famous for. If three years from now, the economy is in great shape, and you point to the voter that Goldman-Sachs is in control of the Treasury Department. They may react with “Great!!! We need more people from Goldman-Sachs running the world. I want my kids to work for Goldman-Sachs. God bless Goldman-Sachs” If three years from now, the economy is in a depression, then Congress is going to hold lots of hearings on cronyism and people will be demanding human sacrifices.

The first case may sound odd, but there is precedent for something like this. At the start of the Great Depression, a small group of people figured out that they that could run the world by putting key people in charge of the economic infrastructure of the United States, and if did it competently that they would amass more power and wealth than anyone could dream of, and they could do it in a way that the general population would actively support their efforts. These people were in charge of running Harvard, Yale, Princeton, MIT, Stanford, University of Chicago, etc.

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1 Comment »

  1. Paragraph 2 above on banks not willing to sell municipal bonds because they don’t have the cash. They have the cash but are not willing to “lend” it. However, if they poll the potential buyers, and the spread is attractive, which muni spreads are these days, then their underwriting function will lend their capital for short periods of time and they should be willing to float the bonds. Look at what California did:successfully went directly to the end buyer because the spreads were attractive; but that was 10-14 days ago and things are probably slightly better for the intermediaties now.

    Comment by Marlys — October 27, 2008 @ 7:26 pm


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