#OT# PMI, smoke and and the taxpayer's sphincter

--------------- Even more stinky stuff seeping out. Now combine this with massive tax evasion [see other post this thread]

For a copy of their 73 page paper "Looting: The Economic Underworld of Bankruptcy for Profit" and/or info click on

=========== The Looting of America?s Coffers

By DAVID LEONHARDT Published: March 10, 2009

Sixteen years ago, two economists published a research paper with a delightfully simple title: ?Looting.?

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the

1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a ?total disregard for even the most basic principles of lending,? failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors ?acted as if future losses were somebody else?s problem,? the economists wrote. ?They were right.?

And ?Looting? provides a really useful framework. The paper?s message is that the promise of government bailouts isn?t merely one aspect of the problem. It is the core problem.

Promised bailouts mean that anyone lending money to Wall Street ? ranging from small-time savers like you and me to the Chinese government ? doesn?t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today?s crisis look tame.

But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters ? savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade ? can then act as if their future losses are indeed somebody else?s problem.

Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke?s predecessor, delivered on Capitol Hill last fall? He said that he was ?in a state of shocked disbelief? that ?the self-interest? of Wall Street bankers hadn?t prevented this mess.

He shouldn?t have been. The looting theory explains why his laissez-faire theory didn?t hold up. The bankers were acting in their self-interest, after all.

Think about the so-called liars? loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch?s losses from the last two years wiped out its profits from the previous decade.

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it ?management fees? or ?performance bonuses.? Once the investments were exposed as hopeless, the lenders ? ordinary savers, foreign countries, other banks, you name it ? were repaid with government bailouts.

In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it.

Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot.

Mr. Bernanke actually took a step in this direction on Tuesday. He said the government ?needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm.? In layman?s terms, he was asking for a clearer legal path to nationalization.

At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don?t get rid of the incentive to loot, the only question is what form the next round of looting will take.

Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer ? a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday ? that the next candidate for looting already seemed to be taking shape.

It was an obscure little market called credit derivatives.

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Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).