Techdirt. Stories filed under "bailout" Easily digestible tech news... http://www.techdirt.com/ en-us Techdirt. Stories filed under "bailout"http://www.techdirt.com/images/td-88x31.gifhttp://www.techdirt.com/ Thu, 23 Aug 2012 09:32:19 PDT Rep. Nadler Proposes The RIAA Bailout Act Of 2012 Mike Masnick http://www.techdirt.com/articles/20120823/02571620133/rep-nadler-proposes-riaa-bailout-act-2012.shtml http://www.techdirt.com/articles/20120823/02571620133/rep-nadler-proposes-riaa-bailout-act-2012.shtml proposing a music royalty bill that would effectively bump up the rates that cable and satellite radio stations have to pay to make them more aligned with the insanely high rates that internet streamers are supposed to pay (rates so high, and set by a group of judges who don't appear to know what the internet is half the time, that no real business can be built off of them). This is in contrast to a different, but similar, attempt by Rep. Jason Chaffetz to basically bring the internet rates back down to the same rates as those other providers.

Of course, this is all somewhat related to the RIAA's ongoing push for a Performance Rights Act, which would force radio stations to pay extra royalties for when they play music. Under existing law, radio stations only pay the composers/songwriters for songs played on the air, due to the recognition that radio airplay is basically a massive advertisement for the musicians and it's silly to have stations pay the copyright holders for advertising their works. In fact, it's doubly crazy when you realize that the history of radio is filled with pretty indisputable evidence that the major music labels find tremendous value in radio play: payola. Payola is all about the labels increasing the airplay, knowing that it leads to all sorts of revenue elsewhere. But the RIAA is so insanely greedy these days that it's been begging for this form of a "bailout" for quite some time -- seeking to get radio stations to pay them for playing the same music that the labels are paying the stations (indirectly, of course, thanks to all the payola settlements) to play!

These proposals don't directly address that issue, but are clearly based on this idea. In fact, Nadler is incredibly upfront that he views taxing internet radio is his way of making up the money that isn't being collected from terrestrial radio:
“The lack of a performance royalty for terrestrial radio airplay is a significant inequity and grossly unfair. We can’t start a race to the bottom when it comes to royalty rates and compensation for artists," Nadler said in a statement. "The Interim FIRST Act would provide artists with fair compensation for the valuable creations they share with all of us."
In other words, because we can't fund an RIAA bailout off the backs of terrestrial radios (thanks in part to the powerful lobbying of the NAB), we'll instead increase the existing (and already crippling) tax on the useful and innovative services that are trying to help drag the RIAA (kicking and screaming) into the future.

Pandora is, quite reasonably, worried about this turn of events, noting that this new tax would be "astonishingly unfair."

Nadler seems to think that Chaffetz's plan is unfair because it would mean lower royalties from the internet streamers, but that's a gross distortion for a few reasons. First off, it assumes a perfectly static market, which is wrong. Second, it seems to assume that the identical number of services and the identical number of listens will occur. That's not true. As it stands now, the rates are so damaging that Pandora -- the top player in the space -- has made it clear it may never be profitable. Yes, never. Nadler's bill would effectively make sure that no one else in that market would be profitable either. The end result? Many of these services don't exist or never get started. That would actually mean fewer services, fewer listeners and lower royalties.

It's almost as if he has no concept of price elasticity. Lower prices can create higher total income. Also, the idea that any particular Congressional Rep. should be (effectively) determining what the "fair" price is for anything is, well, horrifying.

If these royalties are going to exist, is it really so crazy to think that perhaps (just perhaps) keeping the rates low, to encourage these useful new services to come along and grow, might be a good thing? But, instead, the RIAA and its members are so greedy for the largest payout per music listen, that they're clearly willing to kill off useful legal streaming services like Pandora. In the long run, that's not good (at all) for the record labels and the RIAA, but they've never been particularly good at seeing beyond the price per listen.

Either way, can anyone explain just why the government is bailing out the RIAA in the first place?

Permalink | Comments | Email This Story
]]> riaa-bailout http://www.techdirt.com/comment_rss.php?sid=20120823/02571620133 Mon, 11 Jun 2012 12:36:00 PDT Angry Spaniards Crowdfund Money To Try To Bring Former Banking Boss To Court For Bank Collapse Mike Masnick http://www.techdirt.com/articles/20120609/01505219259/angry-spaniards-crowdfund-money-to-try-to-bring-former-banking-boss-to-court-bank-collapse.shtml http://www.techdirt.com/articles/20120609/01505219259/angry-spaniards-crowdfund-money-to-try-to-bring-former-banking-boss-to-court-bank-collapse.shtml crowdfund a bunch of money in an attempt to bring Rodrigo Rato, the former chair of one of Spain's largest banks, Bankia, to justice for driving the bank into the ground until it had to be bailed out. In just one day, they were able to blast past the €15,000 they were seeking.

I have to admit that I'm interested in this as an outlet for populist outrage, but I do wonder how effective it really is. An English version of the site claims they plan "criminal and civil actions against members of Bankia's Board of Directors," and they "demand prison and seizure of assets." While they can file civil claims, criminal charges have to come from the government. So the goal is to use the money not just for filing a civil suit, but also to hire independent investigators and auditors to work towards building enough details and evidence that it forces the government to file criminal charges as well. This seems like a project that has a ridiculously high likelihood of failure.

Separately, while I tend to agree that the banks were run by some insanely greedy people who did many questionable things, I think it's going a little mob-like "burn him!" crazy to try to pin the problems on a single person. The global economy is still a mess, and the European economy is in turmoil, with Spain being a big part of that. In other words, there are larger economic issues at play here that go beyond just one banker, even if it turns out that he was a really bad banker.

Either way, though, I am fascinated to see how crowdfunding evolves over time, and the unique ways people use it -- and this is certainly a unique plan.

Permalink | Comments | Email This Story
]]> crowdfunding-justice http://www.techdirt.com/comment_rss.php?sid=20120609/01505219259 Fri, 16 Oct 2009 04:54:35 PDT Senate Judiciary Committee Approves RIAA Bailout Radio Tax Mike Masnick http://www.techdirt.com/articles/20091015/1907526556.shtml http://www.techdirt.com/articles/20091015/1907526556.shtml approved the Performance Rights Act, which effectively serves to tax radio stations for promoting music. It's quite obvious to anyone who actually understands radio economics that this makes no sense. After all, the history of radio has always been about payola -- having the labels pay the radio stations to play certain works. That's because the record labels know quite well that airtime leads to more money in terms of promoting an artist and building a business model around music, concert and merchandise sales. To the labels, airplay has always been the equivalent of advertising. That's why they pay for it.

But now they want the radio stations to pay them to advertise the labels' music? Isn't that getting the equation backwards?

This is nothing more than a federal bailout of the RIAA, who still refuses to embrace new business models. Instead, they have to squeeze others and get the government to force them to hand over money. A real business model doesn't involve changing the law. It involves giving others a reason to buy. Apparently, that's too difficult for the RIAA.

As for the claims that a performance license will somehow help musicians, that's bogus as well. First, ask the RIAA's SoundExchange about all the money it keeps for itself and about all the musicians it "can't find." Besides, all this will do is harm up-and-coming musicians. Because radio stations will now need to pay more for playing music, they'll play less music, and if they're playing less music, they'll focus just on the big name acts. Smaller up-and-coming artists should be furious with the RIAA for giving radio stations less incentive to play their works. Remember, this is the opposite of payola. While payola got new records on the air, this will make sure fewer get on the air. But it will sure put a bunch more money in the pockets of the major record labels. So there's that.


Permalink | Comments | Email This Story
]]> and-so-it-goes http://www.techdirt.com/comment_rss.php?sid=20091015/1907526556 Wed, 14 Oct 2009 08:18:00 PDT Pandora Continues To Push Users To Vote For Shameful Radio Performance Tax Mike Masnick http://www.techdirt.com/articles/20091013/1727436511.shtml http://www.techdirt.com/articles/20091013/1727436511.shtml support the Performance Rights Act, which is effectively a government bailout for the RIAA by taxing already struggling radio stations for the right to help promote the RIAA's music. It's a travesty. The only reason Pandora supports it is because Pandora was pressured into its own ridiculous webcasting rates and wants to help bring down radio too. While I like Pandora as a service, I think it's shameful that it's now using the political process to burden competitors with a government created tax, that goes straight to the RIAA.

Apparently, Pandora has once again ramped up this effort to have the government tax its competitors. A whole bunch of you have been forwarding these ridiculous emails from Pandora that urge people to contact their elected officials in support of the RIAA Bailout bill. Most of those submitting those emails to us have said that you'll be doing the exact opposite, and are offended that Pandora is pushing you to support such a thing.

Yes, Pandora, it sucks that you got stuck with ridiculous webcasting rates that will make it difficult to remain profitable, but that's no excuse for trying to get the government to dump an unfair tax on your competitors.

Permalink | Comments | Email This Story
]]> can't-compete? http://www.techdirt.com/comment_rss.php?sid=20091013/1727436511 Tue, 11 Aug 2009 13:55:27 PDT Why Is The FCC Even Giving The Time Of Day To RIAA's Bogus Radio Witchhunt? Mike Masnick http://www.techdirt.com/articles/20090811/0152565837.shtml http://www.techdirt.com/articles/20090811/0152565837.shtml boycotting musicians who supported the Performance Royalty tax. There were numerous problems with this claim. First, we thought it was rather hypocritical of MusicFirst to demand that radio stations play these artists, when it was the very same MusicFirst that was also claiming that radio was "a kind of piracy" for playing the music of these very same artists without paying a performance tax.

So, apparently if a radio station does play these artists, it's piracy. If it doesn't play these artists, it requires an FCC investigation.

Beyond that, MusicFirst failed to note that many of the artists topping the charts (including the Black Eyed Peas, who topped the charts at the time) were some of the most outspoken artists in favor of this tax. If there was some big conspiracy to not play these artists on the radio, someone forgot to tell... well... pretty much every radio station around.

That highlighted the third problem: MusicFirst didn't happen to point to any radio station that actually did this. The only one that could be dug up was a small high school radio station that had publicly boycotted artists supporting such a tax (which would have shut down the radio station), but only did so for one month and that month happened two years ago, and was a clearly supported expression of free speech.

And that brings up the final point. The recording industry has no right to demand that radio stations play certain artists. A radio station is free to play whatever artists they wish and run whatever commercial they wish. This is a pure free speech issue, and it's quite troubling that the recording industry is targeting radio stations when they have no right over this.

Based on all of this, you would hope that the FCC would simply laugh off the petition... but tragically, it's opened up a consultation on the matter and is asking for public input (found via Michael Scott). The article linked here goes through all of the First Amendment questions raised by this, and notes (thankfully) that the FCC seems to recognize those issues as well. But, if that's the case, why even bother holding this investigation in the first place?

Permalink | Comments | Email This Story
]]> waste-of-resources http://www.techdirt.com/comment_rss.php?sid=20090811/0152565837 Tue, 14 Jul 2009 12:34:21 PDT Pandora: If We're Getting Taxed So Heavily By SoundExchange, Radio Should Be Too Mike Masnick http://www.techdirt.com/articles/20090714/0431085541.shtml http://www.techdirt.com/articles/20090714/0431085541.shtml caving in and agreeing to new webcaster rates that will harm pretty much everyone, Pandora has gotten right into bed with the RIAA/SoundExchange in supporting the Performance Right Act (the RIAA Bailout Act) to extend a similar unnecessary tax on radio. Pandora's reasoning is no surprise: basically it's saying that if it has to pay such a silly tax to help promote musicians, it's unfair that radio stations get away without paying something similar. But, still, it's disappointing. Rather than looking at adding value to the overall market, Pandora has basically decided that it's "enemy's enemy is a friend" and is supporting such a law simply because it will harm radio stations. This makes me think significantly less of Pandora.

Permalink | Comments | Email This Story
]]> strange-bedfellows http://www.techdirt.com/comment_rss.php?sid=20090714/0431085541 Wed, 17 Jun 2009 09:56:00 PDT Recording Industry: Radio Is Piracy, But Not Playing Our Music Is A Federal Offense Mike Masnick http://www.techdirt.com/articles/20090616/1527385253.shtml http://www.techdirt.com/articles/20090616/1527385253.shtml big time lobbying group put together by the RIAA to push for the highly questionable Performance Rights tax on radio stations, did a neat little publicity stunt where it asked the FCC to investigate radio stations that apparently were "boycotting" musicians who supported the Performance Rights tax, claiming that it was an abuse of the airwaves. Remember, this is the same group that just recently called radio "a kind of piracy."

So, wait, which is it? If it's a kind of piracy to play songs on the radio, shouldn't musicFIRST and the RIAA be thrilled that radio stations aren't playing their music? Or do they recognize the free promotional benefits radio provides for artists? They can't have it both ways, can they? First they're upset that the music is being "pirated" and now they're upset that it's not being "pirated"? Please explain!

Now, as for those nasty nasty radio stations "boycotting" certain artists, well who are they? Turns out one of the main culprits is a tiny 100-watt high school radio station who has explained, in great detail the reasons behind their political stance. They are making a political choice by purposely boycotting musicians who support the view that playing their songs on the radio is "a kind of piracy." You would think that would make musicFIRST, the RIAA and those musicians happy. But, more to the point, that music "boycott" was a temporary thing, and lasted for one month, from mid-June 2007 until mid-July of that same year. Yes. It lasted for one month, to make a political statement, and it happened two years ago. And suddenly the RIAA/musicFIRST wants an FCC investigation? Of a bunch of high schoolers making a political statement against a tax that would harm their educational radio station by not "pirating" materials that the lobbyists claim are pirated?

Permalink | Comments | Email This Story
]]> logic-much? http://www.techdirt.com/comment_rss.php?sid=20090616/1527385253 Thu, 14 May 2009 10:48:18 PDT Bailing Out The RIAA? Mike Masnick http://www.techdirt.com/articles/20090514/0218574881.shtml http://www.techdirt.com/articles/20090514/0218574881.shtml promoting their music for free, and Carson seems to believe their explanation 100% (which is, unfortunately, quite typical of the Copyright Office). He argued, unconvincingly, that while radio used to promote artists (the reason that stations don't need to pay musicians), it no longer does so. That makes no sense. While there are alternatives out there for promoting artists, and radio may not have the impact it once had, that hardly means that the stations aren't promoting the music.

And, of course, the most damning argument against the recording industry's demand for money here is the fact that, for decades, the industry has (illegally) had the money go in the other direction. The system of payola has shown, quite clearly, how much the recording industry values airtime, in that it's willing to pay radio stations to play its music.

So, can anyone explain why it's illegal for record labels to pay radio stations to play music, but it's okay for Congress to force radio stations to pay the record labels for playing their music? It defies common sense.

Yet, with a nice push from the Copyright Office, the bill is moving forward, and will face a full House vote. During the Committee debate over the bill, Rep. Daniel Lungren made a perfectly reasonable suggestion: why not wait until the GAO had a chance to do an economic analysis of how the bill would impact radio stations. Considering that the bill is effectively a tax on those radio stations, this seems like a perfectly reasonable idea... but it resulted in Rep. Howard Berman (who represents Hollywood, always) accusing Lungren of trying to kill the bill. Isn't it great when simply waiting to find out what kind of impact the bill might have gets you accused of trying to kill it. Apparently in Congress, it's all about shooting first and asking questions later.

That said, Peter Kafka, over at AllThingsD, has made the best point: most people don't care about this bill because they don't realize that it's really a bill to bail out the RIAA by creating a radio station tax that goes straight into the recording industry's bank accounts. So, rather than call it the Performance Rights Act, it should more accurately be called the Britney Bailout Bill.

Permalink | Comments | Email This Story
]]> there-we-go... http://www.techdirt.com/comment_rss.php?sid=20090514/0218574881 Mon, 30 Mar 2009 05:18:00 PDT Making The Tough Choices To Save The Economy? Mike Masnick http://www.techdirt.com/articles/20090329/2207174296.shtml http://www.techdirt.com/articles/20090329/2207174296.shtml Planet Money had a decent "is it good or bad?" show, the folks there didn't get too deep into it (and even claimed that no one really thought the plan was all that dangerous (just that it could slow down the recovery). However, the more I read up on it, the worse and worse it seems. Simon Johnson has a long, but worthwhile writeup at The Atlantic, where he delves into how Wall Street has effectively taken over Washington DC, such that it helped both create the mess, and then set things up so that the "recovery plan" only benefits those who caused the problems in the first place. This echoes a piece by Andy Kessler last week, where he pointed out that we're effectively handing money to those who brought the collapse upon us -- and suggests that the better response is to simply stymie the plans of the hedge funds -- flooding the markets where they're looking to buy, rather than subsidizing them.

Then, there's Umair Haque, who basically makes the same points, but suggests that this is an outright looting of taxpayer money by putting most of the risk on taxpayers, and encouraging the hedge funds to make increasingly risky loans (you know, like the ones that got us into this mess in the first place). The root of all of these stories is that the government seems to think that the only way to fix the problem is to reinflate the bubble, rather than letting the bubble deflate and moving forward from there. The problem with reinflating the bubble isn't just that it puts off the inevitable (though, it does), but that the inevitable is that much worse when it comes.

It's what we've done for the past couple decades -- effectively building an even shakier house of cards, and every time the cards start to fall... we just reinforce it with another layer of shaky cards to prop it up. At some point, the cards do have to fall, and propping it up with more leverage isn't going to help that.

Even if, as Richard Posner suggests, the current plan is about the most politically feasible, it's still problematic. The politics of the situation is troubling. On one side, you have populist anger, making it difficult to do certain necessary things. On the other, you do still have the influence of the bankers, who view the world as being one where we need to keep propping up that house of cards.

Why is it that no one is talking about carefully taking down the house of cards while building a sturdy house next door?

Permalink | Comments | Email This Story
]]> stop-giving-the-banks-everything-they-want http://www.techdirt.com/comment_rss.php?sid=20090329/2207174296 Fri, 13 Mar 2009 14:44:00 PDT Why Aren't We Trying To Solve The Too Big To Fail Problem? Mike Masnick http://www.techdirt.com/articles/20090312/1702544099.shtml http://www.techdirt.com/articles/20090312/1702544099.shtml become small enough to fail. That could mean spinning off parts, selling off parts, shutting down parts, exiting businesses, shrinking businesses -- whatever. There just needed to be some sort of guarantee that within a certain time frame, the company wouldn't be so tied up that if it failed it would bring down the rest of the economy. And, if a company didn't want to deal with those restrictions, then fine, it didn't need to take gov't bailout money.

The idea didn't get much traction (not surprisingly), and now some are pointing out that the opposite seems to be happening. Our solution to dealing with companies that are too big to fail has been to make them bigger and bigger, and pass off the question of "too big to fail" to other politicians in the future -- at which point the problems will likely be even bigger and harder to deal with. Propping up companies that are too big to fail, without a clear path towards making them small enough to fail, is a recipe for a future disaster.

Permalink | Comments | Email This Story
]]> getting-it-wrong http://www.techdirt.com/comment_rss.php?sid=20090312/1702544099 Mon, 23 Feb 2009 17:44:00 PST Throwing Money At Problems Usually Is Not The Solution Mike Masnick http://www.techdirt.com/articles/20090223/0036013858.shtml http://www.techdirt.com/articles/20090223/0036013858.shtml give $20 billion to top venture capital firms and have them invest in new innovation. The initial thought makes sense, and, in fact, we discussed something quite similar a few months ago -- though, concerning a new venture fund in the UK, rather than giving money to existing funds. Indeed, if we must throw money at the economy, it should be to invest in new innovation, rather than throwing good money after bad. However, Fred Wilson points out that the top VC firms don't want or need the cash, and in fact, adding more money to the venture investing pool at this point might cause a lot more harm than good.

And, that brings up an important point, worth discussing, that the government seems to be missing: throwing money at problems is very rarely the best solution. Often the problems are caused by too much money sloshing around (see: Wall Street). Dumping more money into the system just encourages the same inefficiencies and bad decision making. The real fix to problems is to wipe out the broken parts of the system, not fund them further. Yes, letting some of these businesses fail will have rippling effects into other parts of the economy -- but shouldn't the focus be on helping out those aspects, rather than rewarding companies like GM and Chrysler that have screwed up dreadfully?

While there's something to be said for taking money when it's available, plenty of experienced entrepreneurs know that having too much money on hand is almost as bad as not having enough. Having too little money makes you focus and makes you creative out of necessity. Having too much money makes you lazy and puts you in a position to hide or ignore the real issues for way too long. What we should be working on right now is fixing the systemic problems throughout our economy -- not papering them over with cash.

Permalink | Comments | Email This Story
]]> time-to-work-smarter http://www.techdirt.com/comment_rss.php?sid=20090223/0036013858 Fri, 6 Feb 2009 06:33:00 PST Government Already Overpaid By $78 Billion In Bailout Money Mike Masnick http://www.techdirt.com/articles/20090205/2231493665.shtml http://www.techdirt.com/articles/20090205/2231493665.shtml appear to have already paid $254 billion for assets that appear to be worth $176 billion. That's a shortfall of $78 billion that may have just gone up in smoke, effectively. Now, it may eventually happen that the assets we now own appreciate in value, and that money is made back, but this is the key problem with just having the gov't jump into "buying" bad assets. It's almost guaranteed that they're going to overspend. If that doesn't make you uncomfortable about what sort of mess we're going to get with the stimulus package, I don't know what will. The government isn't just throwing money at a problem that might not need money -- it's doing it badly. On a historic level.

Permalink | Comments | Email This Story
]]> transparency? http://www.techdirt.com/comment_rss.php?sid=20090205/2231493665 Tue, 3 Feb 2009 12:01:03 PST Building Good Banks Instead Of Bad Banks Mike Masnick http://www.techdirt.com/articles/20090202/0311453606.shtml http://www.techdirt.com/articles/20090202/0311453606.shtml build an entirely new set of banks that weren't encumbered by the problems of the legacy banks. It seems like that idea is worth revisiting, as there's been plenty of talk about having the existing banks dump a bunch of their "toxic assets" into a so-called "bad bank." The idea is gaining a lot of steam, but definitely worries a lot of people. Willem Buiter, however, has a different suggestion that harkens back to our older discussion: rather than creating a "bad bank" with all the toxic assets, why not create "good banks" instead and turn all of the legacy providers into "bad banks."

This would solve the biggest problem of the bad bank solution: which is that the government would effectively be paying for a ton of assets that no one has any idea how to value -- meaning there's a half decent chance that we (the taxpayers) will overspend on those assets. Instead, the "good bank" idea would be that those banks would then buy up the good assets from legacy banks -- which are good because they can actually be valued. The legacy banks then automatically become "bad banks," but the taxpayers are left with the good assets, rather than the toxic ones. Buiter then suggests that those legacy banks have their banking licenses taken away so that they can't do any new business -- but can only look to wind down or sell whatever remaining assets they have. Effectively, this system would also avoid rewarding the shareholders of those legacy banks (though, they could still receive something from whatever's left over after the sale of the various assets).

In actuality, this is a suggestion for rebuilding the entire banking system, and throwing off the old banks. It's still pretty risky, however, and plenty of folks in the US would be horrified (of course) at the idea of the government effectively owning the entire "good" banking sector. Still, if you could set it up in a way that allows the system to quickly, but safely, transfer over to private ownership, the idea does seem significantly better than the bad bank solution. That said... you have to wonder why the government is needed to fund the banks under this scenario at all. Why aren't private investors putting up the money to buy up the "good" assets of the legacy banks? Are they still just too afraid to spend? Too afraid that "good assets" are really toxic? Or are the banks too afraid to sell any of the good assets?

Permalink | Comments | Email This Story
]]> revisiting-the-idea http://www.techdirt.com/comment_rss.php?sid=20090202/0311453606 Mon, 19 Jan 2009 18:22:00 PST Sprint Wants Its Government Handout, Too Carlo Longino http://www.techdirt.com/articles/20090116/1303033443.shtml http://www.techdirt.com/articles/20090116/1303033443.shtml $2 billion emergency communications network (via Phone Scoop) for first responders. Sprint's plan calls for satellite-equipped trucks (that sound like mobile base stations on wheels) and up to 100,000 handsets and other gear to be stockpiled around the country so that it could be delivered anywhere in the US within four hours. Sprint wants the plan included in the economic stimulus plan working its way through Congress -- and it's just coincidence, of course, that Sprint would be a huge beneficiary of such legislation, and $2 billion would give its struggling business a big boost. Without a doubt, public-safety communications are in need of a serious overhaul, and this is an area that the FCC and other parties have been looking at for some time. It's a complex situation -- one that deserves a more thorough investigation and solution, rather than a piece of government pork.

Permalink | Comments | Email This Story
]]> brother-can-you-spare-$2-billion http://www.techdirt.com/comment_rss.php?sid=20090116/1303033443 Fri, 16 Jan 2009 16:10:00 PST Connecticut Government Bails Out Newspapers Mike Masnick http://www.techdirt.com/articles/20090116/0412043436.shtml http://www.techdirt.com/articles/20090116/0412043436.shtml stepped in to save two newspapers in the state, that were about to be shut down. This is raising all sorts of questions about the separation of government from the press. What's scary is that just a few years ago, such an idea was used as satire. Then it became a serious suggestion and now it's happening. Of course, the big question is about how this will impact coverage. It is possible for the government to own a newspaper and still have that newspaper report critically on that government... but it's definitely harder, and a lot of people may wonder about how closely the papers will monitor government officials.

Permalink | Comments | Email This Story
]]> will-it-impact-coverage? http://www.techdirt.com/comment_rss.php?sid=20090116/0412043436 Tue, 23 Dec 2008 01:46:59 PST Transparency On The Bailout? Banks: No Thanks! Mike Masnick http://www.techdirt.com/articles/20081223/0006313202.shtml http://www.techdirt.com/articles/20081223/0006313202.shtml "gotcha questions" it asked a bunch of banks that have received bailout money, suddenly demanding that they all explain how the money is being used and how much is being used, but it is an important issue. In handing over all of this money to banks for a stake in those banks, one would think that we, the taxpayers, deserve at least some transparency into how the money is being spent. Considering the sums handed over, this is hardly an out-of-line question. Yet, we've already seen that the promised transparency surrounding the bailout has hardly been forthcoming. And, the worst part of it is that the thing we need more than anything else right now is significantly more transparency to rebuild the trust in the financial system.

Of course, it's not the banks' fault that they're not detailing what they're doing. There's no reason for them to do so right now. However, we should be asking why the government, which rushed to hand over so much money while promising transparency, didn't require more openness as a part of the deal and hasn't done much to add any transparency to the process since handing over the cash. Sure, everyone's been pretty busy, but transparency shouldn't be an afterthought here, it should be a central piece of any economic recovery package. The fact that the government hasn't done much to increase transparency should be seen as a troubling sign.

Permalink | Comments | Email This Story
]]> who-needs-transparency? http://www.techdirt.com/comment_rss.php?sid=20081223/0006313202 Wed, 10 Dec 2008 11:33:00 PST Creative Destruction: Time To Make Companies Small Enough To Fail Mike Masnick http://www.techdirt.com/articles/20081208/0353473054.shtml http://www.techdirt.com/articles/20081208/0353473054.shtml the latest bailout: this time of the US auto industry, and for some reason it has me thinking about Joseph Schumpeter. Schumpeter, as (hopefully) many of you know, was an economist in the first half of the 20th century, who today is probably most well-known for two things: his championship of the concept of "entrepreneurs" and ongoing innovation as the process of economic growth, and the creation of profits, as well as the idea of "creative destruction" brought about by those entrepreneurs, taking down old industries with new ideas, new products and new processes. There is much that Schumpeter got wrong in his analysis (in general, I'm not a huge fan of much of Schumpeter's work), but throughout it all, there were some very important ideas that have been proven time and time again.

It's important to revisit his work, as we're seeing a sudden influx of economic philosophy "battles" between different schools of economists over how to deal with the financial crisis. The new Keynesians still believe that through government tweaking, we can guide the economy to some sort of "soft landing." The more free market-focused economists fear the end result of such tweaking. The split in schools of thinking has become significantly less pronounced than in the past, and ideas seem to permeate back and forth among these and other economic philosophies, but some core beliefs are common across most economists, and they've been shown to be correct time and time again.

Competition and Innovation

Innovation, driven by competition, is the core of economic growth. Competition drives companies to keep innovating, creating better and better products (often for less and less money). Companies that rest on their laurels get beaten in the marketplace, and that's good for everyone (except, temporarily, employees and shareholders of those companies). It gives the public better products, made more efficiently, and it keeps companies from becoming burdens.

Encouraging competition should be a key goal of government, but in most cases that means staying out of the way. Unfortunately, things don't always work out that way, and the government has often been much more involved than necessary, later causing problems. This is often seen in a rush to send antitrust lawyers after a company for being successful, but not when it's doing any actual harm on the market, or preventing any real competition from happening.

We also see it as a problem in the government's intellectual property policies, which often do little to encourage innovation, and plenty to hinder it by creating defacto monopolies.

If the government should be involved at all, it should be to enable (not create) the infrastructure that's necessary for further innovations. It should be enabling the next generation of entrepreneurs to be creating the next great businesses.

Too Big To Fail

But, rather than doing that, we see the government looking to prop up non-competitive, non-innovative behemoths that are being called "too big to fail." These are companies that, often with the help of government regulations and subsidies, have become so intertwined in the economy, that a failure on their part really would cause significant ripples throughout the rest of the economy. While there are some who suggest they should be allowed to simply fail anyway, the economic risk in doing so is quite large -- in part, as a result of bad gov't policies for many years, abused and exploited by these companies.

Simply giving these companies more money and new regulations isn't going to make a difference. It only puts off the inevitable, and potentially will make things even worse when the problems resurface. The regulations and "oversight" will seem like a good deal at first, but over time the companies will twist the regulations to their advantage. They'll create new and larger loopholes, and the regulations won't do what they're intended to do, but will instead have created massive new problems. It's what almost always happens.

Creative Destruction

So perhaps it's time to go back to Schumpeter, with a big twist. If we grant the premise that some of these companies are too big to fail, and they absolutely need gov't bailouts to make them work, then why not set the terms of the bailout as being that they need to use the money to become small enough to fail? That is, they can get the money, one time only, and then need to look at breaking themselves up into separate pieces (even competitive pieces) that, by themselves, are no longer too big to fail.

The end result is that you aren't left with the same terrible situation, while also creating a new generation of "spinoffs" that can innovate and compete against both older firms in the space, and new upstarts that can more readily enter the market, rather than face a few giants. That way we're enabling more competition and innovation, leading to economic growth, while dismantling the structure of "too big to fail."

It's not quite that simple, of course. But, on the whole, it makes absolutely no sense to be "bailing out" companies that are too big to fail while leaving them as too big to fail. The end result is just going to keep sucking in more bailout money and wasting it, rather than encouraging innovation and competition.

A Cold Douche

This, obviously, is not the "creative destruction" that Schumpeter was talking about at all. In fact, at times he toyed with the idea that companies too big too fail were where the market would eventually end up. But, he also recognized the power of destroying old industries and setting the path for new innovations -- and he knew that the process was often messy, tied to business downturns.

In economist Robert Heilbroner's excellent The Worldly Philosophers, Heilbroner recalls sitting in Schumpeter's class at Harvard during the Great Depression:
When he lectured on the economy at Harvard in the midst of the depression, Joseph Schumpeter would stride into the lecture hall, and divesting himself of his European cloak, announce to the startled class in his Viennese accent, "Chentlemen, you are vorried about the depression. You should not be. For capitalism, a depression is a good cold douche." Having been one of those startled listeners, I can testify that the great majority of us did not know that a douche was a shower, but we did grasp that this was a very strange and certainly un-Keynesian message.
And, indeed, this economic restructuring is a good cold shower (though, some may prefer douche), but we don't get that sort of restructuring when the government is propping up exactly what needs to be restructured.

So, let's repurpose creative destruction with a clear plan: if you accept government bail out money because you're too big to fail, then that money needs to be used to make you small enough to fail.

Permalink | Comments | Email This Story
]]> channeling-schumpeter http://www.techdirt.com/comment_rss.php?sid=20081208/0353473054 Mon, 17 Nov 2008 12:32:00 PST Suckers And Transparency: Preventing Another Financial Crisis Mike Masnick http://www.techdirt.com/articles/20081113/0321092822.shtml http://www.techdirt.com/articles/20081113/0321092822.shtml understand the root causes of the financial crisis, we find that the whole story just keeps getting more interesting. While lots of folks are trying to blame one single thing (free markets, regulations, greed, poor people, rich people, bankers, mortgage lenders, hedge funds, short sellers, the President, Congress, etc.), the truth is that almost all of those explanations aren't just wrong, they're highly misleading. The problems involve a whole bunch of different things that combined to create the incentives that resulted in this situation -- and preventing it from happening again is hardly an easy proposition.

Finding the last sucker

Earlier this year, in talking about a highly questionable investment firm that was investing in startups, we wrote about how the venture capital game has always been about finding the last sucker to invest. It used to be the public markets, but when that dried up, apparently some VCs moved on to basically skirting public offerings by getting firms like the one described in the post to effectively trick unsophisticated investors out of their money and put it into a "fund" that then went to startups. It was the same process -- but actually less regulated than the public markets, and much more open to fraud.

The more I read about and understand different aspects of the current financial crisis, the more it becomes clear that basically the same thing happened here, but just on a much, much larger scale. It was a giant game of hot potato, where folks were passing along toxic assets looking for the last sucker to take them -- except the process of finding that last sucker became so valuable, that many of the firms in the business of finding new bigger suckers... found themselves. In many cases, the suckers were, in fact, unsophisticated investors like the school districts we described recently, but the various banks got so tied up in the process that they started betting on these things themselves.

Becoming the last sucker

While we've been trying to avoid the blame game, the more details come out, the more it looks like an awful lot of the trouble actually comes from the ratings agencies, such as S&P and Moody's. As we discussed in the story about the school districts, the ratings agencies screwed up pretty massively, by taking collections of poorly rated loans, and effectively claiming that all together, they suddenly became low risk assets. At some level you can see where they were coming from. If they were basing their decisions on the idea that default rates were independent, then bundling a bunch of questionable assets is a potential diversification strategy. You're assuming that only a small percentage will default, and you can look at historical numbers to figure out the risk. But, the problem is that these aren't independent, and as defaults start happening it leads to more defaults -- and the ratings agencies were simply fooled by their own models.

That's the generous interpretation, at least. The other is that there was outright fraud going on at the ratings agencies, and there's some evidence there was a fair amount of fraud. My guess is there was a little of both. The ratings agencies were pushed to rate these financial products highly, and so they created models that would support a high rating. Basically, rather than creating models that actually judged the risk, they created models that told them what they wanted them to say, because, in part, their business model depended on it. It was, as noted, garbage in, financial crisis out.

A lot of this becomes clear in Michael Lewis' excellent (as usual) discussion with a hedge fund guy who recognized this early (and made quite a bit of money doing so). What's fascinating is how much work even he had to do before he realized how fragile the whole setup was. When the financial crisis first went into full swing, many folks pointed the blame finger at hedge funds that were shorting bank stocks, like this guy. However, as the Lewis profile makes clear, he wasn't to blame. He was accurately telling everyone that the financial system itself had been built on a myth -- and the mythmakers were believing their own myth.

The end result is that the race to find that last sucker resulted in plenty of suckers being taken -- but when there weren't enough of those, the banks basically made themselves the next sucker in line, and convinced themselves that they weren't suckers. While there was almost certainly some amount of fraud involved in all of this, part of the problem was that everyone started believing their own bogus models in order to convince themselves that there would always be a later sucker (or, even worse, that they didn't need a later sucker).

So how do you prevent suckers?

And that leads us to the crux of the problem. How do you prevent suckers? At some point, you can just say, well it should be "buyer beware," and to some extent I agree with that sentiment. But, when all of the other incentives are as screwed up as they were in this situation, then even the "aware" buyer finds that almost every single datapoint he or she is using is wrong. That's what was happening here. You could look pretty deep at many of these assets and everything was saying they were solid, when the reality was they were not. In cases of outright fraud by ratings agencies, you can pull out the blame finger, but in many cases it wasn't so much fraud as it was the "experts" deluding themselves. How do you stop defrauding suckers, when it's the suckers defrauding themselves... and then earnestly convincing everyone else in the process?

Radical transparency

The one thing I keep coming back to as a solution is to put in place some aspect of radical transparency on pretty much all aspects of financial instruments, both on the debt side and the equity side. On the equity side, I'm surprised that more folks haven't picked up on Umair Haque's point that quarterly reports are obsolete and not nearly transparent enough. What if public companies provided ongoing reports that revealed a lot more than they do today. And, similarly, any debt instrument provided much more detail concerning what was actually making up the investment.

The reason school districts got stuck with worthless CDOs was because the information they got wasn't transparent at all. Sure, the prospectus was a book three inches thick, but all that information was actually used to obscure what the product was. Hell, the districts thought they were buying actual bonds, not making a side bet on how those bonds would do (what the CDO actually represented). But if there were real transparency within these instruments, and everyone buying into them could easily understand what was actually at stake, then they wouldn't be so reliant on ratings agencies and their crappy models. They'd be able to build their own models -- or openly share and discuss models with others.

While there will always be some "last sucker" out there, we can limit the risk of such things by limiting the suckers as much as possible -- and the way to do that is to become much more transparent and open with information.

Permalink | Comments | Email This Story
]]> can-we-outlaw-suckers? http://www.techdirt.com/comment_rss.php?sid=20081113/0321092822 Thu, 13 Nov 2008 13:33:00 PST Instead Of Bailing Out Broken Banks, Why Not Build New Banks? Mike Masnick http://www.techdirt.com/articles/20081113/0213132821.shtml http://www.techdirt.com/articles/20081113/0213132821.shtml fund an entirely new financial sector. Then, as the screwed up banks fail, these new banks can take over their discarded assets.

This certainly has some appeal. The idea is that you wouldn't be rewarding shareholders in the original banks and also wouldn't be allowing the entire capital engine to seize -- and, on the flip side, you also might be rewarding the shareholders of the new banks (the American taxpayer). However, there's also tremendous risk in doing this. In effect, it's something like building a new airplane from within a troubled airplane that's flying at 40,000 feet, getting it to fly from the air, and then moving people from the troubled airplane to the new one. There's an awful lot that can go wrong. Also, in doing this in such a rapid fashion, when it's still not entirely clear what all the root causes of this crisis are, you run the risk of simply transferring the core problems to these new banks (basically taking the problems from the first airplane to the second, if we continue the analogy). Then you end up spending $700 billion to basically create a new set of troubled banks that are even more confusing, because they were put together in a rush. So, while it's an interesting idea, it seems like it would present some significant problems as well.

Permalink | Comments | Email This Story
]]> thinking-out-of-the-box http://www.techdirt.com/comment_rss.php?sid=20081113/0213132821 Tue, 11 Nov 2008 08:40:00 PST Bloomberg Sues The Fed For More Transparency Over $2 Trillion In Emergency Loans Mike Masnick http://www.techdirt.com/articles/20081110/1541192790.shtml http://www.techdirt.com/articles/20081110/1541192790.shtml with almost no transparency over who received the loans and what the collateral is or how it's valued. Bloomberg (the company, not the mayor) is now suing to have the Fed reveal that info. The government has been talking up a storm about how all of these bailout efforts would be very transparent with respect to taxpayer money -- but the reality hasn't lived up to the rhetoric.

The article linked above is from Bloomberg (the party suing the gov't), so perhaps it's biased, but it does seem noteworthy how pretty much everyone tried to dodge questions concerning the $2 trillion in loans. The only person who seemed to be willing to say anything was Rep. Barney Frank, who is the House Financial Services Committee Chairman. Yet, his explanation for the secrecy is hardly compelling:
"I talk to [New York Fed CEO Timothy] Geithner and he was pretty sure that they're OK. If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.''
Pretty sure they're OK? That's hardly a ringing endorsement for keeping the details of such loans a secret.

Permalink | Comments | Email This Story
]]> that-would-be-useful-info http://www.techdirt.com/comment_rss.php?sid=20081110/1541192790 Tue, 21 Oct 2008 10:17:00 PDT Transparency Schmancparency: Bailout Payment Details Blacked Out Mike Masnick http://www.techdirt.com/articles/20081020/1843002598.shtml http://www.techdirt.com/articles/20081020/1843002598.shtml screw up, often by handing out favors to friends, rather than focusing on what actually needs to be done to get the economy moving in the right direction. To counter that possibility, one thing you heard repeatedly was that there would be unprecedented "transparency" in how the government conducted this. Transparency here is important. In fact, a big part of the reason we're in this mess in the first place was that banks consistently obfuscated the details of various deals, in order to hide the risk levels. That caused banks and others to buy hugely risky assets, believing they weren't that risky. So, is the government really being transparent?

Of course not.

The folks over at Planet Money note that the first contract awarded under the bailout, with Bank of New York Mellon Corp. just so happens to have the compensation details to Bank of New York Mellon redacted. If anyone is going to trust the government in handling the $700 billion, how much it spends and how it compensates the various banks that take part in the process clearly need to be open. Otherwise this is a huge opportunity for cronyism and corruption. To start out by blacking out the compensation details is quite troubling, and it doesn't exactly bode well for how transparent the rest of this process is going to be.

Permalink | Comments | Email This Story
]]> this-will-end-badly http://www.techdirt.com/comment_rss.php?sid=20081020/1843002598 Mon, 6 Oct 2008 10:41:00 PDT Banks May Say 'Thanks, But No Thanks' To That New $700 Billion Mike Masnick http://www.techdirt.com/articles/20081005/2216172456.shtml http://www.techdirt.com/articles/20081005/2216172456.shtml financial crisis, one thing I mentioned is that despite all the talk of "moral hazard" -- the bigger fear might be moral hazard's sister problem: adverse selection. That is, it would only be those with truly awful assets and no other options that would take the government up on its offer to buy its "toxic" assets. That may be happening. Reports are coming out that some on Wall Street are considering saying "thanks, but no thanks" to the new ~$700 billion that the Treasury Secretary has been given. The article paints the issue as being about the strings that come attached to it, such as limits on executive pay and golden parachutes. That almost certainly could be a part of the reasoning, but a much bigger part may simply be that these banks recognize that the assets they have aren't quite as toxic as they're being made out to be.

Yes, there are bundles of highly questionable mortgages, but contrary to what the media tells you, plenty of the people who possess those mortgages are still paying -- and even if they're not, the property and houses they represent still do have some value on the market -- or will someday. Thus, it may be that the only banks that really take up Paulson on a buyout offer, are those with really toxic assets that aren't likely to appreciate in value. That's not good for anyone. The more you look at this bailout, the worse it seems. It also makes you wonder why there isn't more of a focus on using a so-called "stock injection" plan, whereby the gov't becomes an investor in the banks, rather than just buying out certain questionable assets. That would, in theory, help avoid sticking the taxpayers with only the worst of the worst assets.

Permalink | Comments | Email This Story
]]> hello-adverse-selection... http://www.techdirt.com/comment_rss.php?sid=20081005/2216172456 Mon, 6 Oct 2008 09:19:00 PDT Congress Too Busy Gambling With Your Money To Let You Gamble With It Yourself Mike Masnick http://www.techdirt.com/articles/20081003/1533492449.shtml http://www.techdirt.com/articles/20081003/1533492449.shtml re-legalize playing online poker. However, reports coming out now suggest that with Congress so busy passing pork-filled bailout bills, the online poker bill has been shifted to the backburner and will probably have to wait until next year. So, you know, if you were planning to survive this economic tough time by making it up playing online poker, you may want to consider moving to, say, Antigua.

Permalink | Comments | Email This Story
]]> politics-as-usual http://www.techdirt.com/comment_rss.php?sid=20081003/1533492449 Fri, 3 Oct 2008 12:01:13 PDT Bailout Bill Stuffed With Pork Apparently More Palatable Mike Masnick http://www.techdirt.com/articles/20081003/1133172447.shtml http://www.techdirt.com/articles/20081003/1133172447.shtml for and against the so-called "bailout bill." With some of the important indicators getting seriously scary, it was becoming increasingly important that something be done to keep money flowing, but this bill isn't it. Who would have thought that after the House rejected the bill earlier this week, that they would come back and approve something much worse. Rather than address the fundamental problems of the bill (and, well, the economy), what Congress did was stuff the bill full of pork, adding in every little personal favor to local industries they could dig up. Basically, all of the politicians added in little "gifts" to local industries, as a way of calming public dissent against the bill. And, of course, apparently that was all it took to get the House to approve the bill. Now they can go back home and say that they fought to "protect" their local constituents in the bill, when all they really did was put some pork in to bribe them.

While there's still a chance that this plan works out -- and, at this point, it's entirely based on who will control the fund -- the bill has done little, if anything to actually address the real issues that created this economic mess, and uses a sledge hammer where a scalpel would have made more sense. If it ends up succeeding, it will be in spite of the bill, rather than because of it.

Permalink | Comments | Email This Story
]]> is-that-pork-or-spoonful-of-sugar http://www.techdirt.com/comment_rss.php?sid=20081003/1133172447 Mon, 29 Sep 2008 10:06:30 PDT Take A Deep Breath: Some Perspective On The Financial Crisis Mike Masnick http://www.techdirt.com/articles/20080929/0426042403.shtml http://www.techdirt.com/articles/20080929/0426042403.shtml no one!) can accurately understand all the different variables at play here. Anyone claiming to have all the answers is wrong. They're either ignorant or lying. Also, the blame game isn't just pointless, wrong and silly, it's dangerous. I've been seeing too many folks on both sides of the political aisle trying to use this crisis as a political football, and all that's doing is making it that much more difficult to come up with real solutions. If you see anyone focus on playing the "blame game," ignore them. They're not worth listening to and they'll only be misleading. Finally, any explanation you read that isn't multiple-book-length will probably be greatly simplified -- including this one. But I'm hoping that it at least kicks off an interesting discussion.

So, what happened?

Well, there are tons of good resources that can give you bits and pieces of it. A good place to start, however, may be The Giant Pool of Money podcast that was on This American Life a few months back (which we mentioned recently). The NY Times just had an article about what led to that podcast being created. It's also worth noting (oddly not mentioned in the NYT piece) that the two reporters who put that together -- Adam Davidson and Alex Blumberg -- are collaborating on a new daily podcast and blog for NPR called Planet Money, which is fantastic. They're also working on a new episode of This American Life for next week about the current crisis. That will be a must-listen as well, I'm sure.

But, the basic summary is that a chain of events all resulted in more and more money being put into riskier and riskier mortgages, where much of the risk was hidden away by computer models and the repackaging of those risky mortgages in bulk. Normally speaking, the idea of bundling up a bunch of risky projects into one actually does make some sense -- because you're figuring that while some will fail, the successes will greatly outweigh the failures. And, in many cases, that's true (it's basic diversification). But the problem was that very few, if any, of the models seemed to take into account the fact that these weren't independently risky items, but that many were very dependent on each other. Thus, rather than a small group of risky deals going south, outweighed by the success stories, people started to realize that you could have a domino effect, where a large portion of the risky stuff going bad could actually lead to even more of it going bad. That's just what you get for creating bad models that don't take dependencies into account.

What made this even worse, however, is that a bunch of the risk was eventually pawned off to the least knowledgeable investor: the public markets. In a world where you're always looking for the last sucker to invest, the public markets are always going to be your best bet -- and many investment banks took advantage of that. While, historically, many investment banks were partnerships, where the partners understood the risk of what they were doing, once these banks were public, the risk was shifted from the folks who at least understood some of the more complex details to those who didn't. Whether that rises to the level of fraud, in falsely portraying the real risk at hand, is something that we'll leave to federal investigators to sort out. Either way, we had a long chain of players, who effectively kept "laundering" the risk through various ways until it ended up being held by people who simply had no clue how risky the products were that they owned.

Then, once stuff started to go bad, the dependencies started to snowball and make everything worse -- and the confusion over how bad and how risky things were made those who actually had money on hand reasonably afraid to keep lending it to those who couldn't accurately express the risk. That resulted in a lack of liquidity -- effectively the oil in the economy's engine. Without liquidity, a lot of stuff freezes up pretty quickly and dangerously. That's what caused Treasury boss Paulson and Fed chair Bernanke to ask for the "bailout" plan.

Why are we "bailing out" those who created this mess?

Actually, while almost everyone is calling it a "bailout," it's not quite a true bailout, and it's not clear that it really "rewards" those who created the mess. Like everything else, it's quite complicated. Personally, I like Fred Wilson's use of the phrase "The Splurge" to describe it, because in many ways it's more accurate than a bailout. Basically, the government is asking for $700 billion to try to buy up distressed assets. The details suggest that it's starting out with $350 billion, with another $350 billion to be handed out later, if necessary. There are plenty who believe that $700 billion is just the tip of the iceberg, and eventually that number will grow to be much higher.

So, why isn't this a full "bailout"? Well, because the government would be getting equity back as well, and there are plenty of smart folks who believe that this could lead to the government making a profit. Indeed, buying up distressed assets historically isn't a bad way to make a profit -- if you know what you're doing. Lots of folks tend to shy away from distressed assets, and a good fund manager can buy up distressed assets for pennies on the dollar and figure out ways to sell them down the road for nickels or dimes on the dollar. It's a perfectly reasonable business proposition, and historically, there are plenty of stories of folks who made out like bandits buying distressed assets following bursting bubbles. So, if the government can drive a hard bargain and buy up these assets at a reasonable price, it could work.

So, the good news is that there's a chance that the "splurge" could result in a best case scenario: it pumps liquidity into the market, stabilizes things, gets the economy moving again and lets the government profit.

But that's the best case scenario. Others are a lot less sure, noting that the upside pales compared to the downside risk, and even if an upside scenario may seem a lot more likely, the cost of the downside is much, much bigger (at least $700 billion at this point, and perhaps more). In fact, there are those who suggest that a poorly done splurge will almost certainly make things even worse. And, plenty are pointing out that the smart money seems to be betting that the government is entering the game as the "last sucker" we were discussing earlier. Given that there's still confusion over how the gov't will value these assets, it seems reasonable to worry. Plus, there's the thought that if the hard bargain is really a good bargain, then others will come in and do the deal -- such as JP Morgan Chase buying up WaMu or Barclays with Lehman or BofA with Country Wide or Merrill Lynch. But, there's a question of how much those companies can handle, and if it's enough to keep the economy from stalling.

So, really, a lot of it comes down to how well such a government fund is managed -- and right now that's a huge open question. If it's managed well, by folks who actually have the ability to get a pretty good read on the likely real value of these distressed assets -- then the splurge plan could work wonders. But how often do you see the government do anything right -- especially when it comes to managing money? So, while, in theory, I don't have a problem with the government entering the market as a buyer, you have to worry significantly about the fact that it's the government, and they're prone to screwing things up badly -- especially once politicians get involved. Once you have people trying to get elected on a regular basis messing around with the decision making, you know things are going to get bad fast. That's why, if such a plan does need to move forward, I'm actually all for limited oversight from Congress if (and this is a big if) there's real transparency into what the fund is doing. I might be more convinced if there were oversight from a group of economists instead.

Also, you've probably heard a bunch of folks warning about "moral hazard" lately, which is an economics term basically meaning that if you protect someone via insurance of some sort, it makes them more likely to do risky behavior. That is, if you tell someone you'll protect their downside loss on something, they're more likely to do it. Or, more specifically, if you tell someone that if they jump out of a tree, you'll catch them, they're more likely to jump out of that tree. In this case, the idea is that "rescuing" the banks makes them more likely to do risky things again, knowing that the government will rescue them. In this case, however, the risk of moral hazard seems overblown. This is hardly a pleasant time to be working in the financial sector, and I don't think this is exactly an enjoyable experience. Plus, if the Splurge works by buying stuff at pennies on the dollar, that's not going to be particularly pleasant either. It may be more like saying you'll have insurance to fix your broken legs from jumping out of a tree. Yeah, you've got insurance, but the broken legs are pretty good incentive not to do this again.

Oddly, there's almost no talk of the risk of adverse selection, which is moral hazard's sibling in looking at any sort of "insurance" market. I would think that the risk of adverse selection is much greater here than the risk of moral hazard. With adverse selection, the problem is that when you have asymmetric information (one party has a lot more info than the insuring party), the riskier deals end up gravitating towards the insurer. Thus, the insurer thinks its covering a uniform population, but only the riskiest bets take up the insurer. That seems a hell of a lot more likely in this scenario. The government does not know how to value these distressed assets, but the banks selling them probably have a much better idea, and are more likely to try to pawn off the worst of the worst on the government -- meaning that the gov't may get stuck with assets that are more distressed than they expect.

Perhaps the most worrisome aspect of this is the rush to get this done. Deals done in a panic are rarely good deals. And while I can understand and agree with the idea that perfect is the enemy of good, rushing through isn't a good idea either. Will it mean that some firms go into bankruptcy in the meantime? Yes, almost certainly. But is the whole economy going to collapse? Unlikely to happen right away, and it should be preventable with minor tweaks while the larger details are worked out.

But isn't this just about Wall Street?

There's a common refrain among many, many people, that this is just the result of greedy Wall Street bankers, and the proper thing to do here is to just let them all fail. It's not that easy. The ripple effects here would be pretty serious -- and while I don't think the economy would fully seize up, it would be really painful across the board. The lack of liquidity in the commercial paper world (short term lending, mostly) would impact a lot of businesses that you might not think have such exposure to Wall Street. And that, in turn, could create an ongoing spiral.

It would stop somewhere, but where is anybody's guess at this point, and it may be pretty far down a hole, with a pretty massive destruction of wealth in the meantime. Some may believe this is the best way to get through things (the rip the band-aid off quickly belief), but the overall damage could be significant, and not so easy to come back from. Ripping the band-aid off quickly doesn't always yield the best result if it rips the scab with it, causing more damage. So, simply letting everything fail, while an option, could have serious long term consequences.

And what about Silicon Valley/Tech?

Well, for those of us in tech, the good news is that we're more insulated than others. The tech industry is less reliant on investment banks for cash (with some exceptions) and, on the whole, doesn't have huge exposure to the commercial paper markets either. There is some fear of a loss in customers, especially for those who service Wall Street -- but there should be lots of integration work in the meantime. On the startup front, VCs still have plenty of cash for investing, and while they only put out cash calls on committed money when it's needed, it's unlikely that most limited partners (i.e., investors) in VC funds will be unable to meet those calls. The big investors, like university endowments, aren't likely to be impacted too badly. You'll likely see some slowdown in startup investing, as VCs get nervous about the overall environment and the potential decrease in exit opportunities.

But, for the most part, that should just mean better and stronger startups get funded, as the investors end up asking better questions, and only the best survive. Downturns are the times when the best startups get created.

I'd expect there also to be some fallout in the online ad market, for a few reasons. The mortgage/real estate industry has always been a big spender in the space, and that's going to drop off (if it hasn't already). Some of the other businesses impacted by the whole mess will also cut back on advertising. However, the market may start to consolidate around advertising models that actually show strong ROI, but will move away from "advertise and pray" models. Once again, the long run result may be better advertising models, rather than a lot of the crap we see today -- and that's a good thing.

To sum it all up

It is a huge mess, no doubt. The splurge is quite risky -- and while I can appreciate the upside potential, if done right, that "if" scares me a lot. I'd be much more comfortable with it if it wasn't being pushed through in its entirely in such a quick manner, with partisan players on both sides going on the news yelling at the other side each night. Instead, focus on a smaller initial package and spend a bit more time working out the bigger deal later, with a lot more input. In the short term, there's still going to be a fair amount of bloodshed, and the downside will impact companies outside of the financial sector, but for those in tech, the good news is that we're probably more isolated than other industries, though certainly not completely isolated. And, since everything is changing so rapidly, you never know what shoe might drop next.

However, in the long run, there is still money out there, and there are still opportunities. People will need to put that money to work one way or another, and rather than freaking out, now is a time to be looking for the opportunities created by this mess, and the tech industry is likely to have a lot of those opportunities. Remember that for every bubble bursting, something ends up getting devalued below its real value. The trick is just figuring out what it is before anyone else notices.

Permalink | Comments | Email This Story
]]> bailouts,-moral-hazard-and-adverse-selection,-oh-my! http://www.techdirt.com/comment_rss.php?sid=20080929/0426042403