Sometimes (just sometimes) we cannot help but watch Andrew Ross Sorkin videos. This particular round, while watching the ARSE's Charlie Rose interview with automotive industry shill David Cole, something occurred to us: the United States has become the world's leading authority on creating inoperable, metastasized industrial tumors. Not only this, but the creation of, maintenance of and discussion surrounding these tumors has become so integrated in the economic fabric and incentives system of the United States, that it doesn't even occur to participants that their behavior is part of a highly developed, multi-generationally optimized, metastasized tumor growth system.
Paul Kedrosky's Infectious Greed is the first place we saw the "too metastasized to fail" concept spelled out. It was inevitable, we suppose, that it would rear its ugly head in spades during this ARSE's video (focused as it is on the automotive industry). But it was not Sorkin this time, but rather listening to the absolutely and utterly myopic class of denial that David Cole continued to dribble out all over himself whenever Sorkin would let him get a word in, that really drove it home: The United States is geared to reward massive, horizontally integrated firms with extensive and varied moral hazard properties and, moreover, this has become so automatic that these market participants, the David Coles of the world, don't even realize they are trained this way. Automotive is just the industry up in the rotation at present, but airlines, investment banking and insurance all fit the bill nicely.
The formula is easy once you learn it. You build an entity with large money, employment or political influence multiples, leverage it as heavily as possible, be that with unfunded, pyramid contribution structured pension plans, long term and excessive labor rate contracts, pure leverage, or ballooning health care liabilities, and make sure it touches as many middle class hub points as possible. (This is the metastasized aspect). "Too big to fail" was no longer a viable option once billions of dollars of private equity and hedge fund money in conjunction with cash-rich investment banks could buy up LTCM or Amaranth without much of a hiccup. To enjoy the protections of that kind of systemic failure risk you have to aim your losses at the heart(land) of America now. Homes. Cars. Retirement accounts. Insurance. Annuities.
Listening to the bejowled heads of the big three recite over and over again the multiplier effect they had on jobs from parts manufacturers to car washes made it clear. That is the business they are in. Siphoning cash to their constituents by daring anyone to let them implode. No one even pretends the cars are worth anything at all anymore. It is the jobs, the tax revenue, the health care and the community infrastructure that are the central issue here. They are professional industrial oncologists, not CEOs. They sagely scare the wits out of you so you will sign the consent form and start radiation and chemo (and pay them handsomely for the privilege to do so). Until we sit through a few chemo serious sessions and spend several weeks puking our guts out, we are doomed to find tumor after tumor after tumor one at a time, and pouring a lot of money into the bank accounts of industrial oncologists.
(Oh, as an aside: Hey, airlines, you better get your act together. So far as we know there is no "American Dream Of Coach Class Travel.")
Video: Sorkin on Rescuing the Automakers [Dealbook]
Posted by guest , Nov 21, 2008 4:35PM
First / Too Long Didn't Read...
Posted by guest , Nov 21, 2008 4:37PM
tldr
Posted by guest , Nov 21, 2008 4:37PM
My GOD EP, that was sooooo freak'n long...WTF!!! No seriously, WTF?? Check yourself! Awful! (My head hurts this late in the day reading that garbage)
Posted by guest , Nov 21, 2008 4:40PM
Too long, didn't read.
Posted by guest , Nov 21, 2008 4:46PM
Long time reader - even the long ones - first time poster - Excellent use of analogy. When will we actually start talking about things we do, make, etc.??
Posted by guest , Nov 21, 2008 4:46PM
WTF? EP doesn't know economics?
And what's this drivel about moral hazard? The horses left the barn already. Deal with it like a mature person. If that's the way the powers that be think they can save capitalism, that's what they believe and you can't do anything about it except complain.
Posted by guest , Nov 21, 2008 4:48PM
very TLDR
Posted by HAM05 , Nov 21, 2008 4:49PM
holy shit i saw this whole interview and it made me want to jump into the tv, rip sorkins face off, skull fuck his face, and wear his skin mask for my birthday
Posted by Anal_yst , Nov 21, 2008 4:54PM
F the haters, EP, this is solid (not that you didn't already know that).
Unfortunately for the big 3 (and their cancerous brethren), there is no Dr. House around (nor will there be) to come up with some miraculous life-saving cure.
Posted by guest , Nov 21, 2008 5:03PM
Citi deathrattle- Sunday night beatdown by the Govt.
Posted by Lowly Assistant , Nov 21, 2008 5:05PM
Let us limp to the next dance. We could'a been contenders.
Great read.
Posted by guest , Nov 21, 2008 5:07PM
What about the newspapers?
Posted by guest , Nov 21, 2008 5:08PM
Goddamn, that seemed almost Marxian.
Posted by guest , Nov 21, 2008 5:09PM
@ep, anal,
Well this is how empires fall. Too big to NOT fail...
Also, this is by no means a specialty of the US of A. I would say that what is unique to us - is that this is more or less accomplished without the help of elected/appointed govt officials. Yes they are ultimately entangle in it but the driving force behind it is completely separate from govt. This is unique because I think it usually takes the full might of a sovereign nation to F&CK SH&T up so badly.
Posted by guest , Nov 21, 2008 5:11PM
VP appears to be standing up to the street. So maybe as Macke says VP won't do "what the street tells him to do".
Posted by guest , Nov 21, 2008 5:12PM
And when I say Marxian, I mean like "Das Kapital", not like "A Day at the Races."
Posted by Clown Capital , Nov 21, 2008 5:12PM
Out of all the big 3, GM in particular is protracted beyond help. The 2005 GM Credit Crisis should have spurred the end of their sorry asses. Their brand sucks donkey balls.
If they want money, they should at the very LEAST take responsibility for their suckballsness. I get tired of hearing them pin their troubles on the "auto industry" as a whole.
Posted by guest , Nov 21, 2008 5:13PM
Last friday Adami said that Geitner would be the next treasury secy. so now he is saying that Eric Dinalo will replace him at the NY Fed.
Posted by guest , Nov 21, 2008 5:14PM
Conrad Black
I think we all agree that if Bush will serve out Black's prison sentence..might be a swap
Posted by guest , Nov 21, 2008 5:16PM
14: This never could have happened without decades of soft Fed monetary policy and implied or explicit government backup of debts and debt-issuers of every stripe. Do you honestly think we'd have been issuing subprime mortgage debt at the levels we did for the length of time we did if interest rates hadn't been artificially low and the debts hadn't been guaranteed by a GSE with an implied backing from the US Treasury?
Sovereign power *was* involved, it's just that it was one step removed.
Posted by guest , Nov 21, 2008 5:21PM
Honestly - I can't wait until the NY times goes down the tube and Andrew Sorkin loses his job because of loss of ad revenue.
Glib *ss holes
Posted by guest , Nov 21, 2008 5:28PM
He is preparing for his television career, he's been on the tube a lot lately. # 21
Posted by guest , Nov 21, 2008 5:36PM
What do you think lawyers are?
Posted by guest , Nov 21, 2008 5:38PM
@ 22
So you think TV doesn't rely on Ad dollars as well?
http://industry.bnet.com/advertising/1000141/auto-ad-spend-to-fall-by-9-percent/?p=141
Posted by guest , Nov 21, 2008 5:42PM
@22
http://adage.com/article?article_id=132584
I love how people comment from a distance and with disdain thinking that the Auto Companies failure would only affect Detroit.
Posted by guest , Nov 21, 2008 5:48PM
Be prepared to turn your tv on and see test signals. Then the real fun begins.
Posted by guest , Nov 21, 2008 5:54PM
OK, I did not finish, but I think the takeaway is "manufacturing is bad" and also "no business should employ too many people with the right to vote in the country in which said business is headquartered." Oh, and also "healthy economies never allow too much interdependence; that just creates moral hazard." On that last point I'll agree with you in part; if the Fed hadn't bailed out LTCM the financial services industry might have learned its lesson and asked the government to mandate a little transparency on all that counterparty metastasizing that gave us the "insurance" company, whose bailout alone could finance a Big 30 manufacturers. But that would create moral hazard because it would just create too many damn jobs.
Posted by guest , Nov 21, 2008 5:55PM
Can anyone summarize? I can't concentrate long enough to read the whole thing.
Thanks,
Analyst, Circuit Citi
Posted by Lowly Assistant , Nov 21, 2008 6:00PM
28,
Take a nap, kiddo! Lord knows you haven't slept for months.
Posted by Phobos , Nov 21, 2008 6:00PM
@25
That's the problem right? fear? The move from self preservation being that of survival to that of success?
Inherent in the issue of Too Big To Fail is that people are concerned with how anything will affect them, not in the long run, but in the short. In the long run the act of sustaining these corporations through times of malfeasance has led to a situation where if we kill the tumor, we kill the host. But that was done because in the short run we didn't want to go through the pain of radiation treatment. We bought into the theory that herbal remedy would cure the ailment -- stop the pain; if we don't have any pain then we don't have a disease.
Pride kicked in, pride always kicks in. Ad campaigns about the pride of America, how can we be a powerhouse without these cars, and these airlines -- they're a part of American Culture?
How are IBs different? A very valid question. Firstly, we're not inefficient. There are inefficiencies in our system occasionally (see Citi), yes, but by and large our goal is to make as much money as possible and that means actively weeding out inefficiencies (again, in most cases, and more specifically when there doesn't exist a counter gain to be made by gaming the system with inefficiencies). Secondly, we're a transactional business that deals with public and private enterprise. This means that we're constantly interfaced with people who's primary goal is a moral hazard -- and we search those out and seek to capitalize on them. In this instance, we were caught in the moral hazard, and thus suffered huge. We didn't catch it, it permeated.
Citi isn't too big to fail -- no bank is. The whole of the banking system can absorb them, as long as the whole of the banking system isn't failing at the same time. The issue here isn't that Citi is too big to fail, the issue is that the health of the system isn't sufficient to absorb (in full) the loss that would occur.
Posted by Phobos , Nov 21, 2008 6:06PM
1) I apologize for the long post
2) substitute "moral hazard & information asymmetry" for "moral hazard" in above post.
Posted by Harald , Nov 21, 2008 6:06PM
TLDR . can i get a 3-5 sentence summary?
Posted by guest , Nov 21, 2008 6:07PM
Sorkin needs a new gig, but that was a horrible audition.
sorkin + NYT = Fail
Posted by guest , Nov 21, 2008 6:11PM
@30
Well I could really care less about advertisers or tv or the fear of people losing their jobs. I will do fine personally. I just give a sh*t about how it affects other people.
What I really have a problem with is the glib and heartless way that people make pronouncements concerning the failure of industries.
When these things go down it hurts real people. There is nothing wrong with criticism and the destruction of an industry inherently. It's the way it's being done by the media that p*sses me off. Like their sh*t doesn't stink. Come on- the NY times is a relic and don't even get me started on Charlie Rose.
As far as IB's and banking and their efficient allocation of capital goes. You must be joking. IB's do not allocate capital efficiently. They have turned the stock market into a casino and when they get a losing hand they want a bailout from the house while all the other players get stuck with the losses.
Posted by guest , Nov 21, 2008 6:13PM
@30 Oh PLEASE dude. Wal-Mart is efficient. The semiconductor industry is efficient. IBs profit by raking in fat fees selling the real economy on the idea that they'll raise more money if they agree to conspire with them to sell pension funds on fundamentally inefficient financial "instruments" like convertible bonds -- seriously, what is the point of a convertible bond if not as a cool thing to arb? buy bonds and options if it better fits your risk profile! -- so hedge funds can exploit their "inefficiencies." Read this story if you don't believe me.
Posted by guest , Nov 21, 2008 6:16PM
@35 I guess the story didn't post. It's here:
http://www.wbjournal.com/news41989.html
And thanks 34, voice of reason.
Posted by guest , Nov 21, 2008 6:20PM
Good points BUT I also agree with the comments which (basically) said: so what? American society is a welfare society top to bottom, and has been for decades. The ONLY difference from our socialism and (say) European socialism is that most of the American peasantry are too stupid or too racists to fully embrace it. So, you've got socialism for the intelligent and scummy wealthy (mostly) with the dumb-ass white-trash still HOPING (and praying to Jesus) that the Republicans will help them (the white-trash) to "get even with those people". Once the white-trash get over "those welfare queens" and completely embrace socialism - meaning start demanding a piece of the scam - the entire thing collapses. It won't collapse YET, however, because the white-trash are STILL more worried about "those people" getting welfare than the nobility.
Posted by guest , Nov 21, 2008 6:21PM
@36
thanks!
I have kept quiet about this stuff for a while and I feel it's time to add to the discussion or blow a gasket (no pun intended)
Posted by guest , Nov 21, 2008 6:22PM
speaking of fear:
from matt drudge
"CITIGROUP 'May Get Rescued by U.S. Government'..."
Posted by guest , Nov 21, 2008 6:24PM
@37 That's completely true, but it's also the societal distrust generated by the diversity and attendant racism you mentioned that, in my view, has produced an economy that fetishizes greed, competition, comparative advantage and sales in lieu of innovation (and fucking synthetic CDOs are not what I mean by innovation) and long-term growth. It's the price of diversity, in some part, but it didn't have to be this steep a price. Mercifully, it looks like things are changing a bit.
Posted by Phobos , Nov 21, 2008 6:26PM
@34, @35
The stock market has always been a fucking casino, you twit. What *ever* led you to believe it was otherwise? And the banks don't want money because the stock market failed, the banks need money because the underlying mortgages that main streeters bought were fraudulent.
And you think Wal-Mart is efficient? You're fucking joking, right? Seriously? Have you ever been to Wal-Mart HQ? It's a fucking nightmare, so much inefficiency it's an eye sore. Try talking to an ex WM employee, ask them about their efficiency.
I'm not even touching the article. That's just.. dumb.
Posted by guest , Nov 21, 2008 6:27PM
@38 No kidding. I have never posted a comment on a blog that was not my own before this. (I'm unemployed now.) (I used to be employed ranting Marxistly on Gawker, just for transparency's sake.)
Posted by guest , Nov 21, 2008 6:28PM
@37
If the auto industry collapses I have a feeling the gig will be up. Joe 6 pack, veteran with his membership in the NRA( which a lot of UAW members are) is going to want vengeance for the disparity in approach to the problem.
It will seriously affect the breads and circuses charade as well.
Posted by guest , Nov 21, 2008 6:31PM
@Phobos -- oh goodgrief FOREST TREES DUDE. Just to my point: maybe enforcing all that "efficiency" on everyone else (like, say, the arbs do) can make for a bloated bunch of efficiency enforcers. That would explain the whole Republican small government debacle.
This is inefficiency: AIG making eightysomething percent profit margins selling CDS in the middle of the decade.
Posted by guest , Nov 21, 2008 6:32PM
@46 Ok you got me there it has always been a casino. So how is that efficient allocation of capital again?
Also no need to call us a twit. I was beginning to think it was possible to have an intelligent conversation on deal breaker for a second.
Posted by guest , Nov 21, 2008 6:35PM
I meant @ 41 re market being a casino
-guest w
Posted by Phobos , Nov 21, 2008 6:35PM
@44 where is the inefficiency in that? Pure market buy-sell. Are you arguing making a profit, even an exorbitant one is inefficient?
Posted by guest , Nov 21, 2008 6:38PM
Gambling is not efficient use of capital.
Unless you are a casino.
Keep defending your inefficient system run by insiders. It makes me laugh.
Posted by Phobos , Nov 21, 2008 6:43PM
@46
If you're offended at being called a twit, you'd last about 5 seconds in finance. That being said..
You assume that by Casino, money is lost to the house. Money isn't being lost to the house, it's being lost to people who are making better decisions through capitalism.
See, if you sell your stock at $5 down from $30 it proves some things:
1) you bought on asymmetric information
2) you're willing to take a loss
3) someone is gambling that it will go up
If (2) isn't in the books for you, then don't play. Because someone (and note: not the house) will take your money.
Open Markets are the ultimate in efficiency. They seek stable prices with all known information, always.
Posted by guest , Nov 21, 2008 6:44PM
@42 sorry to hear that you are unemployed. I hope you get through this in one piece.
-guest w
Posted by guest , Nov 21, 2008 6:46PM
"Open Markets are the ultimate in efficiency. They seek stable prices with all known information, always."
Do we have an open market?
Posted by guest , Nov 21, 2008 6:48PM
@phobos: Sorry, there appears to be some information asymmetry separating us. Google "Cassano CDS"
Posted by guest , Nov 21, 2008 6:50PM
re being called a twit -- hahahahah. I have had a gun pointed in my direction and turned it on my attacker. I have been stabbed, beaten etc..I think i can handle being called a twit.
That being said -- respectful disagreement tends to yield better results.
Posted by guest , Nov 21, 2008 6:51PM
So, you're saying it's metastasized? Metastasizically speaking, you could say it's metastacized, but I would say more likely it's in a metastacized state of metastasis, trending toward metastasisopoly.
Posted by Phobos , Nov 21, 2008 6:53PM
@53
Point taken, apologies.
Posted by guest , Nov 21, 2008 6:56PM
Phobos thank you sir.
BTW -- I agree with you on markets being efficient as a general rule. I just don't think the one we have now meets the criteria of being open.
Posted by Phobos , Nov 21, 2008 7:01PM
@52
I see what you're saying. Cassano was inefficient in his job, yes; lost Billions.
To my point: he was removed because of his inefficiencies, "weeded out". You'll find this (almost) universally at banks: if you lose money you lose your job.
And given the crowd, I should have qualified: in banking it's not that we're absolutely efficient, because nothing is. It's that we seek efficient behavior in a violent, unabated manner.
Posted by guest , Nov 21, 2008 7:10PM
So, Phobos the question is when everyone is being hammered by the market and is losing money.
Does this result in all the losers in executive positions at banking and financial institutions losing their positions?
Or is it just the rank and file that bare the brunt of the efficiencies of the market?
I am still waiting for some CEO's to lose their positions. That would prove to some degree that the board of directors actually give a f*ck about the bottom line and respect the markets.
Posted by Phobos , Nov 21, 2008 7:26PM
@58
I hope they lose their positions too -- as it would say "you're responsible". It draws a difficult line though: when are CEOs responsible for the direct investments, where do you separate that? I think on the larger level, we all have to admit that in something this massive, they were responsible.
I can say VPs are losing spots left and right.
Posted by guest , Nov 21, 2008 7:29PM
The discussion about efficiencies is interesting. I believe that related to that idea there's some recent data compiled by the WSJ in yesterday's online edition.
Here's how it's described:
"Investors in the U.S. stock market have lost more than $9 trillion since the peak a year ago. But in industries at the center of the crisis, some executives managed to emerge with substantial fortunes. A study by The Wall Street Journal analyzed the cash compensation and net proceeds from stock sales of top executives at financial and home-building companies, over a five-year period. The list includes executives at companies that have performed relatively well, in addition to poor performers. Click on the columns below to sort the top 25 CEOs by total amounts they received. "
Here's the link to a table:
http://online.wsj.com/public/resources/documents/st_ceos_20081111.html
The house is supposed to ultimately win at the casino. That's not efficient.
Posted by guest , Nov 21, 2008 7:30PM
Re: #40. I hope your optimism is correct. But, the white peasantry I work with, in a large northern city, are pretty worked up over "dis muslim guy dat's gonna be runnin' tings now. N doze people are gonna git all da welfare day want now, because of him, ya-know. Hey, gotta go to da jewels, be right back."
If Obama sticks to a typical mildly socialistic Democratic plan and:
Brings home the troops
Nationalizes a bank or two.
Proposes a “New Deal 2”
Bails-out the car companies
And suggests that Fred Flintstone didn’t run around with dinosaurs
We might have a white-trash revolution on our hands. I'm sure Faux News will be encouraging it.
Posted by guest , Nov 21, 2008 8:05PM
CNBC finally getting serious Donny Deutsch, Steve Liesman and Charlie Gasparino on now.
Posted by guest , Nov 21, 2008 8:07PM
and Mary thompson..all the real brains..
Posted by guest , Nov 21, 2008 9:28PM
#60, the house did win. The CEOs and employees were the house, rewarding themselves handsomely for all their "success" and then handing the bill to investors and taxpayers when it turned out to be one giant scam. Equity wasn't the house. They were the suckers.
Posted by guest , Nov 24, 2008 9:14AM
You've got a good acronym hiding there in your post.
Knock the CHAIR out from under the economy.
(Cars, Homes, Annuities, Insurance, and Retirement accounts.)