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We Found An Abnormal Growth

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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]


Banks Prove That They Are Not Too Big To Fail By Saying "We Can Fail" On A Piece Of Paper, Moving On

One way you could spend this slow week is reading the "living wills" submitted by a bunch of banks telling regulators how to wind them up if they go under. Don't, though: they're about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**: (1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank). (2) If after stiffing its non-deposit creditors it didn't have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar. This seems wrong, no? And not just in the sense of "in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy." It's wrong in the sense that it's the opposite of having a plan for dealing with banks being "too big to fail": it's premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can't get out of without taxpayer support, it'll just file for bankruptcy like anybody else. Depositors will be repaid (if they're under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha.

Vikram Pandit Not Feeling Sandy Weill's Break-Up The Banks Call

About a month ago, retired Citi CEO Sandy Weill set his alarm an hour early, got out of bed when it was still dark, ate a piece of rye toast, told Joan he'd see her when he'd see her, took the elevator downstairs to wait for the car that drove him out to Englewood Cliffs, and went on CNBC to proffer a small suggestion to Wall Street: break up the big banks. Perhaps you heard about it? Not many people were receptive to the notion of Weill giving them advice on the matter, which may or may not have had something to do with the fact that in his day, Weill couldn't get enough of big banks and was the man responsible for cobbling together the behemoth known as Citigroup, an institution so huge it can barely support its own weight. The response by most, in fact, was "Shut it, you old bag." But what about Vikram Pandit, the lucky guy who inherited the place? What did he think of Weill's tip? After giving it some good thought-- really and truly considering it-- for a few weeks, he's decided to take a pass: Citigroup’s chief executive has knocked back the idea of big banks being split up after calls from people such as his predecessor Sandy Weill. But not for the reasons you might think! Pandit actually agrees with Sando because if you think about it, Citi's already been broken up and is basically the bank it was before the merger that resulted in it needing firefighters to use a giant pulley system to lift it out of bed and get around every day. Pandit said Citi, formed in Mr Weill’s time with mergers such as the acquisition of Travelers in 1998, had already gone back to the basics of banking, and aside from some global markets businesses had sold most of the units from that deal. “What’s left here is essentially the old Citicorp,” he told the Financial Times. “That’s a tried and proven strategy. Why did it work? Because it was a strategy based upon operating the business and serving clients and not a strategy based on dealmaking. That’s the fundamental difference.” So we're all on the same page here. Citi Chief Rejects Calls For Bank Splits [FT]