Government Resorting To Enron Style Tactics With Resolution Trust Corp

All of the jubilance in financial markets today over the U.S. Government proposal to create a RTC 2.0 that would buy-up the bad mortgage assets of the banks, in order to prop up/save/rescue the financial system, as a cure for the credit crunch, etc, has a rather glaring fatal flaw:

The first RTC wasn’t created to buy toxic assets from struggling banks it was created to assume assets from failed ones, since it didn’t have an investment in the assets and was merely holding them it wasn’t exactly vulnerable to issues round pricing, raising funds, having enough resources to buy all of the assets, etc, etc.

The new RTC as proposed by the government would amount to a government sponsored Enron style SPE that would be used to artificially prop up banks by taking on their toxic assets (with taxpayer money), enriching shareholders, executives, and bond-holders in the process, whilst saddling taxpayers with more debts and liabilities created by Wall St.

Not to mention the fact(s) that it’s almost guaranteed that the banks will inflate the prices of the assets they sell, and the government doesn’t exactly have the resources to buy up all the toxic mortgage paper out there. We’re already at a point where the government is arranging special bond sales/borrowing money from China to pay for the current slate of bailouts, can our government (better yet future generations) afford to take on more debt?

In my view RTC 2.0 is a non-starter and would be nothing more than another financial GSE that would grow out of control and create another risk to the economy.

Finally let’s discuss the proposal to insure money market funds in order to shore up investor confidence and prevent them from “breaking the buck”, in the end it’s all pretty simple: the government shouldn’t be in the business of insuring investment, and you have can’t have a capitalist economy when the government is backstopping risk for people’s investments. Guaranteeing investment risk may shore-up confidence but it also inspires recklessness, as risk is what modulates people’s investment behavior towards smart and prudent choices.

I understand that the current economic crisis requires radical solutions, but solutions that will inspire WORSE behavior than that that caused the current crisis AND constitutes a dismantling of our economic system are patently fatuous and unacceptable.

Not too long ago I said that the government take over of Fannie Mae (FNM) and Freddie Mac (FRE) constituted the veritable death knell of American style capitalism. I now fear that recent actions by our government may constitute the birth of a new economic system tries to backstop all risk in the economy, encourages bad behavior on the part of executives, provides artificial rewards to a chosen few, artificially props things up, and mortgages its future and punishes the taxpayer in the process.

While certain actions of the government were necessary considering the alternative (AIG, the GSEs), it doesn’t change the fact that the combination of the way things were executed, the nature of other actions (fund insurance, RTC 2.0) and the lack of any real action towards implementing real regulatory reform all up to a rather negative economic big picture moving forward.

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