The House Republicans, the Wall Street Bailout, and the LTCM Crisis
September 27, 2008, 08:05 AM
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Hmm - The White House, The Democratic Congressional leadership, most Republican Senators who aren`t hiding, and the MSM versus - the House Republicans. That is the Bailout Battle.

This is exactly the ideological fissure which erupted in the Amnesty Wars, as we remarked two years ago. And once again, it appears that the valiant House band is being heartened by the general reaction of the American public (minus some selfish businessmen).

Instinctively, the public seemingly knows that something cooked up by Congress and the Wall Street and Administration wings of Goldman Sachs is not going to be good for them. But the matter is so esoteric and technical as to inhibit comment.

Happily, VDARE.COM can help. Exactly a decade ago the same thing happened: the crisis caused by the collapse of the Long Term Capital hedge fund. It was in miniature, and it was contained, but the transmission mechanism of arcane financial techniques was the same. So was the suspicion of Government influence (but not in that case cash) being commandeered for private benefit. We published two essays on the subject Wall Street`s Changing Culture and Wall Street`s Changing Culture: The Cost. These were based on two fine books, When Genius Failed and Inventing Money.

Wall Street`s Changing Culture remarked:

Why was the LTCM affair such a crisis?...The New York Fed, when called in to evaluate the LTCM situation in mid-September 1998, guessed 17 counterparties might lose $3-$5 billion combined. While annoying and bonus- (even department-) threatening, this amount, or several times this amount, simply was not big enough to create systemic risk...However...although the likely losses might have been limited, some of the bonuses and jobs threatened by LTCM exposure and by involvement in similar trades were located at politically well-connected private institutions, notably Goldman Sachs.
[When Genius Failed] judges the derivatives revolution harshly... [and] asks penetrating questions about the role of the authorities. Given that LTCM`s "stunning losses betrayed the flaw at the very heart - the very brain - of modern finance" and that the concept it used "prevails at virtually every investment bank and trading desk," it is very strange to find Greenspan and Rubin (when Secretary of the Treasury) blocking all efforts to improve transparency and improve regulation even to the extent of forcing out the former CFTC head, Brooksley Born. A ridiculous situation has been allowed to arise where the balance sheets of major financial institutions have no reliable relationship to the actual economic situation of the firm, because of derivatives. Who benefits from this?... One day we may all regret this very much.

Wall Street`s Changing Culture: The Cost, noting

suspicions of ominous fusion between private commercial objectives and the formulation of public policy

also highlights Inventing Money`s contention that certain financial institutions, linked to LTCM by a mass of derivatives, were apparently moved to push for the firm`s demise, which in this case would have worked to their advantage:

By now the reader is wondering about the wisdom of allowing these financial nuclear weapons to fall into the hands of such children...It makes the furious efforts by Rubin and Greenspan to block closer supervision of derivatives look, in the words of Alice in Wonderland, curiouser and curiouser.

The House Republicans are right to be suspicious. Reading Wall Street`s Changing Culture and Wall Street`s Changing Culture: The Cost will give an insight as to why.