Five Things You Need to Know: The Real Entity That's Too Big to Fail? You

167-1... You Are Too Big to Fail... Whatever It Is, We're Against It... The Unforced Feminization of Men... What We Need Now Is an iPad

"The treasury secretary told a House panel that failure to provide A.I.G. with the $85 billion bailout would have been “catastrophic” for the economy."
-- Geithner Defends A.I.G. Rescue as Essential, New York Times, January 27, 2010

"But the fact is we're all sitting in a big galley, pulling at the oars with all our might. You can't tell me different!... Sitting on nails and pulling like mad. And what do we get for it? Nothing! Thrashings and misery, hard words and hard knocks. We're workers, they say. Work, they call it! That's the crummiest part of the whole business."
-- Journey to the End of the Night, Louis-Ferdinand Céline

If Treasury Secretary Tim Geithner could grasp just half the awful divide that separates the galley pullers of Céline from the financial engineering geniuses at AIG (AIG), he wouldn't be sitting in front of politicians right now complaining about not being a politician. "I have never been a politician," Geithner told the assembled politicians. For some people, I guess, the taste of their own shoe leather is an irresistible addiction.

But so what? At the rate the United States is currently burning through Treasury Secretaries -- five in the past 10 years -- what's one more body on the pile? The main problem with Geithner is that he's so toxic to the very idea of money that great piles of it spontaneously combust whenever he comes within 200 yards of it. Not a good quality to have in someone who sits in the fanciest office in the US Treasury building.

It's impossible to overstate the weirdness of our current hybrid financial system. We're caught somewhere in-between flagrant graft conducted in wide-open view of anyone with even a cursory interest in finance and the cruel bullying of vicious billionaires with a fetish for rubbing our noses in it.

Not paying attention to all that Wall Street stuff? No worries, Bubba. Give it a few minutes and some billionaire will come rolling down from the Swiss alps to make sure you get a taste, after which he'll stomp back up the mountain and lie down in a pile of naked women while gulping down champagne and caviar served from an assortment of expensive wild animal skulls.

If that's too much for a decent worker to bear... "Work, they call it! ... then turn off the Davos World Economic Forum for a moment and just focus on the math. According to Geithner, we the workers were forced to give AIG $85 billion to prevent an outright economic catastrophe and certain doom. Ho ho. And so the joke there is that the entirety of the $14.2 trillion US economy was levered to AIG at a ratio of 167-1. Row on, galley puller. Row on.

While the theater of the Geithner-AIG grilling makes for good entertainment and packs enough gristle for just about anyone to walk away with a heart full of hate, it really pales in comparison to the mechanics behind the deal. It's not oversimplifying things to say that had the US just put the AIG money in one big trust to handle granny's life insurance policy, as opposed to Goldman Sachs' (GS) interest rate swaps, we'd all have made out just fine.

Instead, what was engineered in broad daylight -- what the billionaires take periodic breaks from the Davos banking orgy to rub our noses in -- was just one more structured finance deal on a grand scale. 

UPDATE -  Almost ready to post this when I saw the following headlines across my Bloomberg:
 

• PAULSON SAYS SYSTEM COLLAPSE WOULD'VE MEANT 25% JOBLESSNESS
  
  
• PAULSON SAYS AIG FAILURE WOULD'VE TAKEN DOWN ENTIRE ECONOMY

There you go, my fellow galley rower; 167-1. Former Treasury Secretary Hank Paulson confirms what present Treasury Secretary Geithner says; that the failure of AIG, an insurance holding company with 116,000 employees headquartered near the bowels of Wall Street, a stone's throw away from either a massage parlor or an Abercrombie & Fitch (ANF) depending on how your tastes run, would have taken down the entire United States economy.

If you believe that, well, I'm not sure what there is left to say, except, row on.

Who's Too Big To Fail? You Are

"Big real estate developers do it all the time -- like yesterday, when the owner of New York City's Stuyvesant Town complex decided to stop paying its $3 billion mortgage. So why are you still writing a check every month on that mortgage that's much bigger than your home is actually worth? Good question, University of Chicago economist Richard Thaler says. Thaler tells New York Times readers that it's not just alright to walk away from one's over-sized mortgage -- it may actually be a moral imperative."
- The New Mortgage Revolution: Walk Away, Housing Watch, January 25, 2010

Mass debt repudiation is still but a pebble in a dank pond, but make no mistake: The ripples will begin to be felt sooner rather than later. The Tishman-Speyer default is instructive, if only for the fact that it illustrates the lending conundrum we face going forward. The implicit message, one that no one bothered to consider when times were good, is that the penalty for default is unfairly distributed.

Operating free from moral obligations to lenders, since presumably lenders are also risk-seeking entities, businesses have far fewer constraints than individual borrowers. The old saw that a $100,000 default will keep a borrower up at night, while a $1 billion default will keep the lender up at night is quite true, but cliches aside, apart from losing equity in the deal and waking up a little hungover and bruised, it will essentially be business as usual for borrowers such as Tishman-Speyer, the ramifications dealt out over a span of days, not years. Walk away from your $100,000 mortgage? You'll be frozen out of levered speculation and risk-seeking for at least a full decade.

The Thaler angle -- that there's a behavioral economics optimization here, that there exists a small versus big lender treatment conundrum, and that large banks have already walked away and defaulted to the American people via the Federal Reserve and Treasury -- all make this a compelling thread. After all, almost a quarter of borrowers nationally owe at least 20% more on their mortgages than their homes are actually worth. In states such as Nevada and Arizona, according to the article linked above, the percentage who owe more than their home is worth is far higher... it's more than half.

So who's really too big to fail here? To date, the biggest con perpetrated on the American people isn't a paltry $85 billion bailout of AIG, it's the grand lie that AIG, Citigroup (C), Wells Fargo (WFC), Goldman Sachs -- take your pick -- are too big to fail in the first place. As debt repudiation gains momentum, we'll come to understand this on both a personal and sovereign scale.

Whatever It Is, We're Against It

Yesterday Barry Ritholtz posted an old film clip from a 1932 Marx Brothers film, Horsefeathers. In the clip, Groucho sums up the public's political sentiment as the Great Depression persisted: Whatever it is, I'm against it.



If that truly was the popular political sentiment running through the heart of the Great Depression, then perhaps we should expect to see similar sentiment shifts gathering steam these days. After all, the same trends in social mood that created the "Whatever it is, I'm against it" feeling in the 1930s are identical to the trends in place today, right?

Well, have no fear, the Washington Post is here to summarize our current political mood. What the article is about isn't really important. Rather, look at how it beings:

"The state of the union is obstreperous. Dyspepsia is the new equilibrium. All the passion in American politics is oppositional. The American people know what they don't like, which is: everything."

The Unforced Feminization of Men

"Japanese college students are more interested in moisturizer, cleansing scrubs and beauty salons than they are in cars, according to a survey of 1,600 men and women by the Japan Automobile Manufacturers Association last year. The group wanted to find out why vehicle demand was sliding. Sales last year plunged 9.3 percent to 4.6 million vehicles, the lowest level since 1977. 'More and more men are becoming feminized,' said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments Ltd. in Tokyo. 'Their desire for better looks is getting stronger.' "
- ‘Feminized’ Japanese Men Boost Kao Sales as Women Pamper Less, Bloomberg, January 27, 2010

According to Robert Prechter's seminal book, The Wave Principle of Human Social Behavior, a key trait of a falling transition in social mood is the "feminization of men" and the "masculine, liberated woman." If the social trends in Japan toward increased feminization are correct, the view that Japan's battle with deflation has formally ended will likely be challenged over coming months.

What We Need Now Is an iPad

I'm sitting here under deadline as Apple's (AAPL) Steve Jobs is showing off his company's new innovation, the iPad. It looks cool. The size is good. The design flawless. It's truly remarkable what men will invent to streamline their ability to access and view pornography.