"In fact, the only real difference with Iraq is that in the campaign against Saddam we found no weapons of mass destruction; by contrast, in the campaign to save the economy we actually used them – or at least their economic equivalent."

Why Deficits Do Matter
by David Stockman

The Triumph of Crony Capitalism occurred on October 3rd 2008. The event was the enactment of TARP – the single greatest economic policy abomination since the 1930s or perhaps ever.

Like most other quantum leaps in statist intervention, the Wall Street bailout was justified as a last resort exercise in breaking the rules to save the system. In the immortal words of George W. Bush, our most economically befuddled President since FDR, "I’ve abandoned free market principles in order to save the free market system."

Based on the panicked advice of Paulson and Bernanke, of course, the President had the misapprehension that without a bailout "this sucker is going down." Yet 30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown is nowhere to be found.

In fact, the only real difference with Iraq is that in the campaign against Saddam we found no weapons of mass destruction; by contrast, in the campaign to save the economy we actually used them – or at least their economic equivalent.

Still, the urban legend persists that in September 2008 the payments system was on the cusp of crashing, and that absent the bailouts, companies would have missed payrolls, ATMs would have gone dark and general financial disintegration would have ensued.

But the only thing that even faintly hints of this fiction is the commercial paper market dislocation. Upon examination, however, it is evident that what actually evaporated in this sector was not the cash needed for payrolls, but billions in phony book profits which banks had previously obtained through yield curve arbitrages which were now violently unwinding.

At that time, the commercial paper market was about $2 trillion and was heavily owned by institutional money market funds – including First Reserve which was the grand-daddy with about $60 billion in footings. Most of this was rock solid but its portfolio also included a moderate batch of Lehman commercial paper – a performance enhancer designed to garner a few extra "bips" of yield.

As it happened, this foolish exposure to a de facto hedge fund which had been leveraged 30-to-1, resulted in the humiliating disclosure that First Reserve "broke the buck," and that the somnolent institutional fund managers who were its clients would suffer a loss – all of 3%!

This should have been a "so what" moment – except then all of the other lemming institutions who were actually paying fees to money market funds for the privilege of getting return-free risk decided to panic and demand redemption of their deposits. This further step in the chain reaction basically meant that some maturing commercial paper could not be rolled over due to these money market redemptions.

But this outcome, too, was a "so what": Nowhere was it written that GE Capital or the Bank One credit card conduit, to pick two heavy users of the space, had a Federal entitlement to cheap commercial paper – so that they could earn fat spreads on their loan books.

Regardless, the nation’s # 1 crony capitalist – Jeff Immelt of GE – jumped on the phone to Secretary Paulsen and yelled fire! Soon the Fed and FDIC stopped the commercial paper unwind dead in its tracks by essentially nationalizing the entire market. Even a cursory look at the data, however, shows that Immelt’s SOS call was a self-serving crock...

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