The Great Deformation by David Stockman

$700 billion blank check.
    And so the TARP bailout was enshrined as a last-resort exercise in breaking the rules to save the system. Ever the master of malapropism, President Bush soon took to proclaiming, “I’ve abandoned free market principles to save the free market system.”
    Ironically, however, the truth was more nearly the opposite. The financial meltdown of 2008 was occurring because sound economic principles had already been abandoned—years earlier, in fact. The right solution was to restore these discarded canons, not to eviscerate them further. That meant promptly dismantling the giant gambling halls which had ushered in the crisis.
    It also meant returning the Fed to its proper role as guardian of the dollar’s value and stern taskmaster of banking system liquidity; that is, to a policy of dispensing discount window loans only at a penalty rate of interest against sound collateral while remanding insolvent institutions to the FDIC for closure. But most importantly, it meant liquidation of the massive pyramids of debt and leveraged speculation that had built up throughout the American economy over more than three decades.
    THE ARROGANCE OF WALL STREET:
CRONY CAPITALISM, JOHN MACK STYLE
    The urgent imperative for the Fed to revert to these canons of sound money can be illustrated by its opposite: the utterly shameful and gratuitous bailout of Morgan Stanley two weeks after the Lehman bankruptcy. On September 29, 2008, Morgan Stanley was insolvent and belonged in the financial morgue on a slab alongside Lehman.
    Yet that very day it reported to the public that it had “strong capital and liquidity positions.” That statement was utterly misleading, but it never gave rise to an SEC investigation because it could be defended by means of a hair-splitting technicality. A later investigation by the Federal Crisis Inquiry Commission, in fact, showed that Morgan Stanley had $99 billion of liquidity on the date in question. What the investigation also showed, however, was that very same day it had been the recipient of $107 billion in liquidity injections from the Fed’s alphabet soup of bailout programs. It was liquid only because it had become a branch office of the New York Fed!
    Absent the cash being injected by the Fed’s multiple and massive firehoses, Morgan Stanley would have been deeply illiquid. Its hot-money lenders would have seized tens of billions in collateral, which they would have sold at any loss necessary to retrieve their cash. Lehman’s reputed $40 billion loss at the time of its filing would have paled compared to the losses which would have been ripped from Morgan Stanley’s tottering $1 trillion balance sheet.
    As previously indicated, the survival of Morgan Stanley was of no moment to the American economy. It was a giant leveraged hedge fund being subjected to the mother of all margin calls; that is, its reckless reliance on overnight wholesale money to fund massive amounts of impaired, illiquid, and highly volatile assets was undergoing a flaming crash landing.
    The claim that its vestigial capabilities in the mergers and acquisitions arena and in underwriting stocks and bonds needed to be preserved was ludicrous. Neither of these businesses required meaningful amounts of capital, and there were always dozens of pedigreed Wall Street veterans waiting to hang out a boutique investment banking shingle to pick up the slack.
    Even though no public purpose was served, the details of the Fed’s $107 billion bailout of Morgan Stanley underscore the abject manner in which it had capitulated to the imperatives of crony capitalism. About $61 billion of this amount was obtained from the Fed’s Primary Dealer Credit Facility, and the Crisis Commission’s data show that Morgan Stanley had put up only $66 billion of collateral against this advance. This meant that the “haircut,” or margin of safety, was only 8 percent.
    Yet Morgan Stanley’s