MoralHazard

..the question, which is if in fact [AIG going bust] was systemic risk, if in fact Goldman Sachs was going to, you know, fail or somebody else was going to fail because of this, let’s take a look at this list of counterparties and decide who, in fact, does need to be bailed out because of systemic risk, and who does not and who could take a haircut and who could say, OK, I will pay, you know, the government could negotiate tough across the table and say, you are not in any risk of failure, you are going to take -- you are going to pay 75 -- I am going to pay you 75 cents on the dollar, instead of 100 cents on the dollar.

There did not appear to be any thought to how to make this the best possible deal for the taxpayer. It was all just hurry up, we have got to do this, it’s a problem, it’s a problem, and now we are paying the consequences.

But how f-ing bad, darn it?

I want to call this bluff. They tell us, look, see what happened after Lehman. What happened, really? Some stocks went down. Some banks went and got capital. AIG should have gone bust, but they weren't allowed to. Citi had other problems. Goldman Sachs neatly swiped off $12 billion of the AIG bailout, as did Deutsche Bank and Merrill/BoA.

In general, everyone survived. Maybe if we let AIG go down, they will survive - and if they can't, the US government can figure out if saving anyone is of any real use (not to save THEIR counterparties, but to see if putting capital will provide any return to the taxpayer) and then consider putting capital in. Surely, people like Buffett will identify the best survivors and put capital there; and the rest may not even need to be saved.

I know this is way early; and also way too easy for me to say, sitting where I am. But this is my rant for the day, and I need to figure out how "systemic" this "risk" really "is". I'm already scared of words in quotes.

China will tolerate an increase in bad debt this year as it eases rules governing bank lending to prop up an economy that’s slowing faster than expected, the nation’s banking regulator said.

The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a “massive and rapid rebound” in soured debts, Chairman Liu Mingkang said in Beijing today. A transcript of his speech was obtained by Bloomberg News.

Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than $500 billion. Lenders will likely face weakening asset quality, rising defaults and “significant” constraints on profits in 2009, Standard & Poor’s said Jan. 7.

India's going this way too. RBI has slowly started reducing provisioning for real estate loans (which are the biggest problem) and for other kinds of loans that actually need tightening, not loosening. But we're loosening. Next stop: credit cards and personal loans. When regulations there loosen, the sh** will hit the fan.