Moral hazard, on the other hand? That is not a matter of perspective. And in this regard, at least in the case of so-called crooked accounting scandals, there is no issue of moral hazard, since steps have been subsequently made and many of the party involved given prison sentences. Not so in the case of LTC.

As for the wealthy investors behind LTC, did they take a bath? Well, that depends on what you mean by bath. The principals did come out with a loss, this is true, but far less of a loss than if they had been left to their own devices, which would have wiped many of them out, and remember, we are talking almost exclusively the very wealthy here. In a country where a major illness will cause a middle-class family to potentially lose their home, the moral content of the difference in treatment is reprehensible. Remember that many of these same investors whose losses were cut are the same sorts of folks who insist that markets solve all ills, that self-regulation is optimal and that the only noble goal of the corporation is, in Friedman's immortal words, to make money for its shareholders, screw social responsibilty, loyalty to home markets, workers be damned.

But one of the things that LTC shows is that what is good for the goose clearly is not good for the gander.

As for the indirect effects, I don't know if we're talking the same thing. I'm talking about emerging market volatility, of the sort that hurts workers in those markets. One day, a plant in Argentina is churning out goods, and the next, its door closes, often simply for want of net orking capital. As for the insurance company returns, it's more of a portfolio analysis problem, wherein the PMs at major insurers were managing to appropriate risk level along the efficient frontier that was being arguably, esp for their intents and purposes, distorted by LTCM's (and similar) investment strategy (your wiki link actually somewhat speaks to this when talking of the S&P 500 gamma that the massively levered LTC was basically making a market in). In this case, I am not simply saying, as you imply, that "prices simply went back to where they should have". I am saying that folks buying such insurance products had their returns impaired, as a direct result of LTC's market behavior, and for which they were not compensated.

And in any event, the fed will do exactly what, in your opinion, when MBS markets start getting really hammered and the inevitable ARM crisis bites the non-wealthy? Yup, that's right, a lot of hand-wringing, that's where my money is.

Let's not forget why the Fed intervened: on the heels of first a peso crisis in Mexico, then a currency crisis throughout Asia, we find ourselves, not long after Warren Greenspan's "irrational exuberance" statement, confronted with a rouble crisis, the crisis that triggered LTC's failure. Bailing out LTC was as much an attempt to calm frazzled markets, generally speaking, as much as it was an assist to the folks who brought us LTC in the first place. Fed action on behalf of bond markets, and on behalf of equity markets. Now, when the fed starts intervening on behalf of low-income housing markets, then I'll grant you that "minimizing shocks to the system" is a noble goal.

But they only tend to minimize such shocks on behalf of one particular class. And on this larger point, of course, you are correct, there is quite a lot of discrimination viz. the wealthy.

But counter to where you appear to be going with this thought, it should be clear that this discrimination is virtually always to their benefit.


The Hun is always either at your throat or at your feet. Winston Churchill

The lesson I came away with is that properties that remained valuable over time--in this case so valuable that boarded up hulks were worth very expensive restoration efforts--were those properties that were so overbuilt in the first place they ended up in bankruptcy court.  In some cases, multiple times.

It was with that experience in mind that I watched the Chunnel being built.  The idea that it would ever be "profitable" was beyond amusing.  On the other hand, I could easily foresee the day when both nations would point with great pride at their accomplishment.  Because except for the original investors, no one cares about the petty finances so long as final product is worth doing.

The Chunnel does have value and probably has a solid positive cash flow now as long as you don't have to return the original capital or service that debt.