Abort, retry, fail ?

by John Q on March 9, 2009

Every now and then back in the Dark Ages, I would have to deal with the late, unlamented MS-DOS operating system. It wouldn’t be long, as a rule, before I encountered the message “Abort, Retry, Fail?”

Of these, “retry” sounded the most hopeful so I’d choose it a few times, but I don’t think it ever worked. Usually the best thing was to shut down the machine and start again.

This trilemma struck me when looking at the options for US-based banks, and Citigroup in particular.

Like lots of others, I think the only serious option is “abort”, that is, to take the whole thing into public ownership, sell off what can be sold, and eventually return a drastically cut-down version to private ownership, under much tighter regulation than in the post. There are some big problems along the way, most importantly how to treat the holders of Citi’s debts, but these problems have to be addressed sooner or later.

The alternative, recently advocated by US Senators Shelby and McCain with specific reference to Citigroup is “Fail”. They haven’t spelt out what they mean, and perhaps (as suggested by Calculated Risk) it’s really just a semantic variation on the standard FDIC practice of nationalising failed institutions for which no buyer can be found. It’s worth looking, though, at the idea of closing down the US retail banking operations and repaying the depositors out of FDIC funds, then putting the rest of the group into bankruptcy as was done with Lehman Brothers. Citi has at least $100 billion in insured deposits, so this stage won’t be cheap, and since Bank of America and others would almost certainly fail as well, the FDIC would be up for the best part of $500 billion.

The bigger problems will be the potential for failure to bring down lots of counterparties, and the international operations. In the case of Lehman, the immediate consequence of failure was the collapse of AIG (which had written lots of credit default swaps on Lehmans a few days later). This threatened total collapse of the global financial system, and AIG was expensively rescued.

But the international ramifications are even scarier. Just before it went under, Lehman’s extracted $8 billion from its European operations, to reduce the losses of its US home office. When Iceland looked set to pull the same trick a few weeks later, the UK government invoked the Anti-terrorism, Crime and Security Act against it, to freeze the assets of Icelandic banks and the Icelandic government. A “Fail” policy for Citigroup would present governments around the world with the choice between allowing a Lehman-style expropriation, or seizing what US assets they could at short notice.

After the Lehman debacle, “Fail” is to scary for anyone actually in charge of policy to contemplate. But the Obama administration is still unwilling to go for Abort. As the NYT says, the Treasury is “pursuing a strategy that seeks to avoid either the failure or nationalization of the biggest banks” which is a bit like wishing for a pony that can win the Grand National.

So, every week or so, Geithner and Summers have pressed “Retry”, announcing some variant or other of recapitalization, good bank/bad bank or similar. Perhaps they will keep on doing that until Shutdown brings the whole process to a halt.

Update 10/3 Andrew Leonard talks about Citigroups global sprawl and the difficulties it poses for nationalisation. As I note above, the difficulties are far greater with the “Fail” option



MH 03.09.09 at 3:59 am

West of House
You are standing in an open field west of the White House.
There is a small mailbox here.

>open mailbox

Inside the mailbox is a bill for $700 billion, a letter pointing warning that your country’s largest banks and insurers are about to go under, a copy of Atlas Shrugged, and a mutated beaver.

>examine beaver


Kieran Healy 03.09.09 at 4:11 am

The beaver has six legs and curiously tough fur. It is carrying a blackberry and wearing a badge that reads “Volcano Monitor”.

> Take blackberry and badge.

Taken. The beaver flails ineffectually with three of its legs, but it seems tired and stunned after its journey through the mails and is helpless to prevent your act of theft.

> Take bill.


> Look


John Quiggin 03.09.09 at 4:14 am

One of the words you’ve always known is useful here.


Maurice Meilleur 03.09.09 at 11:45 am

> Look help

There is nothing here by that name.


Maurice Meilleur 03.09.09 at 11:47 am

> Look accountability

There is nothing here by that name.


dsquared 03.09.09 at 12:06 pm

> Nationalise banks

What do you mean, “nationalise”?

>Nationalize banks

What do you mean, “nationalize”?

>Make bad bank

The bank is already bad.


jimbo 03.09.09 at 12:29 pm

You are in a maze of twisty passages, all alike. You are likely to be eaten by a grue.


Barry 03.09.09 at 1:46 pm

“A “Fail” policy for Citigroup would present governments around the world with the choice between allowing a Lehman-style expropriation, or seizing what US assets they could at short notice.”

OTOH, a credible threat by the Obama administration to do this might gain cooperation from some unnamed countries (which sprechen zie….) to Get With the Stimulus, and stop worrying about the Weimar hyperinflation.


Ginger Yellow 03.09.09 at 1:50 pm

>go south

You have already gone south.


Henry 03.09.09 at 2:37 pm


You go North. You are in a long underground room. To your North is a swimming pool. There is a stimulus inside the swimming pool.


You are in the south end of the swimming pool. Sir Norman Montagu is standing beside the swimming pool.

>get stimulus

There is no stimulus here.


You are in the north end of the swimming pool. Sir Norman Montagu is standing beside the swimming pool.

>get stimulus

There is no stimulus here.

>say to norman “give stimulus”

Sir Norman sits down and starts singing about gold.


Abby 03.09.09 at 3:47 pm

A hollow voice intones, “To be developed.”


Alex 03.09.09 at 4:12 pm

I can hear a voice. It is saying “crunch”.


Gary Franceschini 03.09.09 at 4:15 pm

Interesting hook for the article. You stated:

“…the late, unlamented MS-DOS operating system.”

Most of the POS infrastructure in the United States, Europe, and Australasia, relies on MS-DOS based systems. They are so fundamentally solid at doing what they are designed to do that, rather than dismantle them, every so often they are given a makeover (with a GUI, not functionally) when someone decides they need something “new”.


Preachy Preach 03.09.09 at 4:37 pm

You are in a bank. There is a LIBOR in the corner. It is very high.

> Make bank work.

You will need to use a more specific verb.

> Guarantee bank debt.

The LIBOR remains very high. It starts to bubble.

> Guarantee bank debt.

The LIBOR remains very high. It starts to bubble.

> Guarantee bank debt.

The LIBOR remains very high. It starts to bubble. It is now shaking. There is an explosion.

> I

You are holding:-

Northern Rock
Bradford & Bingley


toad 03.09.09 at 5:23 pm

1. If banks bad then punish them.
2. If stock market dives then goto 1.


JP Stormcrow 03.09.09 at 5:30 pm

A huge green insolvent insurance company bars the way!

> drop taxpayer’s money

Are you trying to somehow deal with the huge insolvent insurance company?

>drop magic pony

The magic pony takes control of the insolvent insurance company, and in an astounding flurry of breathtaking transactions makes everything better.


dsquared 03.09.09 at 5:31 pm

> Make market

You have no money

> look for bidders

You see bidders in Singapore and Qatar

> Go to Singapore

You go to Singapore

> Sell bank

You sell bank to Singapore

> Go to Qatar

You go to Qatar

> Sell bank

You sell bank to Qatar

> Make market

You do not have enough money

> Borrow money

There are no lenders

> Go to China

You go to China

> Borrow money

China sits down and sings about copper and hydrocarbons.


toritto 03.09.09 at 6:08 pm

Once upon a time (maybe 25-30) years ago there were lots of strong, well capitalized commercial banks. They were highly regulated and rarely failed.

They had low leverage (by today’s standards) of maybe 9 or 10X. A well performing bank earned 1%+ on total assets and 10%+ on equity. They loaned out perhaps 80% of their deposit base to local or regional customers. They rarely funded themselves with “hot” money. They paid solid if uninspiring dividends to the little old ladies and local businessmen who owned their stock.

There were thousands of these banks from the largest cities to the most rural area.

They operated in virtually protected franchises as hostile take-over, or virtually any take-over for that matter that didn’t involve a failing bank was not an option. Banking regulators simply wouldn’t allow it. Branching was severely restricted by state statues, protecting smaller banks from intense competition from major metropolitan area banks. There was plenty of credit available and plenty of banks from which to choose. Banks developed their own specialities in order to effectively compete. Bank of Boston had vast trading contacts in Latin America. Irving Trust was the largest commercial factor in America. Morgan Guaranty was the premier corporate bank. Citi was NYC’s largest retail bank. Regional banks dominated their geographic areas as branching restrictions kept others away. North Carolina allowed state-wide banking which nurtured NCNB, First Union and Wachovia.

The largest commercial bank failure during that period was Continental Illinois of Chicago. Illinois was a “unit” bank state – no branches were allowed. Continental Illinois was housed in one building in downtown Chicago. As a result of the Illinois branch restrictions, Continental had a relatively small retail deposit base. It funded itself each day in the overnight markets. It was a risky strategy. When it ran into credit difficulties its sources of funding dried up. It was seized by the FDIC and liquidated. The last real estate crisis brought down a few banks – Republic of Dallas, Texas Commerce – but nothing that would threaten the stability of the banking system as a whole.

The system worked fine even if it could be criticized as dowdy. Banking was not the most exciting profession to be in.

Then came deregulation. Branching and nation-wide banking came into existence. With it came the hostile take-over. Glass-Steagle was revoked. Suddenly there was money to be made in bank stocks..

It all began when Bank of New York put a take-over offer in front of the Board of Irving Trust. Irving rejected th offer. BONY sweetened it. It was rejected again. Irving was counting of the Fed and regulators to do what they had always done – reject hostile takeovers. But the wind of change was in the air. Wall Street smelled defeat for Irving. After battling BONY for a year Irving lost in court and the Regulators gave approval. The rout was on. Chairman Rice of Irving Trust caved the day after losing in Court and Irving was acquired. Rice immediately retired.

Thus was set in motion the creation of the banking system we have today. Plenty of money was made by Wall Street, bank stockholders and insiders holding shares and options, including me. The major regional banks were acquired and disappeared along with thousands of jobs.

“Growth, growth, growth!” was the mantra. “Marketing” rather than credit worthiness became the norm as loans were marketed as if selling soap. Credit insurance from AIG made it possible to shovel billions of dollars into mortgage assets without worrying about the loans themselves – after all, they were insured by AIG and carried a Moody’s/S & P investment grade ratings.

Within all of the major banks in trouble today there were those who had serious doubts about how business was being conducted. “Nay-sayers”. “Old fashioned”. “Not up to date”. They were ignored. There was no money in their Cassandra prognostications; not for “business development officers”, executive management or shareholders.

What was the matter with the old system? Not much.

Deregulation, the revocation of Glass-Steagle and the cowboy mentality of growth brought us to where we are. Unfortunately, the banking system needs to be rescued one way or another. It is more than the system deserves.


Pghmom 03.09.09 at 6:38 pm

Thank you for being funny. My depression era relatives were all alkies and now I am beginning to see why. They hated FDR .


David 03.09.09 at 6:42 pm

Let them fail and bail out the depositors. Whatever’s worth buying another bank will buy it. The governement’s really good at spending good money on bad things


Matthew Kuzma 03.09.09 at 7:46 pm

Perhaps they will keep on doing that until Shutdown brings the whole process to a halt.

I have to say I’m very curious to hear what people more knowledgeable than me think that would look like.


salient 03.09.09 at 9:59 pm

U:\> cd balance
The system cannot find the path specified.

U:\> verify account
VERIFY is off.

U:\> find my money
FIND: Parameter format not correct

The syntax of the command is incorrect.

U:\> find “my money”
A path is not specifed.

U:\> find money I had in cds
File Not Found

U:\> help
For more information on a specific command, type HELP command-name

U:\> help command-name
This was funny in DOS 4.0. Not so much anymore.

U:\> sorry
All is forgiven.

U:\> start appropriate stress tests
The system cannot appropriate stress tests.

U:\> nationalize banks
‘nationalize’ is not recognized as an operable program.

U:\> apply stress tests
This is not recognized as an operable batch file.

U:\> verify which banks are secure
VERIFY is off.

U:\> let banks fail
This is not recognized as an operable program.

U:\> recover economy
cannot RECOVER the drive

U:\> help us survive this
That command is not supported by this utility. Try “x /?”

U:\> x /?
‘x’ is not recognized as an internal or external command.

U:\> convert assets to gold and go hide in a shed somewhere
This will cause loss of data. Are you sure?
Preparing to wipe out U:
Reformatting… 1%


Stuart 03.09.09 at 10:21 pm

They were ignored. There was no money in their Cassandra prognostications; not for “business development officers”, executive management or shareholders.

Because of its imperfections, the free market will always tend to underestimate long term risk so that the business can make short term profits – the conservative bank manager (or whatever) is irrelevant, they either get bought out, lose market share, or take part anyway in the end. There is always someone more optimistic about the risks who will bid the price down until the disaster strikes. Deregulation in these sorts of market situations is like removing the leash from a lemming because you want to see if it will jump off the cliff yet again.

Of course just any sort of regulation isn’t enough, just like you need to ensure your lemming can’t chew his way free over time.


Jessie 03.10.09 at 6:00 am

It’s beyond me what AIG did selling Lehman protection. But as far as selling CDO protection (presumably a core part of their “insurance” business) it was a great fiction all around. If you think about it from a counterparty risk management perspective or a contingent CDS perspective that protection was actually worth zero (no I’m not exaggerating) due to massive wrong-wayness of the risk. Marry that with the fact that AIG didnt realize what risk they were underwriting (MTM rather than default) and you have a recipe for disaster. I flesh this out here:


Ginger Yellow 03.10.09 at 11:04 am

I’d like to strongly endorse the above-linked post. It’s by far the most clear-headed and accurate analysis of the AIG fiasco and related broader CDS issues I’ve seen online.


JM 03.10.09 at 2:12 pm

Once upon a midnight dreary, fingers cramped and vision bleary,
System manuals piled high and wasted paper on the floor,
Longing for the warmth of bedsheets,
Still I sat there, doing spreadsheets,
Having reached the bottom line,
I took a floppy from the drawer.
Typing with a steady hand, I then invoked the SAVE command
But got instead a reprimand: it read “Abort, Retry, Ignore.”

Was this some occult illusion? Some maniacal intrusion?
These were choices Solomon himself had never faced before.
Carefully, I weighed my options.
These three seemed to be the top ones.
Clearly, I must now adopt one:
Choose Abort, Retry, Ignore.

With my fingers pale and trembling,
Slowly toward the keyboard bending,
Longing for a happy ending, hoping all would be restored,
Praying for some guarantee
Finally I pressed a key –
But on the screen what did I see?
Again: “Abort, Retry, Ignore.”

I tried to catch the chips off-guard –
I pressed again, but twice as hard.
Luck was just not in the cards.
I saw what I had seen before.
Now I typed in desperation
Trying random combinations
Still there came the incantation:
Choose: Abort, Retry, Ignore.

There I sat, distraught, exhausted, by my own machine accosted
Getting up I turned away and paced across the office floor.
And then I saw an awful sight:
A bold and blinding flash of light –
A lightning bolt had cut the night and shook me to my very core.
I saw the screen collapse and die
“Oh no – my database,” I cried.
I thought I heard a voice reply,
“You’ll see your data Nevermore.”

To this day I do not know
The place to which lost data goes.
I bet it goes to heaven where the angels have it stored.
But, as for productivity, well
I fear that it goes straight to hell.
And that’s the tale I have to tell.
Your choice: Abort, Retry, Ignore.

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