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Author, Teacher, Screenwriter

Wednesday, October 01, 2008

Bailout Question

Is anyone out there familiar enough with the bail-out business that they can explain why we're not just buying up these companies? I want something for my money. Just why shouldn't a company that wants government money accept the public as a partner? If I'm being stunningly ignorant, I'm sorry, but I just don't understand. Can someone help here?


Steve Perry said...

The theory, I think, is that the real estate, i.e., houses, will someday possibly re-value -- thus offering a return. The companies' worth is tied to what holdings they have.

wraith808 said...

A really good link to some analysis and explanation of the situation:

Anonymous said...

"Just why shouldn't a company that wants government money accept the public as a partner?".

Accountability and oversight up the wazoo, and no shortage of it. Instead of having a colluding buddy packed board of directors of say 10-20, you've got figuratively some 300 million bean counters and potential judges, juries, and jailers standing over your shoulder watching every move you make.

In theory there's supposed to be that kind of accountability now with the SEC and the Justice Department, but when you start taking some REAL money like 700 BILLION smackers with millions and millions of shareholders the ante has been upped considerably and people will likely not stand for ANY nonsense whatsoever. None. Why they "shouldn't" is one thing. Why they'd be most reluctant to do it and feel good about it is as plain as day.

Josh Jasper said...

As I understand it, that's not too dissimilar to what happened for Sweden's bail out - they government expected a return of the investment, and got repaid.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.
[NY Times]

So really, some sense of this as an investment, if not a buy-out might work. It's got precedent.

Anonymous said...

The bill under consideration will send a percentage of the bailout money overseas, according to yesterday evening's news. That might explain why we cannot and will not receive equity.

I start to suspect this financial crisis is actually a hostage crisis. We'll know for sure in a few weeks (after it's too late to change anything).

Pagan Topologist said...

I think the real reason is that having the government take an equity interest in anything is too much like socialism. This scares some Americans, even when it is, in fact, a good idea.

Christian H. said...

This country should have already invested in business. The government can make any law they want.

I don't think people would be upset gettign a return. SOme say that a true capitalist society cannot allow the government to "compete" but buying a stake in all companies in a market would not be competition.

I doubt it will actually stick though. If it does it will be a great day for America.

The government should be able to generate income from something other than taxes.

Shady_Grady said...

Many people have talked about the government taking an ownership stake. For the amount of money being talked about the government could outright purchase several, if not all of the institutions. However that would be "nationalization" which is anathema to the political network.

The companies seeking bailout money do not want government ownership; they just want the government to purchase their bad paper.

This stuff is either valueless or can't be fairly valued on the market. Theoretically if the government bought this stuff, obviously at a premium, credit would start to flow again.

That's the theory anyway. I think it's wrong.

Anyway here are some other explanations of what's going on.

Nancy Lebovitz said...

Here's my "can someone answer this in words of one syllable" question: I realize there's toxic debt in a lot of places. Still, some banks and financial institutions were sensible and cautious and didn't buy the bad stuff. Why aren't people in the financial world doing the research and getting the money moving among the trustworthy players? Is it a problem of literal emotional panic, or is there something I'm not understanding?

Shady_Grady said...

"Why aren't people in the financial world doing the research and getting the money moving among the trustworthy players?"

The link Charles provided gives a good explanation to that question.
Basically no one is really sure exactly who is trustworthy at the moment.

When that happens banks are going to sit on their reserves and turn away many borrowers.

Also there is the fact that in a competitive market, institutions are not going to have a huge interest in helping rivals avoid bankruptcy or destruction.

Until the bad assets can be properly valued and disposed of, this crisis will remain.

Unknown said...

I think the real reason is that having the government take an equity interest in anything is too much like socialism. This scares some Americans, even when it is, in fact, a good idea.

There's also the political fact that the Democrat leadership (which controls Congress) has been trying to craft the bill such that it could pass with bipartisan support, so the Republicans in Congress can't make the price tag a campaign issue against the Democrats (sure, the initiative came from the Bush administration, but if it got modified to Democrats' liking but not to Republicans', it could still wind up as a campaign issue against the Dems). So, anything that could be seen as "too much like socialism" needs not to be "too much like socialism" for Republicans, not just Democrats.

Nancy Lebovitz said...

Shady Grady, the piece I disagree with is the bit about "no one knowing who's trustworthy". If I can believe NPR (which I think is mostly trustworthy), there are banks and investors which didn't get into chancy new investments. This also matches my idea of how the universe works-- people don't agree with each other completely.

Warren Buffet, in particular, looked into those bundled mortgage investments in 2002. When he discovered that his crack team of forensic accountants couldn't trace back to the individual mortgages and evaluate them, he got out.

There are people who aren't as rich or famous, but who are either too smart or too cautious to fall for a particular scam.

I haven't heard any numbers about what proportion of banks didn't get into the mortgage mess. It's possible that there are too few of them to keep things running, but that's not the argument I hear people make. Nor does anyone say that they can't trust what anyone says about their records.

It still sounds like panic and/or laziness and/or embarrassment (the banks not wanting to admit that some banks didn't get caught) when something which is at least somewhat possible is described as impossible.

Shady_Grady said...

Hi Nancy.
You mention NPR. Here's an NPR piece that references the LIBOR rate (the rate banks charge each other) and specifically notes that it's at an all time high as a measure of the banks' distrust of each other.

This is huge.

There are some extremely complex derivatives and paper that is connected to underlying mortgages. Some of these are basically wagers on the mortgages.

Several of these items were rated as AAA , which in retrospect was incorrect. If institutions or investors discover that AAA doesn't mean what they thought it meant, they flee to Treasury notes and generally reduce loans.

The entire economy starts to contract.

That's what's happening now.

There are definitely banks or institutions that had less exposure than others to the bad paper but not enough to fix this issue on their own. At least that appears to be the case.

This is where people will start to argue over the solution based in part on their underlying ideology and how serious the problem is perceived to be. It could be worse than we know. Bear Stearns, Lehman, Washington Mutual, AIG, Freddie Mac and Fannie Mae could just be the tip of the iceberg. If more money market funds start to break the buck, all bets are off.

More on trust and its impact here.

Anonymous said...

my commodities trader son
tells me
the bailout is
that in the bundles of mortgages
(many thousands of mortgages)
only about 15% are in default
and the other 85% are being paid regularly

but bankers don't like
to show any losses
so they will sell the bad ones to us
and keep the goodies

free market in this case
pretty much means
for them
and a load of debt
for us

I'm so glad he's in
because we all must eat
no matter what

he also points out
that when commodities traders
no one offers
to bail them out
which is at it should be
it's supposed to be
about risk taking
and owing up to
the consequences

this IS the October surprise
and yet
I happen to think
the losers here
will be the repugnicants

B the II said...

in a word: republicans

Those free-market loving republicans will not have the government 'nationalize' the core business of hyper-capitalism, investing.

A company accepting government as a partner is somewhat different. Many people think the government's function is to protect the many from the few, while business is to protect the few from the many (at least financially). With a gov't-run business you'll get bureaucracy out the wazoo and little profits and investment opportunity.

I also saw the sweden article, but we're not that evolved on this side of the pond (even though the London office tanked AIG -nytimes article by gretchen morgenson 9/27)