Tom Patterson: Can’t anybody do something to stop this bizarre bailout mania? Capitalist economies expect ceaseless change. Fortunes rising — and falling — is a given. The story of learning and persevering through failure is the quintessential entrepreneurial experience.
Can’t anybody do something to stop this bizarre bailout mania? Capitalist economies expect ceaseless change. Fortunes rising — and falling — is a given. The story of learning and persevering through failure is the quintessential entrepreneurial experience.
Now, personal responsibility is so yesterday. Government is busy bailing out even homeowners who lied to get mortgages they couldn’t afford and the brokers who sold them. Banks that bundled and sold the “toxic” paper are getting rescued, as are the insurance companies that bought them and the quasi-government agencies that guaranteed them.
States that overspent, car companies that underperformed and financial firms with enough influential friends at the U.S. Treasury are all getting the royal rescue treatment from the taxpayers of the future.
Unsurprisingly, it’s not working out. The recidivism rate for adjusted mortgage holders appears to be far more than 50 percent. Corporate beneficiaries awarded themselves billions of dollars in bonuses just before or after receiving bailout money and threw lavish parties with the loot.
Meanwhile, nobody can say where the first $350 billion in the Troubled Assets Relief Program ended up, although small businesses still report difficulty in accessing credit.
“House of Cards,” a book by William D. Cohan recently reviewed in the Wall Street Journal, details how the rescue of Bear Stearns went off track. Bear Stearns was the first, precedent-setting investment bank to receive a bailout. There was a reason.
Bear Stearns was a leading light in the mortgage-backed securities business, starting it all with a $385 million offering in 1997.
Moreover, Bear Stearns was a full-service wealth destroyer, making and servicing dodgy loans to homebuyers, bundling the loans and marketing the securities to investors and even borrowing to finance their own hedge funds that owned them.
Bear Stearns managers maintained a balance sheet full of hard-to-value securities financed by short-term borrowings.
They even passed on several chances to become better capitalized and more diversified, refusing an infusion of private capital the day before the bailout. One senior officer admitted “we did this to ourselves … it’s our fault for allowing it to get this far, and not taking any steps to do anything about it.”
Bear Stearns was a classic failure. Investment banks by nature presume higher levels of risk than commercial banks. Although they usually make enormous amounts of money, their deposits are uninsured and sometimes they fail. In the past, it hasn’t been that big a deal.
Yet the Federal Reserve committed $30 billion to grease the sale of Bear Stearms to JP MorganChase, because Tim Geithner, then the president of the New York Federal Reserve and now the Treasury Secretary, “wasn’t confident that the fallout from the bankruptcy of Bear Stearns could be contained.”
The fallout that can’t be contained is the devastation raining down on taxpayers. Insurance giant AIG was granted an $85 billion line of credit last September so that it could stay out of bankruptcy and avoid financial losses for its institutional clients and policyholders. The hole was bigger than originally thought, so the tab for this one firm has reached $173 billion and counting.
Meanwhile, it has since been discovered that the clients saved from harm include Deutsche Bank, Societe Generale, Royal Bank of Scotland, Barclays and other financial giants not domiciled in the U.S. Since their governments aren’t that into bailouts, the extreme generosity of U.S. taxpayers is a financial windfall.
Even venerable General Motors, badly needing bankruptcy proceedings to restructure its debts and union contracts, is now back to Congress for more relief since the $13.7 billion they got in December didn’t go far. So struggling Americans should step up to the plate so 50-something UAW retirees can keep their lavish health care plans? Unbelievable.
Tim Geithner admitted there was “no rulebook” for corporate bailouts, since “nobody’s got some terrific plan for dealing with them.” President Barack Obama recently disclosed he wasn’t committed to any particular strategy for relieving our economic distress.
Yet this confusion and uncertainty at the top hasn’t stopped our new leaders from spending trillions of dollars we don’t have so that at least they appear to be “doing something.” Americans will be paying for their incompetence for many years to come.