The United States Government’s bailout of the financial sector is approaching breathtaking proportions. There are so many pronouncements and announcements of this monetary stimulus and that loan of this preferred equity stake and that interest rate cut that I can’t keep up with the news flow. Meanwhile, on Main Street many a homeowner will wait for her bailout in vain. Welcome to Bailout Nation.
This whole mess started with the assistance that the Federal Reserve gave to JPMorgan Chase in taking over Bear Stearns. The failure of Bear came as a bit of a surprise and the Fed was loathe to let the investment bank collapse completely for fear of systemic risk. These bailouts continued with the conservatorship of Fannie Mae and Freddie Mac, which effectively nationalized both government-sponsored enterprises.
However, Paulson and company got cold feet after this mammoth deal. After all, the Bush administration was supposed to be full of laissez-faire, market-oriented businessmen. Subsequently, they decided to let Lehman Brothers fail and the whole house of cards that is our global financial system collapsed.
I don’t need to go into a point-by-point recount of what has happened but I do want to use recent events as a demonstration of where this has led.
Take Fannie and Freddie for example. Jake at EconomPic Data has a very nice article on this today. He shows that these organizations, likely to cost taxpayers many hundreds of billions of dollars, have lost more money in 2008 so far than they gained in the entire previous business cycle. I definitely suggest you read this article, “Fannie: Going Concern, but I am Getting Concerned” because it will enlighten you as to the magnitude of the anticipated bailout.
Then there is AIG. After Lehman Brothers went belly up, AIG’s share prices collapsed and they looked likely to fail. However, the Federal Reserve panicked as the Lehman failure demonstrated the risk of allowing financial companies to fail. And AIG was a systemically important institution. So, the Fed tried to put the company on a leash by using very severe lending terms and making the government the de-facto owner of the institution. The problem is that AIG needs more money, much more. The rescue has grown to $150 billion and the government has ponied up another $40 billion in preferred shares while relaxing the loan terms significantly. That is not a very tight leash AIG is on.
Next, we come to American Express. Apparently, the US Government feels that American Express needs to get on the gravy train as well given that they just granted the company authorization to become a bank holding company. Bank holding companies can lend at low rates from the Federal Reserve, offering up dodgy collateral like Asset-backed securities in turn. That is why all of the investment banks have become bank holding companies and that is also why the Federal Reserve has been sued by Bloomberg News to find out just what kind of collateral these companies are using.
And, then finally, there are the automakers. Even though this is a financial crisis, somehow the automakers weasled their way into discussions on Capitol Hill with Pelosi and the Gang about a bailout. Now, Rahm Emanuel, who is going to be the new President’s chief of staff has said he favors helping the automakers. This suggests that the bailouts for the financial services companies may now move to bailing out even more companies.
There are many problems with all of this, the first being that you and I are not getting bailed out. It strikes one as a clear signal that special interest groups like the Big Three Automakers and the Financial Services industry are getting special treatment while ordinary citizens are left to fend for themselves. Yes, there are many jobs here at risk. And, yes the auto industry is strategically important in America. But, there are bankruptcy laws in this country and I reckon GM, Ford and Chrysler could avail themselves of those laws just as the airline industry has done.
America is quickly becoming a Bailout Nation. And given the lack of savings in this country, I fear that making good on all of the bailout promises our Federal Government has made points in only one direction: printing money.
Originally published on November 11, 2008 at Credit Write Downs and reproduced here with the author’s permission.