What is a bailout?
For example, AIG and GM. What does it mean that AIG and GM got bailed out? Shareholders got wiped out. All of the senior executives got fired. Creditors lost money (certainly in GM). Isn't that plenty of moral hazard?
What's left of AIG and GM beyond the name and the business that continues to operate with the jobs of workers below senior management? Assuming the business had intrinsic value and the shareholders got wiped out and senior management got fired, what is the basis of complaining about bailing out "fat cats"?
I recently read a piece which said:
"A bailout (in my book) means the shareholders benefited from the government action. I don't see any shareholders of AIG and GM saved, I see them obliterated. As such I disagree with the term bailout and prefer restructure."
I dwell on this issue because I think it is important that people know the truth of what a bailout means so if needed in the future politicians' and peoples' judgment will not be distorted by the demonized use of the term.
Eric
Update
I think this is absolutely correct. In fact, if you recall, Obama took heat for insisting on a management change at GM. The problem, of course, is that very few of the banks that got bailed changed management and their s/h did not get wiped out. Most people look at that.
ReplyDeleteIn actuality that is not quite true regarding the "bailed out" banks.
ReplyDeleteCitibank's CEO lost his job and the stock went to $1.50 ( still now only about $3) from $55-- pretty close to getting wiped out.
BofA CEO lost his job and their stock also got clobbered.
JP Morgan, Wells Fargo and Goldman really didn't need or want the bailout, but they took it sort of gladly at the government's insistence. They also paid it back quickly at a very handsome profit for the government.
Most other banks taken over by the FDIC all fired their management and wiped out their shareholders.
I guess the essence of my inquiry is what does it mean if the company still continues to exist, but it's old shareholders and senior management are gone?
It's kind of a metaphysical question about what is a company? Does it have an existence apart from it shareholders and executives and if so and if the business is worthwhile , what's the moral hazard of a bailout?
I raise the issue because the term "bail out" has become so misused and demonize and if we need to do it again , politician may not have the courage to do so.
GM and AIG were in fact real bailouts. The financial assistance to GM preserved the jobs for thousands of GM employees and the economies for dozen of cities and towns in Michigan, Ohio and Indiana. (There was a parallel bailout in Canada that preserved thousands of jobs in Ontario). But of course, the Republicans couldn’t speak about saving hundreds of thousands of jobs, so they spoke only of the bailout.
ReplyDeleteYes, all the shareholders of AIG got wiped out, and many of its creditors as well; but AIG was just a cipher in its bailout, because had it gone down the drain, so would most of the major U.S. Banks (including investment banks). So, it was the U.S. financial system that got bailed out with AIG, and along with it the shareholders and creditors of our major banks. Again, that’s not something the Reps cared to say, so they just referred to the AIG bailout.