let the bailouts begin! - 3/10/08

From Brent on October 3rd, 2008


From Buck on October 3rd, 2008

Unfortunately there's a misconception that this bailout is only helping out the people that made bad choices at the expense of people who didn't.

Fortunately, that's not true.

The people that did make mistakes are going under, being taken over by the better run companies, and in some cases (as in AIG) the government is taking over the company (at a major loss for CEO's and stock holders). For AIG it's an 80% stake. Also, there's a very good chance that tax payers will actually make a profit from this bailout, as long as the bad assets are bought at market value (and not above).

The 700 billion dollars is a max that may need to be spent. The number was actually picked high enough to induce confidence that this plan would be enough. It may not all be used. A similar plan was actually used in the 80's for a similar crisis they had at that time, and in the end the government and taxpayers (like dlbuffy from the article) made a profit.

The free market is like evolution, it's a survival of the fittest type of system, problems come along and the weakest of the gene pool get weeded out, and at the same time things get changed and fixed to adjust to the new atmosphere and new threats. If this had been the 1930's we'd be in a great depression already but people, companies, and governments have learned their mistakes. There are organizations in place like the FDIC to help make the recession as smooth as possible. A lot of why this stuff happened is there were new financial systems built in the last 80 years, whose risks and benefits weren't quite understood yet. Now they're much better understood and companies and government are changing accordingly, like how I told you that Morgan Stanley and Goldman Sachs applied to be bank holding institutions which means they will be more regulated and won't be able to take as big risks, but have more access to assets. The free market didn't fail, it's working perfectly. We're in the downside of a business cycle, which, though can be painful, hypothetically should allow the bad companies to fail or at least restructure and for the good, strong, innovative companies to retrench and prepare for a more prosperous future. Many of the major companies that exist today actually were started during recessions.


  1. I would like to hear the media report on individuals who have been helped by the bailout. It appears gloom and doom are what the media wants to report. Didn't we just find out AIG had to pay those bonuses because the lawyers determined it was illegal if they didn't? Sorry, I could not get to the rest of your post because I got hung up on AIG!

  2. That's interesting, I hadn't heard that about AIG. If you could pass on a link or something I'd be interested to hear more about that.

    It is unfortunate how the media suffers from a kind of momentum effect, where when one thing seems to be selling there's a mad rush to cover it and of course that lead to partisanship, etc... And of course, nothing sells better than doom and gloom!

  3. from the Toronto Star:

    'Distasteful' AIG bonuses spark outrage; Insurance giant hands $165 million U.S. payout to executives in unit that nearly ruined firm:

    Leaders of the White House economic team bellowed about bonuses at bailedout insurance gian AIG Inc. and pledged to stop such payments in the future.

    From one Sunday talk show to the next, they tore into the contracts that AIG asserted had to be honoured, to the tune of about $165 million (U.S.) and payable to executives by yesterday - part of a larger total payout reportedly valued at $450 million - even as the company has benefited from more than $170 billion in a federal rescue.

    AIG has agreed to requests from the administration of President Obama to restrain future payments.

    Quote from Austan Goolsbee, staff director of the president's Economic Recovery Advisory Board: "I don't know why they would follow a policy that's really not sensible, is obviously going to ignite the ire of millions of people, and we've done exactly what we can do to prevent this kind of thing from happening."

  4. A March 17th, 2009 WSJ article on AIG:
    The Real AIG Outrage: http://online.wsj.com/article/SB123725551430050865.html?mod=rss_opinion_main

    From the article:
    President Obama joined yesterday in the clamor of outrage at AIG for paying some $165 million in contractually obligated employee bonuses. He and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout.

    Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG "rescue." This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.

    Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts.
    The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

    Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.