Town Hall

Bailout

2010-04-13T04:59:37-08:00

A bailout is an act of giving capital to an entity (a company, a country, or an individual) in danger of failing in an attempt to save it from bankruptcy, insolvency, or total liquidation and ruin; or to allow a failing entity to fail gracefully without spreading contagion.

A bailout could be done for mere profit, as when a predatory investor resurrects a foundering company by buying its shares at fire-sale prices; for social improvement, as when, hypothetically speaking, a wealthy philanthropist reinvents an unprofitable fast food company into a non-profit food distribution network; or the bailout of a company might be seen as a necessity in order to prevent greater, socioeconomic failures: For example, the US government assumes transportation to be the backbone of America’s general economic fluency, which maintains the nation’s geopolitical power. As such, it is the policy of the US government to protect the biggest American companies responsible for transportation—airliners, petrol companies, etc—from failure through subsidies and low-interest loans. These companies, among others, are deemed “too big to fail” because their goods and services are considered by the government to be constant universal necessities in maintaining the nation’s welfare and often, indirectly, its security.

Emergency-type government bailouts can be controversial. Debates raged in 2008 over if and how to bailout the failing auto industry in the United States. Those against it, like pro-free market radio personality Hugh Hewitt, saw this bailout as an unacceptable passing-of-the-buck to taxpayers. He denounced any bailout for the Big Three, arguing that mismanagement caused the companies to fail, and they now deserve to be dismantled organically by the free-market forces so that entrepreneurs may arise from the ashes; that the bailout signals lower business standards for giant companies by incentivizing risk, creating moral hazard through the assurance of safety nets (that others will pay for) that ought not be, but unfortunately are, considered in business equations; and that a bailout promotes centralized bureaucracy by allowing government powers to choose the terms of the bailout. Others, such as economist Jeffrey Sachs have characterized this particular bailout as a necessary evil and have argued that the probable incompetence in management of the car companies is insufficient reason to let them fail completely and risk disturbing the (current) delicate economic state of the United States, since up to three million jobs rest on the solvency of the Big Three and things are bleak enough as it is. In any case, the bones of contention here can be generalized to represent the issues at large, namely the virtues of private enterprise versus those of central planning, and the dangers of a free market’s volatility versus the those of socialist bureaucracy.

Furthermore, government bailouts are criticized as corporate welfare which encourages corporate irresponsibility.

Governments around the world have bailed out their nations’ businesses with some frequency since the early 20th century. In general, the needs of the entity/entities bailed out are subordinate to the needs of the state.

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Obama selling auto bailout good news in Michigan

2010-08-30T23:39:29-08:00

DETROIT — President Barack Obama on Friday heralded the recent turnaround for U.S. automakers, arguing that thousands of jobs and increased production vindicate his unpopular decision to bail out the industry.
With Americans facing a still-limping economy and potentially pivotal congressional elections in three months, Obama is seizing on the positive new trends in the auto industry as evidence of broader economic good news. He launched an intensive campaign to highlight the story as a concrete area of improvement with direct ties to his administration’s actions.
“This industry is growing stronger,” Obama declared from the floor of Chrysler’s Jefferson North plant, which recently added a second shift of production to the tune of about 1,100 jobs. “You are proving the naysayers wrong.”
Separately Friday, Chrysler said it will add nearly 900 jobs at a factory in suburban Detroit. Its decision is a show of optimism that consumers will embrace its redesigned midsize sedans.
Chrysler said it would be profitable on a net basis if it were not for the interest costs of loans remaining from its bailout, the automaker’s chief executive said on Friday.
Sergio Marchionne, who heads both Chrysler and its controlling partner Fiat SpA , also repeated that he expected Chrysler would launch an initial public offering in 2011 to cash out part of the stake held by a union trust fund.
From Chrysler’s Jefferson North plant, where the president greeted workers making Jeep Grand Cherokees and sat in a mostly finished model, Obama went to nearby Hamtramck to visit a GM plant planning to assemble the Chevrolet Volt rechargeable electric car. That factory is one of nine the automaker will keep open during the usual two-week summer shutdown.

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Wall Street’s Bailout Hustle

2010-08-30T23:39:01-08:00

On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America’s pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman’s role in precipitating the global financial crisis.

The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a “bailout tax” on banks. Maybe this wasn’t the right time for Goldman to be throwing its annual Roman bonus orgy.

Not to worry, Blankfein reassured employees. “In a year that proved to have no shortage of story lines,” he said, “I believe very strongly that performance is the ultimate narrative.”

Translation: We made a shitload of money last year because we’re so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.

Goldman wasn’t alone. The nation’s six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. “What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?” asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.

Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America’s populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what’s the difference if some fat cat in New York pockets $20 million instead of $10 million?

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e110 billion bailout package for Greece

2010-08-30T23:38:21-08:00

BERLIN: The heads of state and governments of the 16 eurozone nations on Friday launched a historic e110 billion financial aid package to bailout heavily indebted Greece from bankruptcy and vowed to fight speculators endangering the stability of their common currency.

At an emergency meeting in Brussels, the eurozone leaders expressed concern over mounting pressure on the euro in financial markets and deplored the fact that speculators were targeting other debt-ridden nations such as Portugal, Spain and Ireland as the next candidates for a bailout.

“They agreed on a “crisis management mechanism” to protect the eurozone from speculators and to prevent the debt crisis in Greece from engulfing the whole euro area,” chairman of the euro group and Prime Minister of Luxembourg, Jean-Claude Junker, said at the conclusion of Friday’s summit.

Details of the plan are still being worked out and they will be made public by the finance ministers of the euro group in Brussels on Sunday, Junker said. He said he expected the crisis management mechanism to be put in place before the financial markets open on Monday. The drop in the value of Greek government bonds to their lowest level and the plunge in European stock markets are evidence of a “worldwide coordinated attack against the euro”, Junker said.

The eurozone nations are determined to defend their common currency at any cost, president of the European Commission Jose Manuel Barroso said. French President Nicolas Sarkozy said, “The euro is facing its worst crisis since it was created eleven years ago. We have taken some very important decisions here.” Sarkozy also spoke of plans for further regulating financial markets and closely scrutinising the work of ratings agencies.

The finance sector will have to make a significant contribution to preserve the stability of the eurozone.

“The euro is Europe, we cannot leave it to the speculators,” he said.

German Chancellor Angela Merkel shared similar views and said, “We have established that the euro is subjected to a high level of speculation.”

The eurozone leaders cleared the way for immediately releasing the bailout funds involving credits of up to e80 billion euros from Greece’s eurozone partners and e30 billion from the IMF for a period of three years. A maximum of e30 billion will be paid in the current year and the first loan tranche will be made available to Greece in the coming days to meet a May 19 deadline for repaying its debts.

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Reasons against bailouts

2010-04-13T05:01:07-08:00

Signals lower business standards for giant companies by incentivizing risk
Creates moral hazard through the assurance of safety nets
Promotes centralized bureaucracy by allowing government powers to choose the terms of the bailout
Increases government control over businesses.
Instills a corporatist style of government in which businesses use the state’s power to forcibly extract money from taxpayers.
Paul Volcker, chairman of Barack Obama’s White House Economic Recovery Advisory Board, said that bailouts create moral hazard: they signal to the firms that they can take reckless risks, and if the risks are realized, taxpayers pay the losses, also in the future. “The danger is the spread of moral hazard could make the next crisis much bigger”.

On November 24, 2008, American Republican Congressman Ron Paul (R-TX) wrote, “In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me…. It won’t work. It can’t work… It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians.”

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Government Motors

2010-07-22T16:06:44-08:00

We the People bails out GM (a “victim” of the subprime meltdown). They return the favor by agreeing to purchase a subprime lender….

http://www.bloomberg.com/news/2010-07-22/gm-agrees-to-buy-lender-americredit-for-3-5-billion.html