http://www.intuitive.com/blog/should_fed_federal_reserve_bailout_failing_corporations_aig.html
The Business Blog at Intuitive.com
Dave Taylor has been involved with the Internet since 1980 and is widely recognized as an expert on both technical and business issues.
Should the Fed bailout failing corporations like AIG?
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As an investor and citizen, I have been following with increasing concern the shenanigans in the financial market. First it was the huge problem with greedy banks and an overextended Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) that had underwritten loans to more and more risky borrowers, gambling that the upside of high-interest-rate loans would offset the tremendous risk of default.
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Which is why I find it so interesting that when I read the WSJ headline that Feds Plan $85 Billion Rescue Deal for AIG [sub required] or the Bloomberg report that the government is considering an AIG conservatorship plan, I dislike the notion and feel that if we really were a free market capitalist economy, we’d let the companies fail, knowing that new ones will spring up to replace them, stronger, smarter companies that will avoid these poor management decisions.
Fannie Mae – fanniemae – logoFannie Mae and Freddie Mac were bailed out by the government. So was Chrysler, years ago, in a quite hotly debated rescue from mismanagement, Lee Iacocca’s hubris, and poor strategic planning. But Enron wasn’t bailed out and the Enron investors were left to their own personal financial nightmares.
The rule seems to be that if it’s a big enough company or enough people are adversely impacted then the never-empty wallet of the Federal government opens up and billions of taxpayer dollars are allocated to alleviate the impending crisis.
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Since then both Clinton and Bush aggressively promoted home ownership, even for homeowners who couldn’t afford it. The magic solution? adjustable rate mortgages that had a low interest rate when the prime rate was low, but could rapidly grow to create unmanageable mortgage payments as the rate went up. Now those high risk subprime loans back almost 40% of private-sector mortgage bonds and that’s the root of the financial problem we now face.
Back to the central dilemma, though: should we bail out AIG or not? Should our hard earned dollars paid to the government as taxes be used to prevent these massive corporations from facing the dire consequences of their stupid, myopic actions?
I have to say that, yes, I think that we should. Or at least, we should have some sort of program that helps out those most affected by the demise of these companies. When mortgage holders find that their adjustable rate mortgages prove a nightmare because the rates have gone up, that’s one issue, but when a large corporation actively and aggressively markets to these subprime borrowers without fear of consequence, that’s very, very bad for the market.
The consequences are what we’re feeling today, with a dramatic drop in the financial market, the bankruptcy of Lehman, Federal bailout of AIG, and more to come as the ripples affect other markets and industries. Bailout because too many regular Joes are affected by these failures, but for goodness sake, tighten regulations and fix things so that we can prevent this happening again in the future!
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Interesting.
The politicians get to pick winners and losers. Lehman loses; AIG gets bailed out. Freddie and Fannie shareholders get wiped out and the CEOs walk away with taxpayer-paid golden chutes.
The taxpayers get 80% of AIG; in bankruptcy, the common stockholders would get zero and the taxpayers would get 100%. Who died and left the Fed as the bankruptcy court?
IMHO we need to let biz be biz and the chips fall where they may. Nuke the Fed! Return to honest money.
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