Silver Lining to Financial Bailout Plan
I have been following the news on the bailout plan for the mess that the US markets finds itself in. There are the free market thinkers who absolutely abhor the plan. There are the liberals who think government intervention and throwing out laissez-faire thinking is the need of the hour. Then there are the voters who seem to dislike the plan tremendously.
But really, what are the choices? Peter L. Bernstein writes about this in an article quite clearly. The confidence in the markets are low. The damage has already been done and further consequences need to be managed. Not doing so is really not an option. If it seems that the Democrats are getting their way, it’s just how it has to be right now.
Stepping beyond the arguments of whether the step should be taken or not (and not asking what else is lurking right around the corner), I wonder if there is a silver lining to this chaos? I am no economist and don’t pretend to be one, but common sense says it isn’t exactly outside the realm of possibility. It depends on the bailout agreement. If the government is going to gain equity in the companies it assists, which was a key requirement to reach a deal, and if the “investment” (which no ones seems to be calling it that, why is it just a bailout?) turns positive over the next two or three years (or longer), there could be potentially be a large reward for taxpayers.
The scenario that I am thinking about involves the government making a financially sound investment similar to the one Buffett made with Goldman Sachs (can the man still continue to surprise, what a shrewd investor!). If that is achieved, and the rest of the factors fall into play (large enough equity received and a turnaround in the assets), we may see a major windfall from a lousy situation. Could that money be used to pay down the national debt?! Wouldn’t that be some turn of events.
2 Responses
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The bailout plan is a bad idea on so many levels. Basically government is proposing to intervene, at taxpayer expense, to stave off natural consolidation in an industry that has had a huge run up in recent years – fully 1/3 of *all* US corporate profits were from the financial services industry in 2006.
Dave
http://www.islandersoftware.com/weblog/2008/09/27/just-say-no-to-the-bailout-plan/
General comment:
At a high level, I wish the bailout wasn’t happening. Free markets should have ensured that. But the fact is, the non-regulation of the markets led to people taking advantage of it to make a buck. Now that we are in the situation, how do you fix it?
Specific comments:
a) I think most would agree this is a situation beyond natural consolidation. No one seems to want to consolidate without government support as far as I can tell. If companies don’t get government support, foreign or domestic, they walk out on consolidation talks. Isn’t that why Barclays walked away from Lehman? Who exactly do you consider smart money? Would the people who passed on an opportunity to buy WaMu until it was finally sold (with government mediation) be considered smart money.
b) If smart money gets smart only after causing the mess and wiping its hands of it, who’s left to choose the posion to fix it? Foreign investors? Foreign companies? Hedge funds? Or private billionaire citizens like Forbes 400 richest Americans? People seem to be doing what they can by buying foreclosed homes. But it hasn’t been enough and won’t be enough to solve all the problems. Who’s left to help? The government.
c) How do you avoid further deterioriating situations like a run on the bank that caused Washington Mutual to go bellyup? How do you avoid the lowering of a company’s rating so that it isn’t required to put up more collateral, which it doesn’t have and can’t get, and stop it from going under?
d) If banks won’t even loan to each other, a normal practice to ensure daily functioning, who’s supposed to ensure they start doing it? They clearly aren’t interested in doing it by their own initiative.
I think the situation is beyond natural consolidation, which does happen all the time with no one stopping it. That’s why we read about mergers and acquisitions. This is more akin to Prince singing “party like it’s 1999″ except people are crying like it’s 1929!