Dangerous Dan Thoughts and musings on the world

11/12/2008

Bailout Feeding Frenzy

Filed under: General — Dangerous Dan @ 12:23 pm

As noted a couple of days ago, the federal bailout is becoming a ridiculous satire as all sorts of companies jockey for federal money.  The intent of the bailout was to shore up the major banks and investment firms that were hit hard by the sub-prime crisis.  Not surprisingly, any companies that can claim a business slowdown that was somewhat, kind sorta, tangentially, barely related to the overall economic problems resulting from the subprime crisis are also making a play for bailouts.

The congressional bailout law gave the Treasury broad authority to decide how to spend the $700 billion. Under the terms of the $250 billion capital purchase program announced last month, cash infusions are available to "qualifying U.S. banks, savings associations, and certain bank and savings and loan holding companies, engaged only in financial activities."

That definition has grown to include private banks and insurers like Allstate and MetLife, which own savings and loans. It may also encompass industrial lenders like GE Capital and GMAC, the financing arm of General Motors, provided they win approval to reclassify themselves as a bank or savings and loan holding company.

American Express is officially requesting $3.5 billion.  Its business is slowing down generally, but it's also having trouble selling its securitized credit card debt.

GM, of course, still wants some, but as CNBC says:

Many economists are against the idea, saying an auto maker bailout would open the door to a taxpayer rescue of virtually any major company with cash problems.

"Where do you stop?" says Bill Isaac, former chairman of the Federal Deposit Insurance Corp and now managing director at the LECG global consulting firm in Vienna, Va. "Circuit City's going down. Do we help them? What do you do if Starbucks gets in trouble? Do you help them?"

The notion of bailing out Starbucks seems pretty absurd, but it's not that far away:

As the automakers have pushed for U.S. government help, the trade groups for car dealerships and even boat dealerships are pressing their own cases. They argue that showrooms are feeling a squeeze between higher borrowing costs to finance their inventory and slowing consumer sales to move it out the door.

"We have been encouraged by reports that Secretary Paulson is looking to broaden the program," said Mathew Dunn, head of government relations for the National Marine Manufacturers Association.

On Friday, the automobile dealers sent Paulson a letter urging him to keep them in mind.

"A well-capitalized, financially sound dealer network is essential to the success of every automobile manufacturer," wrote Annette Sykora, a car dealer in Slaton, Texas, and the chairwoman of the National Automobile Dealers Association. "Any government intervention should include provisions to preserve the viability of dealers."

Ah, yes, we better keep those boat dealers' showrooms stocked with boats.  I recall that being somewhere in the Constitution's second article.  You even have people going after contracts that are indirectly related to the bailout:

The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers — as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.

This is becoming a farce and will do long term damage to the economy and the free market, while merely possibly avoiding short term problems.  As I said, once it was made permissible for the government to start using federal funds to bail out private companies, there was no longer any good reason for many companies not to be bailed out.  All they have to do is convince the right people.  The toothpaste is out of the tube and it goin' back in.  Way to screw things up Congress.

3 Comments »

  1. I can understand criticizing Congress if it were to actually give bailouts to all those businesses. But it’s not clear Congress will. Currently, the farce is coming from the corporations’ end, not the government’s end. So long as Congress doesn’t give in, there’s no harm here.

    Also, I think your slippery slope worry is unfounded. Perhaps I’ve misunderstood the financial crisis, but I think there is a good reason to limit the bailout to a select few financial institutions. Here’s the crisis story I’ve heard: Institutions that invested in credit default swaps became increasingly inter-dependent through hedging and other multiple-partner investments. So the failure of one of these institution created a domino effect of lost investments: Z failed, and Y was relying on Z’s continued payments, so Y couldn’t pay what it normally could to X, so X couldn’t pay W, and so on.

    As I understand it, the government bailout is meant to prop up one of the centrally-located dominoes in this chain so that the others don’t go tumbling after it. Hence, if done properly, it needn’t require several props spread out throughout the market. The idea is that one well-placed prop could do it.

    Comment by Sean — 11/13/2008 @ 1:50 am

  2. Sean, good points. So far, the farce is from the lobbying end, not the government. And I rather doubt the government will bail out boat dealerships. In noting it, my intent was to show how the bailout concept is developing. And while it may not go as far as boat dealerships, I think it’s likely it will expand outwards to many entities for which it was not originally intended and to which it should not be applied. There’s far too much money in play, restrictions on the Treasury too loose, and too much political maneuvering involved. We’re already starting to see mission creep in the bailout.

    If I could be assured that the money would only be used for its intended purpose, i.e. to prop up those investment firms (the central dominoes), I could probably swallow it, even though I wouldn’t like the taste. As it is, though, it is largely politicians in Congress we have placed in a supervisory role over the distribution of the money. These are the same politicians who want to appease voters in their districts by preserving certain businesses, who accept campaign donations from powerful individuals, who also receive such donations from businesses, who schmooze with lobbyists, who do quid pro quo with other congressmen, etc. There’s far too much motivation there for these senators and representatives not only to allow the funds to go to businesses other than those intended, but also to actively lobby the Treasury to send money to those businesses. It’s a case of the foxes watching the henhouse. I would rather have taken the hit in the short term of these firms failing than now have to put up with the very long term free market disruptions this precedent will establish.

    I’ll admit it’s a slippery slope argument and deductively invalid. But the inductive evidence supporting it I think is fairly decent given the profligate spending behavior of congress and the power of money that exists in politics. I hope I’m wrong, but I believe history will bear out I’m not. I suppose time will tell. Drudge’s top story this morning sure doesn’t fill me with confidence of me being in error: http://www.washingtonpost.com/wp-dyn/content/article/2008/11/12/AR2008111202846_pf.html

    Comment by Dangerous Dan — 11/13/2008 @ 9:15 am

  3. Congratulations…
    very good dangerous dan..

    Comment by de musicas — 12/15/2008 @ 5:58 am

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