Wednesday, October 1, 2008

Bailout redux

The US Senate is voting today on the bailout package -- but only after sundown, in respect of completion of the first two days of Rosh Hoshanah. This version has some elements that the House version did not; including tax breaks for individuals and corporations as well as for alternative energy and, pushed by both Obama and McCain, an increase in the deposit insurance limit from $100,000 to $250,000.

Will that be enough? Perhaps, but the problem still is that those who got America into the mess -- many of them members of Congress on the key financial committees who did not act on their oversight responsibilities, will continue to get immunity. Quite a few of them, if not all of them, should be in jail because they saw this coming and did nothing.

From what I see, the proposal also doesn't give the government the right to demand stock warrants so they in effect take an ownership stake. That's what they did in Sweden when that country experienced a near meltdown in 1992 during a recession that hit that country particularly hard. A meltdown so bad that at one point interest rates hit 500%. When the storm cleared, the government actually made a tidy profit which it put back into social programs; and it still stands to gain as it still owns about 20% of a major bank.

Would that be unprecedented for America? Hardly. Stock warrants are routinely part of loan guarantees to airlines, defense contractors and so forth -- but oddly enough not to banks. When Congress bailed out Chrysler in 1979, it demanded stock warrants as well. Warrants, similar to options but more easily traded, are convertible to shares if tendered before a certain expiry date. At a time when the stock was trading about five bucks no one thought much of it but when the company's fortunes actually did turn around and shares skyrocketed to $35 even after a supplemental stock offering, the government wound up making a profit of over $300 million. Of course, there was a huge price to pay, as over 60,000 lost their jobs in the reorganization -- and as Iacocca recalled in his memoirs, when he wanted to cancel the warrants because of that very fact he was castigated for welching on a promise to the government even if he did repay the loans seven years early.

So what's the big deal here? The principle of equality of sacrifice should also apply in this case. If the banks want an infusion of cash, they should be forced to give up temporarily some of their independence. They certainly should not expect something for nothing. And as for concerns the Sweden model doesn't teach America any lessons because their currency value is only half what it was back then -- well, hasn't the greenback devalued itself already against the loonie, yen, pound and Euro?

Those who still believe in American "exceptionalism," that is America should find its own solutions and not even care about best practices elsewhere that actually worked, must also still believe that "Smurf ™" is an acronym for Socialist Men Under Red Father.

Give me a break.

UPDATE (8:36 am EDT, 1236 GMT): To make a clarification on the Chrysler situation: The warrants in question were exercisable such that the holders, both the government as well as the banks that extended their existing loans, could purchase the shares for just $14. 14.4 million warrants went to the government, the remaining 12 million to the banks. Do the math: The spread between $14 and $35 -- $21 per share -- is where the taxpayer and the lenders wound up making a windfall. As Iacocca correctly complained, the $311 million he had to spend to buy back just the government's warrants could have gone to hire back some of the workers he had to lay off, or at least bolster their pensions.

That's why I still find this bailout irksome. Even if warrants were demanded, too many good people are going to be out of the cold for good and in the end it'll be back to business as usual.

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