Real_Trouble
Posts: 471
Joined: 2/25/2008 Status: offline
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quote:
ORIGINAL: rulemylife quote:
ORIGINAL: Real_Trouble I am for orderly liquidation of companies. I am not for bailouts. To wit - I'm fine with what happened to Bear Stearns (essentially, shareholders were wiped out), fine with what happened to AIG (a significant loan at a penalty rate and enough equity dilution that, again, shareholders are essentially being wiped out), but less fine with things like the maneuvering for Fannie and Fraudy, and definitely not fine with a larger-scale bailout that doesn't include major penalties for shareholders. I'm not so concerned with executive payouts; wipe out the shareholders when the shit hits the fan. Maybe then they will figure out paying executives to take dumb risks is not a winning strategy. Someone had to sign those paychecks (or fail to realize they were being cut). Fuck them over. OK, I'm confused. You're against bailouts but fine with Bear-Stearns and AIG which were what again? Notice: Bear Stearns - Fed agrees to absorb a set amount of losses on a portfolio of mortgage backed products that JP Morgan will hold. JP Morgan buys Bear Stearns for approximately ~7% of the value the company was worth the previous year. Bear Stearns' shareholders got wiped out, pretty much. Taking a haircut from north of $100 bucks to $10 bucks on every single share is a catastrophic hit; that's someone taking 90% of your money away. Who benefitted from the Bear Stearns 'bailout'? It sure as hell wasn't Bear Stearns or any of their employees. Primarily, this was done to make sure JP Morgan would actually buy the piece of junk Bear had become to prevent a disorderly unravelling. Tell me - if this was a bailout, who profits? AIG - The fed extended a loan to AIG. By definition, this needs to be paid back, or they are going to be first in line with claims against AIG's assets. This loan is also at a pretty high rate of interest (far above the LIBOR rate), and likewise, AIG is required to provide the federal government the option to purchase 80% of AIG for a token sum. This means one of two things: Option one: AIG is still going bankrupt and cannot repay, but the fed will be able to dictate the terms of the bankruptcy and make sure that the company is unwound in an orderly fashion, rather than throwing all of the counterparties and insureds into chaos. The fed will probably make money in this scenario by having first claim to most of AIG's assets and selling them off. Option two: AIG recovers, at which point the government can buy 80% of the company for almost nothing and then sell it back into the public market, booking another huge profit. AIG's shareholders get fucked either way. They lose 80% of their value, minimum, and possibly all of it. So, again, who is being bailed out here? I don't get the complaining about these two cases. If preventing a bankruptcy in a way that lessens losses and has very little loss potential is a 'bailout', then I'm all for 'bailouts'. What happened with Fannie and Freddy was a bailout. The smoking crater that was Bear Stearns and the walking corpse that is AIG are not bailout recipients, in that nobody is being handed real money here. The government is basically making sure these entities don't explode and do something like knock down the commercial bank you do business with, causing you to lose all of your money above $100k in savings and checking accounts, all of your CDs, and your retirement portfolio because of the bankruptcy of an unrelated company demolishing their risk hedges and then mark to market accounting putting them into a temporary yet fatal insolvent state. Again, if it was a bailout, who gets the benefit here? In Bear's case, it was probably everyone with a bank account at a major US or European financial institution who might otherwise have had their money locked up or blown away due to Bear's massive derivative positions suddenly vanishing. Likewise, notice the push-back on the Paulson plan for equity stakes similar to what happened with AIG; you do not socialize losses and privatize profits. If someone needs capital, they have to provide you with an ownership stake and a share of the profits.
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