Were The Bailouts Necessary?

The Feds took a lot of heat for the massive bailout of Wall Street. Politicians rode it all the way to the vote bank with their fake outrage and there were some who openly agreed that the bailout was necessary.

Just Take It!

But were the bailouts justified? In my opinion, yes. Letting large financial corporations fail can have cascading effects throughout the world, not just the US. And the Feds can’t be selective on whom to bailout – it was either all or none and some were even forced to take bailout money to make it seem fair! Of course the Feds needed a whipping boy to make an example of. Lehman took the fall. As sordid as this affair was, it was deemed necessary.

Federal Reserve Chairman Bernake

Heads I Win Tails You Lose!

But then what did the bankers do with the bailout money? First order of business, a round of big fat bonuses for all those who helped get the bailouts! I’m all for bailing out banks if it means saving the world, but not the bankers who caused this catastrophe in the first place. What the Feds should’ve done was to throw out those responsible for this mess out as a pre-condition to the bailouts. Hell, some of them deserve to share a cell with Bernie! This is where the Feds failed.

BAAAAAA!

It doesn’t take a genius to tell you that if you lend money to someone with no income, chances are high that he is not going to be able to pay it back. There are Credit Rating firms that specialize in rating Securities. Moody’s, instead rated:

AAAAAAAAAAAAAAA++++++++++++++++++ HIGHLY RECOMMENDED!!!!

There was no dearth of companies rated AAA by rating agencies. Moody’s did such a poor job as a rating agency that it almost caused an economic collapse. This is one firm that should be allowed to fail. Instead they are still doing what they do. No one was penalized. This is where the Feds failed.

True ‘Monstruosities!’

Subprime loans are still legal, there is hardly any regulation. Naked shorts are still fine. The regulations are still the same. If this were to happen all over again, no one can be held responsible because the law is lax. Goldman Sachs who played both sides of the Mortgage Securities fraud knowingly pushing mortgages doomed to fail to clients at the same time secretly taking out an insurance policy against its failure was fined a token $550million which is chump change for Goldman Sachs.

Here’s what Fabrice Tourre of GS, who arranged these swaps said in an email to his girlfriend:

More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!

Back To P0rN!

You would think the SEC would be all over this putting regulations in place to avoid a repeat. But here’s what happened. GS voluntariliy agreed to ‘change the way it does business’ and SEC went back to watching porn. This is where the feds failed.

Shhhhh!

Details are emerging that not just US companies, but even non-US companies were given a line-of-credit. Why? If Toyota needs bailing out, Japan should come to the rescue, not the US. Maybe they were forced to take the money – who knows! Why was this kept a secret? Again, this is where the Feds failed. Transparency, not secrecy with taxpayer money!

This Is Where The Feds Failed

The feds did what they had to do. No matter what party was in power, they would’ve done the same thing. Where the Feds should’ve been pro-active, they were simply being reactive.

They know they can always count on you, the taxpayer, to bail them out.

12 thoughts on “Were The Bailouts Necessary?

  1. The taxpayer had to put up the bill up front, but as companies are repaying their bailouts, it looks as if the taxpayer might come out ahead.

  2. Were The Bailouts Necessary? http://bte.tc/f38V #RTW

  3. I don’t know if the bailouts were the solution or not, but I do know that there are a lot of decision-makers out there that could benefit from a lesson in risk pool analysis. ; ) Great post; you provided a nicely thorough analysis on the subject.

  4. @Robert: The entire process was quite murky. Bailing out UBS, Toyota which are not even based here ..! Plus, the Feds were forced to reveal the names, wasn’t voluntary. When first asked Bernanke refused. Seriously, if I’m paying for it, I have a right to know.

    @Jessica: Thanks!

  5. I personally was glad GM was bailed out I hail from a suburb of Detroit. I cannot imagine how destroyed our area would be if the auto companies went under.

    However, things do seem to be improving, and I think the ‘bailing out’ mentality needs to go to the curb and personal accountability needs to come to the forefront.

  6. With the bailouts, it is easy to see the benefits but hard to see the opportunity costs, since we don’t really know WHAT would have happened without bailouts. I don’t think it’s black and white and there could have been a myriad of other solutions that may have worked out better, and without the issues of moral hazard. We’ll never know.

  7. @Invest It Wisely: Good counter point!

  8. Great article. With the financial world collapsing, the bailouts were needed. However, you would think we would learn some valuable lessons and improve the situation. It looks like business as usual with another bubble bursting sometime in the future. :(

  9. Although I’m a capitalist at heart, I also believe there are certain things the government can do for our society. I’m not sure if the bailout will be a net win or loss. Time will tell.

  10. The bailouts were unnecessary, and will lead to yet bigger bailouts down the road (moral hazard). If the Fed had let little Bear Stearns fail in March 2008, the market would have learned its lesson, and Lehman (4x larger) could have failed in an orderly fashion.

    Now the risk-takers at the bailed-out banks can reap speculative profits for themselves, but if their speculations reap losses, they can throw the losses to the taxpayers.

    I would NEVER deposit one thin dime at a bailed-out bank like Ally or ING Direct. Their “high” rates are a subsidy from taxpayers.

    Try HSBC Advance for 0.90% APY from one of the best-managed banks in the world, that didn’t need a bailout.

    I will concede that today’s 0.25% Fed Funds rate is a subsidy to all banks, but that’s the point — any bank or credit union can get cheap deposits. The bailouts favored risk-taking big institutions over well-managed smaller ones.

  11. @Hondo: I’m no big fan of bailouts either, but if all major banks were allowed to fail, the fallout would’ve been disastrous.

  12. I believe it was very vital to do bail outs as it increases the Investor Confidence in both the Company as well as the Company. Although, Bail Outs turn out to be an expensive Method, but had they not been there, America would have still been in Recession.

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