From what I understand, a lot of these failed companies that the government bailed out offered multiple services or products. Usually, it was one or a few services/products that brought the entire company down (like AIG for example) while other services/products that were provided by that company were profitable. Assuming that's the case, what's the big deal about "bailing out" (giving them a loan) those companies on the condition that they eliminate the services that lost money and keep the services that profited. Then, a)the tax payer gets their money back eventually and b)more people are employed than would be if they let the company go out of business? I don't know a lot about economics, so don't jump down my throat when answering. I understand than a bankruptcy court can do this same kind of thing (eliminate parts of a company, etc.), so not sure how that all fits in. Someone enlighten me. Thanks. Finn
what's the big deal about "bailing out" (giving them a loan) those companies on the condition that they eliminate the services that lost money and keep the services that profited. ----------------- I think the big deal on the bailout was lack of legal precedent prior to AIG. As far as eliminate the services that lost money, FRE and FNM was the guppy.The big fish had nothing to eat.
Can you explain this in more detail? What difference does it make if there was no legal precedent? If it will work, then it will work and so should be tried, imo.
there were different factors in the bailout. first when banks lend money they bundle up the debt and sell it off. product demand fell so banks had to hold onto more risk and pay higher returns. this meant the end of cheap credit. the assets that fell in value did not just fall they stopped. they will never pay the money back and there will be more in the future that don't. another problem due to fractional reserves was a lower holding preventing payment of cash flows, created partly through credit restrictions from the first reason cited. some people think gov will get the money back. but i have doubts.
I believe that many of the banks have already paid back the TARP money: http://www.crainsnewyork.com/article/20090617/FREE/906179993 This still doesn't explain why cutting out money-losing part of businesses and saving the money-making ones (say for example, cutting out money-losing car lines out of GM and saving the lines that are making money) won't work. I freely admit that I don't understand a lot about how all this works.
The profitable portion to the bank was the unprofitable portion for everone else. There is no way to keep the profitable portion of the bank operating, it was a scam.
these products aren't like cars they pass cash flows from one entity to another so if there is a problem the other entity loses money or assets. this then makes the whole working of the bank fail. look at it more like cash flow.
The problem with your premise is that you assume you can unwind the bad or "toxic" side from the healthy side. Except, in order to do this you need to bring out the toxic assets. This also means someone has to eat the toxic assets. Guess what no one has done that . Unless you call the Taxpayer funneling capital out their collective orifices at unheard of rate to financial entities. TARP I was for the purpose. Troubled Asset Relief Program. But we skipped the Troubled Asses and went straight for the relief. You see.. human nature being what it is..Rather than force the toxic assets out on the condition of money, the goverment gave them money and then tried to force the assets out. and then everyone just kind of forgot. Besides everything is ok again. There are no toxic assets any more. Please dont ask about why 95% of new mortgages are backed by Fannie and freddie, and why combined that have lost 150 billion of taxpayer dollars in the last 14 months. Also don't ask, why the FED is still holding the Funds rate at 0 15 months later. Also, don't ask how the banks paid back the TARP money while drawing on the FED Lines. Also don't ask how GM needs to sell more Units in the next 20 years to pay back the loans/equity (52 billion) then its has sold in the last 40 years. While reducing all its lines. Also, don't ask how the Federal Deficit and FED balance sheet exploded, conveniently while all those companies "almost"collapsed. while the Companies are all perfectly ok now..but the FED balance sheet and Federal deficit is still toast. Also don't ask if the Federal Deficit includes the Fannie and Freddie liabilities Marked to market. Everything is fine..move along.
yes.. the problem I have is not that they are bailed out... but the transparentcy and watch that they were given.. seriously we pretty much lost 40% of it... and we gave to much for to little... they are still confused where alot of it went... and we as the lenders will never get back fully what we have given + a rate... It is not our obligation to give companies free money.. big companies should have been forced to split up if they were taking the money. large companies are inefficient they should have been chopped up.. management should have been changed.. toxic assets should have been pushed out not absorbed... seriously if I was a mortgage company rather than be taking these huge losses maybe redoing alot of my agreements .. reseting past due balances... fixing interest rates.. widening the terms... but only few did it.. bankruptcy tho shouldnt have been an option.. these companies it you looked at the sheets looked bad.. but they could have managed their way out with alot less money... they left it the way it was to get more free upfront money so they can turn around and make money with it and give it back with no cost... its like having a unlimited credit card attaching it to your trading account.. transfer the money in at the beginning of the month buying stuff.. turning a profit with no leverage ... selling everything and putting the money back on the card and paying no interest... also the guy above me is pretty spot on... fed balance sheet is F'ed in its A...our debt is huge .. our debt/gdp is starting to look like greeces but ok lets add healthcare in there and not pay for shit up front.