Everyone has their own opinion about the government’s bailing out big business. But here are four unique bailout strategies that encourage good business while holding companies accountable. Do these four plans make sense? Or are we just setting ourselves up for a bigger mess later on?
Federal regulators took over Washington Mutual exactly one year ago. Management was immediately kicked to the curb, $2 billion in assets were sold to JP Morgan, and stockholders were left with little or nothing. Customer accounts were protected though.
Why the bailout strategy was unique: The Washington Mutual takeover wasn’t technically a bailout, since it didn’t cost the government any money. While some might argue that the government has no place moving in and dismantling a publicly-traded company, it may have been a better option than dumping millions and millions in taxpayer money into a bank that may never fully recover. Instead, the government trimmed the fat and turned dead assets into profit. Meanwhile, backdoor bonuses and restructured salaries prove some other bailout banks are still up to their old tricks.
OK, so GM has been under fire for its misguided business practices going all the way back to the days of “Roger and Me” and beyond. But as far as trying to atone for those sins in a post-bailout world, GM’s doing a pretty decent job.
Why the bailout strategy was unique: When the company finally declared bankruptcy in June, a lot of the shareholders were completely wiped out. But the reality is a lot of GM’s stockholders saw the writing on the wall, months prior. CEO Rick Wagoner agreed to testify before congress several times prior to GM receiving any bailout funds. GM also outlined several different plans for returning the company to profitability in the event it was awarded bailout funds. All of these good-faith efforts, whether they were genuine or not, at least gave the impression GM wanted to start over, improve its public image and reclaim its status as a leader in the automotive industry. The proactive moves the company made prior to receiving bailout funds have put it in a much better position to return to prosperity down the road.
Fannie Mae and Freddie Mac
Bad mortgages. The housing crisis. Fannie Mae and Freddie Mac were two of the biggest offenders. The government backing they received made it possible for them to offer the “I’ll-gladly-pay-you-Tuesday” mortgages that threw the housing market into a tailspin in the first place.
Why the bailout strategy was unique: Fannie and Freddie were both federally chartered but since the government took them over a year ago, it meant the Treasury Department and the Federal Reserve were officially backing more than 75% of mortgages, which means safer lending and more secure housing investments.
Unlike GM, which had the option of presenting solvency plans and controlling its own destiny, Chrysler was forced to declare bankruptcy before the government would offer federal aid.
Why the bailout strategy was unique: In the wake of bankruptcy, bondholders got back 33 cents on the dollar, which is better than what investors received in several other bailouts. Chrysler was merged with Fiat, a strategic partnership which gives the company a much better shot at clawing its way back than if it continued on its own.
Jury’s still out
While the jury’s still out on a lot of these moves, and short-term success by no means guarantees long-term prosperity, these four bailout moves are more innovative than simply handing over millions in taxpayer money.
The question is: Should the government even be involved to this extent? Are we advocating more government involvement in big business by allowing federal regulators to call the shots? And in the end, do other industries stand to profit if these bailouts are successful, or is the government basically rewarding companies for misappropriation?
We’d love to know what you think in the comments section below.
Source: “The Five Most Effective Bailouts,” by Rick Newman, 9/6/09.
Mr. Newman is the Chief Business Correspondent for U.S. News and World Reports.