US govt spends $900 bn to take over failing companies
When the going is good for private companies they rake in the profits, but when things get rough taxpayers' money is used to bail them out. Credit crisis: A subprimer
By Subodh Varma, TNN |
NEW DELHI: With the $85 billion bailout of AIG, the world's largest insurance company, the US government has spent $900 billion this year in taking over failing companies. And, with the wolves baying at the doors of several others, this may well go up in the coming days.
There are many who argue that government's intervention is not fair. Nouriel Roubini, a professor at New York University's Stern School of Business, who had predicted this bursting of the bubble years ago, has called it "privatization of profit and socialization of losses".
This is because when the going is good for these private sector companies they rake in the profits, but when things get rough taxpayers' money is used to bail them out.
Several critics have also called for a new regime of regulations in the financial sector to prevent a repeat.
Senator Charles Schumer, chairman of the US Congress' Joint Economic Committee recently said, " the credit crisis is as much a failure of regulation as it is a failure of the marketplace. Meanwhile, the world watches as the home of laissez faire saves itself by desperately clutching at life-saving government support."
These investment bankers pooled together $3.2 billion and bought out LTCM. But, experts criticized government's intervention, calling it a moral hazard. The intervening decade was the golden age of unbridled profit for investment firms.
There are many who argue that government's intervention is not fair. Nouriel Roubini, a professor at New York University's Stern School of Business, who had predicted this bursting of the bubble years ago, has called it "privatization of profit and socialization of losses".
This is because when the going is good for these private sector companies they rake in the profits, but when things get rough taxpayers' money is used to bail them out.
Several critics have also called for a new regime of regulations in the financial sector to prevent a repeat.
Senator Charles Schumer, chairman of the US Congress' Joint Economic Committee recently said, " the credit crisis is as much a failure of regulation as it is a failure of the marketplace. Meanwhile, the world watches as the home of laissez faire saves itself by desperately clutching at life-saving government support."
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A decade ago, when the sizzling hot hedge fund Long Term Capital Management (LTCM) turned belly-up , the Federal Reserve Bank of New York state stepped in and arranged a bailout. All the big names - Goldman Sachs, AIG, Lehman Brothers, Berkshire Hathaway, Merril Lynch - were there to rescue LTCM which had been yielding 40% returns on investment till then.These investment bankers pooled together $3.2 billion and bought out LTCM. But, experts criticized government's intervention, calling it a moral hazard. The intervening decade was the golden age of unbridled profit for investment firms.
The government, dominated by a "hands off " gospel, failed to evolve regulations and oversight to keep pace with the changes. And now it is pay back time. As the subprime crisis unraveled, the first big casualty this year was one of the biggest US banks, Bear Stearns.
The Federal Reserve Bank took $29 billion worth of bad assets off Bear Stearns as collateral, paving the way for JPMorgan Chase to take over the company. Then came the biggest ever takeover in history. Freddie Mac and Fannie Mae were mortgage lenders initially set up by the government but now privately managed. When their mortgages started going bad, the government stepped in with $200 billion to save both from collapsing.
Meanwhile, the tide of foreclosures - confiscation of homes by lender because of payment default - that swept the US forced the government to provide $300 billion in the Hope for Homeowners programme. This was effectively, a subsidy to families who were facing foreclosure because of inability to pay back loans with increased interest rates.
US government also provided $4 billion to local communities to buy and repair houses that had been abandoned due to foreclosures. Apart from pouring in billions, the US government has also been trying to stem the rot by piecemeal regulation.
It allowed billions of dollars worth of safe Treasury bonds to be used as collateral for junk bonds. It prohibited "naked" short selling in 19 stocks of sinking firms. In this innovative way of profiteering, brokers used to sell stocks they didn't even own.
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Courtesy: Times of IndiaThey were raking in huge profits from selling shares of companies that were in trouble - causing more trouble for them. However, all this was closing the barn door after the horses had fled.
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