Don't Call It a Bailout
The government plan is an economic rescue for America, rather than a sweet deal for Wall Street.
By Knight Kiplinger, Editor in Chief, Kiplinger publications
October 1, 2008
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It's time to banish the word "bailout" from our financial journalism vocabulary.
The press's overuse and misuse of this pejorative, misleading word accounts for part of Washington's difficulty in crafting a plan to stabilize credit markets.
The word has come to connote a sweet deal for fat-cats, a giveaway to undeserving business owners who are largely responsible for their own problems.
No wonder many Americans are livid about what they perceive to be a gift to greedy and foolish Wall Street risk takers. I'd be livid, too -- if this really were a giveaway.
But this plan, like almost all of the recent so-called bailouts, does not represent a sweet deal for stockholders, or, in most cases, bondholders either. Most of these deals would be more accurately labeled a wipeout -- borrowing a colorful word from California surfer jargon in the '60s.
Bailout as rescue
My Merriam Webster's dictionary traces the word "bailout" back as far as 1951, and it defines it as "a rescue from financial distress."
Rescue? Tell that to the shareholders of Bear Stearns, Lehman, AIG, Wachovia, Fannie and Freddie. Their stock value was virtually wiped out by their bailouts.
In the interests of full disclosure, I should tell you that I am -- or was -- a small shareholder in AIG, Wachovia and Freddie, and I continue to hold some other big banks, such as Citi and JPMorganChase. I had lightened up on my positions over the past year, just for diversification, because I had been a little heavy in financial stocks.
But I didn't sell all my bank stocks -- didn't see any reason to. So my remaining positions in AIG, Wachovia and Freddie are virtually worthless today. I'm not whining because I believe this is a risk of stock ownership -- usually a remote risk, but ever-present. I'm holding on to my other bank stocks, and I might just add more shares of well-capitalized banks that will benefit from better times a few years from now.
It's not just common-stock owners who've taken a big hit. Even preferred shareholders in Fannie and Freddie are getting wiped out. Preferred stock is a hybrid stock/bond that is considered safer than common stock. Ironically, bank regulators were once delighted to see these preferred shares in the capital accounts of banks they examine, considering them almost as good as Treasuries. Now the so-called bailout of the F-kids has made this stock virtually worthless, and some small banks are now failing or seeking forced marriages as a result.
Reader Comments (28)
Posted by: Lyle Forsberg at 10/01/2008 11:05:42 PM
Call this plan anything you want. "Cotton candy feel good plan". The bottom line: it's intent is to remove water from a leaky boat. The taxpayer supplies the labor and buckets, the boat remains leaky. This is just the beginning until the boat gets overhauled. That means no more risky loaning. It means a return to the basics of banking, no credit-no cash. We would all do well by remembering who started to push these high leverage concepts. "Those who forget history are doomed to repeat it."
Posted by: Christopher Heard at 10/02/2008 03:15:51 AM
If only Washington had communicated this rescue plan half as well as you have in your article, maybe we would all be a little less outraged.
Posted by: RZZ at 10/02/2008 07:46:22 AM
Stabilization will come when good jobs are created in the USA. These good jobs will be created by citizens who attempt to buy USA-made goods.
Posted by: Puhlease at 10/02/2008 09:04:54 AM
It is a bailout, although a temporary one, because the people running the show at these banks are STILL lobbying to make their balance sheets opaque with their proposed changes to the 'mark to market' rules. This kind of continued giveaway to these banks, along with the tax breaks offered as part of the package, are EXACTLY the kind of fat-cat giveaway that enrages all taxpayers. In addition, the govt will NOT be buying this paper at a massive loss to the banks, since the GOAL of this bailout is to improve the banks' balance sheet. This IS a bailout, it WILL reward shareholders and fat-cats, and it do so by adding 1 trillion of new debt to the US taxpayer.
Posted by: C. Lambeth at 10/02/2008 09:24:13 AM
Who is (the) author trying to convince? Us or himself? L. Forsberg is dead-on; call it what you like, it won't change the fact that it is shoring up a corrupt system for which all of us (and future generations of us) will be paying on for a long time. Our forefathers might call this "taxation without representation." Could it be that the best thing we could do for our nation is divest it from a corrupt, greedy and broken system of selfish, conspicuous consumption and living beyond our means with no care for others, the environment and our own future children? Is it too audacious to ask that we actually earn the money for something BEFORE we buy it? We are like petulant children who refuse to be told "no."...Don't support the bailout.
Posted by: Lance K. at 10/02/2008 10:41:10 AM
Nest-egg is gone....Learned my lesson. Never again. Now "gut it up" and get back to life.
Posted by: Vera at 10/02/2008 10:50:38 AM
to Mr. Forsberg: Amen, brother!!
Posted by: Jim Jones at 10/02/2008 10:57:44 AM
Get real. This plan is all about lining the pockets of the wealthy and not helping the average American.
Posted by: Rena at 10/02/2008 11:43:37 AM
Oh come on. "No credit - no cash?" Let's blame all of this on the mortgage holders who bought houses in areas where home prices were appreciating, and did so on the promise that their home values would appreciate enough to cover the risk they were undertaking. Every link in this chain exposes another greedy profit-taker. The buyers may have been foolish and overextended themselves, but they were courted by layer upon layer of people who should have known better. These poorly structured mortgages have been found at every socioeconomic level, and many of them were undertaken by people with good incomes and good credit.
Posted by: M. Smith at 10/02/2008 02:09:05 PM
What causes me distress, besides the fact that we have been put in a place where the "bailout" is necessary, is the attitude of most Americans. They seem to think that this problem doesn't have a direct link to their own lives so they don't want to see anything done. They justifiably want wall street to suffer, but at what expense to their own quality of life? What they fail to realize is that while wall street suffers, we too will suffer. We will lose more jobs, lose more in our retirement funds, more mortgages will go into default due to higher credit rates, and their local economies will take a nose dive. While I don't think we are headed for a "Great Depression" like event, it could be much worse than the late 1980s.
Posted by: J. R. Nelson at 10/02/2008 02:16:10 PM
There is nothing in this bill that reinstates the controls and oversight that were removed in 1999, and 2000. There is no requirement for these lenders to assist their clients by renegotiating their loan terms to facilitate the ability of people to pay. Instead we are getting a socialist country where the government owns vast tracks of homes and land. These will be sold at auction in packages that only the rich cats can afford. But at least we are increasing the FDIC coverage from $100,000 to $250,000. How many AVERAGE Americans have over $100,000 in the bank??
Posted by: C. Renner at 10/02/2008 02:36:25 PM
C. Lambeth is right on! I'm guessing he/she lives somewhere other than NYC or near the Beltway. Taxpayers (and other possible worthwhile programs) are getting hosed to benefit a few ignorant, greedy executives and politicians. A rose by any other name..... Can the airlines and auto makers be far behind? Either you are a Capatlist or not. Either you believe in free markets are you don't. Either you're pregnant or you aren't....
Posted by: K Rasmussen at 10/02/2008 02:46:53 PM
...No matter what you call this "bailout" "Rescue" "Emergency response", "Stablization" the names mean nothing, the bottom line it is a giveaway to the ultra rich on the backs of taxpayers. If you think this so called "bailout" is going to resolve the issue, you are so offbase. There is a tidel wave of foreclosures coming due next year, which means more banks might be going under, and thus more bailouts next year as well? This is a complete sham. No one has done any real in-depth...study of this, so no one really knows how this will play out. Where's the option of the US loaning Wall Street the money and forcing Wall Street to pay it back? Where is the option of the owners of these banks and companies and Wall street "gurus" leverging their multiple homes and their own stash of gold and reserves to rescue themselves? Where is the option of limiting corporation compensation packages for much less then the $500,000.00 cap that is currently proposed? Where is the option of taxing the ultra rich heavily for their corrupt greedy selfish attitudes? The government is acting hastily, and with haste mistakes are rampant. My prediction, even if the "bail out" succeeds it is only a patch. The pants are still torn badly and this one patch will not keep the pants together for that long. This plan will still fail the American people and it may put the whole ecnomny on its knees, becuase no one has addressed the elephant that is causing this - the Greed mentality of those who are manipulating the markets.
Posted by: William at 10/02/2008 02:48:50 PM
Oink! Oink! Oink! Nothing but pork in this socialist bailout deal. Sad. (from a) Concerned Texan
Posted by: CJ at 10/02/2008 03:30:29 PM
Of course there are selfish speculators who tried to game the system by flipping properties and some stupid home buyers who thought prices would go up forever, but BAILOUT does nothing to rectify the root causes of the problem. The slicing and dicing (do these sound like professional terms?) that packaged mortgages in exotic (incomprehensible) ways, and then sold them to institutions (your pension) or other banks so that they could get in on the mortgage bandwagon (even though these instruments were only related to mortgages in name only). The current solution is akin to a brat throwing rocks at you. The solution is not to dodge or deflect the projectiles or purchase an expensive glass house ($700,000,000,000), but to actually stop the damn brat from throwing anymore.
Posted by: Truth at 10/02/2008 04:14:36 PM
Right, don't call it a bailout. Find a clever euphemism instead.
Posted by: Where\'s the revolt? at 10/02/2008 04:23:26 PM
Don't Call It a Bailout – Call it Communism. The rich get richer at public expense. There are a lot of politicians, International Bankers, and CEOs who should be in orange jumpsuits...Their assets should be seized...
Posted by: Patrick at 10/02/2008 08:20:53 PM
This is a free market, not a government controlled economy. They will never make any money on those loans. The government will do what they always do, waste and mismanage till we are further in debt. Lets just get the government out of it.
Posted by: Tim at 10/02/2008 10:25:57 PM
Yeah, bailout is for all the people who couldn't afford their homes to begin with. People forgot that we already gave $300b to these people in the form of the homeowner bailout. Now everyone wants to give more to the same people who were reckless with their money and couldn't afford their homes to begin with. I agree with Knight.
Posted by: BCG at 10/02/2008 11:12:12 PM
...Bailout it is. Nothing else.
Posted by: Kevin at 10/03/2008 05:31:18 AM
So, not only do these guys want to control our capital, they also want to control our use of language. Okay then, I'll drop the word "bailout" and call it what it is: a hostile leveraged takeover of the U.S. financial system by investment bankers who have hijacked the Treasury Department.
Posted by: Bill at 10/03/2008 07:18:13 AM
...It is a bailout, no question. The bailout is for the Wall Street firms. Can't let them take the hit for their poor risk management. The point isn't the losses from AIG, Freddie and so on, it is the bailout of future losses Wall Street would incur due to their poor risk management and greed.
Posted by: Bryant Arms at 10/03/2008 09:37:09 AM
The financiers are snookering us again. We, the taxpayers, will never see that money once Congress caves in to special interests, (as usual). If we try to get it back by taxing these businesses, then they will take the good parts of their portfolios and flee to other countries. Suckers! If we use that money to enhance Social Security, then all of the retirees that lost their retirement funds in the stock market will at least be guaranteed a reasonably comfortable retirement. (The only ones who will still be unhappy are the ones trying to retire to their mansions.) Finally! Congress has found the money to make Social Security work....
Posted by: doug at 10/03/2008 05:56:00 PM
Its this kind of logic I'm seeing in some of these posts that push this issue off the cliff. If they had listened to the Bush Administration and Treasury Secretary Snow, as well as McCain, who all made public statements before Mr. Frank's committee etc that they needed to regulate Fannie and Freddie, we might not be in this mess to begin with. Mr. Frank's concern was the availability of low interest loans to economically disadvantaged. These are the same guys claiming its someone else's fault. Look in the mirror boys!
Posted by: royrogers at 10/04/2008 09:15:59 AM
Do you really think we can borrow and print our way out of this? The real question of the day, with our rising national debt, is: What's a dollar worth? I thing we are getting ready to find out and its going to be a rocky road.
Posted by: roger h at 10/04/2008 07:03:46 PM
the republicans had been running congress for 15 years or more and now they seemed to talk about regulating fannie and freddie for that is farce. we hear the same speech when something seriously happened such as katrina this administration was poorly runned and we taxpayers are taking a hit for it. both parties are full of it. they are both to be blamed for giving these corporations free reign.
Posted by: John at 10/06/2008 08:18:58 AM
Call it a surge.
Posted by: zardoz at 10/08/2008 08:27:53 PM
why doesnt congress give the average american the bailout? its our money anyway. and ill disagree with money bags who made the its a risk comment. this is beyond stupidity. we get 600 or 1200 dollars and wall street gets 700 billion? lets split that money which would then be used to infuse our economy...not fattening over paid execs pockets. im disgusted with the whole mess. im a republican but im voting for the other side this year.