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.
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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.
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The $700-billion question
What about the $700-billion so-called Wall Street bailout that Congress is working on now? Who would be rescued from what?
Well, taxpayer funds would be used to buy from banks and investment companies big bundles of mortgages that contain an unknown quantity of loans in arrears or default. Because the exact percentages of toxic debt aren't clear, it is hard for anyone to price these bundles properly, and almost no one is willing to buy them.
If the administration's plan goes through -- as I think it will -- Uncle Sam will buy them for a very low price, and the sellers will have to record a big loss on their books, which will depress their share prices for a while but stabilize them in the long run. Is this a sweet deal for the selling banks? Not really, unless you consider them lucky to be getting any price at all. The biggest beneficiaries of the debt buyout will probably be rank-and-file employees of the selling banks, who will get to keep their jobs at viable firms. That's good.
How about the debt buyers -- you and I and our fellow taxpayers? I think the odds are good that, when the loans in default turn out to be fewer than we now fear, the performing mortgages can be sold for a decent price over the next few years, in orderly fashion. We taxpayers just might make a profit.
Washington's buying of these mortgages -- at a distressed price -- will enable the selling banks to resume normal lending to American businesses and consumers, which is good for all of us. It will prevent the failures of more and more banks. Will this benefit their shareholders? Sure it will. But it will also prevent the failure of small businesses that wouldn't otherwise be able to get credit for normal operations.
Do we really want to punish every bank shareholder and executive, even if we'll be punishing ourselves in the process? No, so we should curb our thirst for revenge. We should be careful what we wish for.
Now, I'm as outraged as anyone else over grossly excessive executive compensation, especially golden parachutes for departing chiefs who made a mess of things. It's fine with me if Congress makes compensation curbs a condition of our public purchase of tainted loan packages.
And I'd be happy to receive some equity in the banks from which we buy the loan bundles, too -- adding the upside of stock appreciation to the possible upside of appreciated loans.
Déjà vu
If this situation seems familiar to everyone over 30 years old, it's because this is all playing out not unlike the savings & loan and commercial real estate "bailout" in the early '90s. Back then, the only parties who benefited much were depositors, who appropriately recovered all their money through federal deposit insurance. S&L shareholders were wiped out, doors closed, employees lost their jobs, and developers who defaulted on their loans surrendered their see-through buildings to regulators.
The massive taxpayer cost of all this went not to fat cats but to depositors when the crisis swamped deposit insurance for failed S&Ls. That's the way a federal rescue is supposed to work.
So let's stop using the B word. Call it a lifeline, a stabilization plan, a buyout -- anything but a bailout. It's no sweet deal for Wall Street. But it is indeed a rescue -- a rescue of everyone who is involved in the U.S. economy, as a worker, small investor, pensioner or saver. And that's worth doing.
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