was it good to have let some companies go -bankrupt during the recent economic crisis ? or bailout was good?
your thoughts ,,,,did president bush did the right thing in bailing out ,,,companies,,,banks ,,aig,,citi,,,etc,,,
or should they have been allowed to go bankrupt ?
what would have happened ?
This is a "judgement call" question with no right or wrong answer. But my judgement is "yes for some but not for others" and "yes, absolutely."
First, consider the bankruptcies. In the financial sector Lehman Brothers, Washington Mutual, and many smaller banks were allowed to fail. Most analysts agree that letting smaller banks fail made sense. Many of them were then auctioned off to stronger banks that had an interest and ability to take them over. Washington Mutual didn’t have to file for bankruptcy formally but it was sold for virtually nothing to JP Morgan Chase — which had long lusted for a solid presence on the US West Coast. That was painful for WaMu shareholders but it was better for the markets.
But most analysts now conclude that letting Lehman Brothers fail was a huge mistake. Bush’s Secretary of the Treasury, Henry Paulson, and others in that administration were strongly in the "let them fail" camp that believed declaring some banks "to big to fail" would be a mistake. They figured that letting even major banks fail would be a useful "purgative" to cure financial institutions of their lazy attitude toward risk. What Paulson failed to realize was how deeply intertwined outfits like Lehman and AIG were with other financial institutions and what a huge shock to financial confidence the failure of a Lehman would be. Banks lend to each other all the time; sometimes Bank A will take out a $25 million loan from Bank B at 10:02 a.m., then repay $21,500,000 of it before 1:30 p.m. But if Bank B is no longer sure if Bank A will be around at 1:29 p.m., why would it lend? In fact, neither Lehman nor AIG were banks. Lehman was an investment bank regulated (lightly) by the SEC, not by the Fed, the Conptroller of the Currency, or the FDIC. AIG was an insurance company. But all of the major financial institutions now operate in a wide range of markets. They may not be banks but they sure function like them in many respects. In a crisis you must keep major financial institutions willing to lend to each other. If they don’t trust each other, people won’t trust the banks, the money supply shrinks by 80% in a few days and all businesses grind to a halt.
So, yes, it was wise to let some financial institutions fail. But not Lehman.
As for the bankruptcies of the non-financial institutions such as GM, Chrysler, Fleetwood,and many more, the general opinion is that while painful for many employees and smaller firms it was necessary. When you go into to bankruptcy you have two options. Filing for Chapter 7 causes the company to stop operating and have its assets sold piecemeal. The assets are nearly always less then the debts They are worth even less still when the economy is spiraling downward. (Who wants a welding machine when most welding machines are already idle?) Bond holder, banks, suppliers, employees and other creditors get stuffed but they get something. Filing for Chapter 11 (the number refers to a difference section of the bankruptcy law) allows the company to cease paying its debts for a while so that it has time to develop a repayment plan. That plan usually means all creditors must first wait then eventually settle for a more gradual payout (and maybe a smaller amount). The first group to get "stuffed" in this process is the retired employees, whose benefits under the pension and medical plans are reduced. But if the company can get its act together perhaps it can survive in a smaller scale and a different business focus. For Chrysler that meant becoming part of Fiat, the Italian firm. For GM it means trying to shed non-core businesses like Hummer and Saab in order to concentrate on business lines that make money. A classic example of a successful reorganization was Navistar in the 1980’s The firm had been International Harvester. It made agricultural equipment and trucks. When the economy tanked in the early 1980s it declared bankruptcy, then sold off the agricultural equipment division for virtually nothing. Ouch! But lo and behold the truck business was still solid and, re-branded as Navistar, the company soared out of bankruptcy in about two years.
Now consider "the "bailout," which I gather refers to many things, such as the virtual takeover of AIG (60% owned but the US government), the takeover of GM (nearly 75% owned by the US government), TARP lending to banks, GMAC and others, as well as the increased deposit insurance that persuaded people to leave their money in banks. By and large this is turning good. People tend to forget that the bailout money earns interest. Further, in many cases the US governement holds warrants giving it the right to purchase shares in the company at specified prices in the future. Those warrants can be sold and in some cases have for a decent return. In the case of Citicorp the Treasury decided not to sell the warrants yet; the bank hasn’t don’t enough to improve it’s performance and get the public confident th
January 1st, 2010 at 7:12 pmyes
January 1st, 2010 at 7:12 pmFirstly very few companies go bankrupt, what happens is that they become insolvent. This means they are unable to service a debt on time.
Bankrupt means your debts outweigh you assets, while insolvency often occurs when you can’t turn your assets into money.
For example, if you have an iPod, a Blackberry, a can of caviar, a rolex watch but you left your wallet at home you have assets worth a lot of money, but it doesn’t mean have bus fare or able to buy a Big Mac.
That is insolvency.
When one bank collapses others also follow. This then follows there is no money for business development and loans are called in, meaning that less jobs, less business, your interest rates go up…etc etc.
So when these collapses happen they then impact on your life.
The problem that the bailouts use government money but don’t actually end up giving the government any more control.
Anyway, the evidence is that these type of bailouts do in fact work and keep the economy afloat.
January 1st, 2010 at 7:12 pmyes and no.
Failure would have had a catastrophic shock in the financial world. Had other economic consequences. Since the world wide system was in a faltering state it had to be helped.
January 1st, 2010 at 7:12 pmJust not the way it was done. No exit strategy, but then the Bush administration went to war the same way.
They should not have bailed these companies out – why ? because the idiots are
doing exactly the same thing they did when the company needed the bail out money.
Look at the banks that jumped on board – running around now not making any
worth while loans and buying up other financial companies like mad –
they should have let them go out of business – period because they are
antiquated or just not suited to survive.
Something else more worthwhile would have taken their place
January 1st, 2010 at 7:12 pm