Above the Crowd

BAILOUT what?

July 22, 2008:

I wish someone could help me understand why Fannie Mae and Freddie Mac stock prices are not hovering near zero. Is our governement really going to bail out equity investors in a failed business enterpriose? I totally get keeeping America afloat, but it is critical that failed businesses FAIL. They must FAIL. You can’t provide band-aids to equity failure. The whole system will come to a halt. Risk that pans out must result in failure. it is a crucial part of the system.

6 Comments

  1. Steven Kane July 23, 2008

    would you have had bear sterans fail (rather than be bailed out in the form of a US Treasury guarantee to JP Morgan?)

    Reply
  2. markharrison July 23, 2008

    The short answer, as far as I can tell from here in the UK is that, yes, your government is going to rely on your US taxpayers to bail out both of them.

    The answer to “why” is, as far as I can tell, that the danger to the short-term of letting the shock-waves wander through the system is currently “valued” more highly than the long-term moral hazard of allowing bankers to get away with ludicrous practices.

    Makes you wonder about the valuation basis, doesn’t it 🙂

    Here in the UK, these shareholder bailouts with public money tend only to come in the runups to elections.

    Reply
  3. Jake July 24, 2008

    Not only that. If the gov’t does bail them out then all SVP’s and above should give back any market-level compensation earned over the last 5 years. They’re working for a government institution, not a private company…

    Reply
  4. Brendan Ross July 28, 2008

    The issue here is the equity holders. Sure, it might make sense for the companies to continue to operate. But should the owners (the stock holders) really get anything but sawdust.

    Reply
  5. Kevin Cimring October 9, 2008

    Hi Bill, since this post there has been an unprecedented bail-out plan of US$700billion-plus. Would be interested to hear your views.
    Kind regards
    Kevin

    Reply
  6. bgurley November 25, 2008

    Kevin,

    I still find it odd that the government is making the decision to leave equity holders with value when they are indeed the lender of last resort. I am pleased to see the shift to senior preferred stock + warrants. That makes way more sense than a loan.

    Reply

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