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US Government Bailout is More Like Government Robbery ala Latin America

Posted on September 17, 2008

What the government is essentially doing in its current “bailout” schemes, in my opinion, is simply stealing companies from US shareholders. This sort of thing used to happen in third-world countries, like Brazil, where for example during the reign of their President Fernando Collor de Mello, citizens bank accounts were essentially confiscated overnight and replaced with less money the next morning.

In the same vein, Paulson and the rest of the US Government, are simply taking advantage of short-term liquidity issues to confiscate US companies, and wipe out shareholders in the process overnight. Yes, they haven’t actually gone into citizens bank accounts yet, but is there really a difference? And could we expect anything different when we hired a Treasury Secretary, whose former job was running Goldman Sachs?

Some may argue that the stocks are really worth $0 and hence the Government is doing the right thing. This of course is too complicated a subject to get into at the present time, but suffice to say, there are other more rational options to the current crisis and it is quite obvious that these companies are not worthless. And are regular shareholders really to blame for the current crisis? By what measure are creditors of these companies more worthy than the equity shareholders, especially since it’s the creditors who have created all these derivative schemes?

For instance, most people I’m sure realize that AIG’s fall had to do with the need to post collateral for credit default swaps. There is absolutely nothing wrong with AIG’s other insurance businesses. Why on earth AIG really feels the need to honor these collateral requests is beyond me, especially since most of the company’s counterparties are seemingly themselves facing a similar crash crunch. Couldn’t the level of collateral required been renegotiated or paid out over time when things settle down? And who exactly are the counterparties that are forcing AIG to post collateral immediately? Why should AIG bow to their demands?

The key question to ask, therefore, is who is getting wealthy off of these US “bailouts”? In the Lat Am countries, like Brazil, it was clear that President Collor and his friends and family made fortunes off of the bank raids. But, who is making money off of the US Government’s Robbery of US companies? Hedge funds that are shorting on inside information? Foreign governments?

Bottom line, the current bailout scheme is simply unprecedented in the US and is akin to government robbery of US business to benefit a few insiders. Time will tell how this plays out. In the meantime, if Brazil’s past provides any clue as to the ultimate endgame, it is this: At some point the robbery will end, business will get back to normal, and investor’s confidence will return.

It may take 1 year, 2 years or 5 years, but things will get back to normal, as there is not much left for the government to steal, unless of course they opt to pay for the next “bailout” by raiding US citizens regular day-to-day bank accounts. Perhaps, then US citizens can dip into Paulson’s and Bernanke’s bank accounts to pay our day to day bills?

Investment Opinion: Stick with commodities, related commodity/energy equities, such as alternative energy, and invest in companies with business overseas. After this crisis passes, the US dollar will plummet again, as no sane person could possibly believe the US currency is worth much, after all this. When the dollar once again begins its descent, oil and other commodities/energy will soar, along with the stocks in emerging markets, many of which are more stable the US, which has quite literally become now become a third world market.

Quick Follow-Up:
I listened to an interesting interview with Donald Trump yesterday who said that Paulson probably made a great deal with AIG. However, the flaw in this argument is that the government should not be in the business of “making great deals.” They are not a business, they are a government and a lender of last resort. As such, trying to negotiate a takeover of AIG, taking equity etc. is completely senseless and the wrong approach for government (as the Markets have already decided). Paulson, given his background, probably can’t help himself from acting like a businessman/shark in this environment, while what the financial system really needs is simply a government that supplies cash (”lender of last resort”) and restores confidence.

A second interesting debate, centers around the fact the government is getting equity in these failed institutions, and that ultimately these investments may become quite profitable, benefiting tax payers. But does anyone seriously believe this nonsense? In what way will taxpayers ever see the profits (if there are any) from these equity positions? Will the government lower taxes in years ahead or send out dividend checks to everyone, if these equity positions become profitable? I’m sure nobody believes either option is possible, and ultimately it’s not clear who benefits, if in fact the government’s equity in these failed institutions increases in value. The truth is probably that there are no financial benefits that will accrue to any taxpayers, and this is why the government forcing companies into bankruptcy, and taking equity stakes, instead of just supplying cash, is utter foolishness, in my opinion.

One of the issues in this crisis, probably centers around the fact that many in the government actually believe in the “reality” of the financial system. However, any rational person recognizes that the financial system is merely a ponzi scheme and can only sustain itself with constant cash infusions from the government. There is nothing wrong with that. That’s the game and it’s usually a fun game for everyone. But the government needs to recognize the game and keep it going by supplying huge amounts of cash, and not busy itself by negotiating to buy troubled businesses.

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