Federal Government Bailing Out Companies

The Federal government through the Federal Reserve Board recently bailed out Bear Stearns, the wall street financial giant to the tune of $35 billion early this year. At the time the Fed was making its case that the economy is not in a recession. The idea of bailing out big companies is not new to the Federal government, they did it with the savings and loans industry in the early 1980s. The company that I was familiar with that the federal government bailed out was automaker Chrysler Corporation. This was in 1979 and the government guaranteed loans to the amount of 1.2 billion which Chrysler did pay back within four years and its charismatic CEO Lee Iacocca became a national hero after turning around the company and writing a best selling autobiography.

At the time the argument was that there was going to be a lot of jobs lost and the US needed its third automaker in order to stay competitive with the Japanese, who at the time were the main US economic rival. I read Lee Iacocca's best selling book and at the time I was in total agreement with the government's action to bailout the automaker. With the current economic crisis and after some personal experiences over the years I am beginning to wonder if in a free market economy bailing out companies is such a good idea. I have seen two publications about the amounts involved in the Fannie Mae and Freddie Mac financial mess and both numbers are huge. This first figure said the amount involved is $800billion and the second said it will be around $125billion.The second figure appeared mysteriously sometime last week. I turn to lean towards the 800b figure. How in the world do you lose 800b dollars, I have no idea. People get locked up all the time for fraud. The case here is not fraud, at least that has not come up yet. But at the very least this is gross misappropriation, gross mismanagement. I can sit here and call it all types of names and that would not help the situation.

In a free economy, companies that screw up are suppose to be let go under. Enron,MCI-Worldcom are examples of companies whose management either were involved in fraud or hugely speculated and the are all belly up now. A lot of the dot_com companies in the late 90s are all history now. The government did not go trying to bail them out. A lot of individuals slip on their personal finances and the government do not show up to bail them out.

Should they federal government had led Chrsyler go under?Now I would say yes. 1.2billion US is not a lot of money compared to what is has been spend so far and the list of companies that would be looking for bail outs is just going to keep growing by the day. Lehman Brothers is rumoured to be in trouble. Companies in the auto industry are also in trouble. They all are going to be looking for a Fed Bailout. Bear Stearns got bail out for $35 billion and a few people cried fowl, maybe because it involved the very rich. They srew up and get bailed out and the little guy srews up and he is let to dry. The top management of companies like Stearns, Freddie Mac and Fannie Mae are suppose to be the smartest and the brightest. They themselves would tell you that. So if such people decide to go speculating instead of running companies based on sound principles, why should the government bail them out? I say that you let them go under and in a free economy other companies would emerge to take their places. The management of these new corporations should be more prudent in the manner in which they go about running big corporations.

Lets take a look here how difficult it would be for either Fannie Mae or Freddie Mac to ever recuperate the amount of money that they have just lost. In the history of Corporated American, the biggest quarterly profit by a corporation was when Exxon_Mobil, the oil giant netted $3billion. So if we take that and attempt to convert it to a yearly figure you get maximum $12billion. Lets just make it $10billion a year for argumentative sake. So if the two housing giants ever get back to profitability it would take them 80 straight years of net profit to make up for the srew up that they just did. That would never happen. Look at all the time that you hear that a company is loosing money, it is usually in the billions and each time that they make a profit it is usually in the hundreds of millions. That is why if you are top management in a major company you take your time and weight the risks involved before you get into activities that ended up costing taxpayers billions of dollars.

The fun part is that a lot of this big corporations usually make a mockery of the bureaucracy that is involved in federal governing. Now they are looking for the fed to bail them out. The US is not a socialist country. That is where the government runs all the major corporations. The private sector is suppose to be independent of the fed government. If they decide to go do what amounts in some cases of gambling with their finances, let them pay the consequences. A more efficient housing giant is going to emerged. The capitalist system is not going to crumble because a few companies are let go under.