An Equitable Bailout
I am tired of seeing news about the federal government bailing out large corporations as a remedy to (dare I say a reward for) bad business practices. When was the US Declaration of Independence modified to say that corporations had the unalienable right to a bailout after its management has managed poorly?
I understand that when a large corporation such as AIG takes a nosedive, the effects are felt beyond the boardroom and beyond the shareholders’ pockets. Average American citizens who have policies or accounts can be affected. Their savings and security can become at risk. In the case of a mortgage lender, people’s mortgages and homes are at risk. And, of course, innocent employees are at risk of losing their jobs.
But a free bailout is not the answer. Let’s take a look at the AIG bailout. The federal government is handing over $85 billion of taxpayer money to AIG. In a free market, if AIG wanted to raise cash, they can carry out a stock offering. In other words, they would offer to sell company stock to the public at a fair market price. Each investor would decide whether or not to invest in the company based upon his or her assessment of the company. Each investor would weigh the potential risk of losing money if the stock price declines against the potential reward of making money if the stock price increases.
I have to admit that a company that is in as much trouble as AIG would have to offer its stock for next to nothing. But that’s exactly the point. And I realize that AIG would have to create new shares in order to have such a large stock offering. And the creation of such a large number of shares would dilute existing shares and further erode the price of the stock. I say, so what? That’s how a fair market works.
With the bailout structured as it is, I have to ask the question “What are we, the American people, getting in return for our $85 billion dollar investment – an investment over which we have no decision?” If the government is going to take our tax dollars to the casinos, we deserve the benefit of the potential winnings. We have already put our tax dollars in the government’s hands. And they have already put the money into the slot machine. So we have nothing to lose at this point.
Maybe the casino analogy is a bit harsh. The odds of winning this game are stacked in the government’s favor. The way the deal is structured, the government stands to earn a nice return on its investment if AIG can manage to keep their lights on and repay the bailout money, with interest, to the government. AIG has a very good chance of recovery given the size of the bailout. If AIG goes under, the government takes over AIG’s assets and at least gets something in return for the investment.
But, what right does the government have to take the earnings on our tax dollars when so many of us are against the bailout in its current form? I propose something different. AIG should print a ton of new shares of stock – enough stock that will cover their bailout needs. AIG should sell the new shares of to the federal government. These shares should be then be given to the taxpayers. If and when AIG recovers, the American taxpayers reap the rewards. And, the rewards may be significant. AIG’s peak share price over the past year is nearly 15 times as high as it was the day of it’s demise. That leaves plenty of room for a rebound. If the stock price rebounds, the taxpayers reap rewards, and so does the government when we file our taxes with the capital gains.
Furthermore, if the federal government has more bailouts in mind, let’s set up a “Bailout Mutual Fund.” Whenever a bailout occurs, the stock purchased by the government would go into the mutual fund, whose shares are owned by the US taxpayers. If even a few of the bailed-out companies make a comeback, this fund would be the hottest mutual fund this planet has ever seen. Sign me up, please.
