The Real Message Behind the Bailouts

The Real Message Behind the Bailouts
Photo: wallyg, Creative Commons, Flickr
There’s a message behind the recent bailouts, but it isn’t what you think.

These bailouts began in March with investment bank Bear Stearns, a global investment bank and brokerage firm engaged in securities trading. The presumptive "loan" didn’t prevent implosion, so Bear Stearns was bought out by JP Morgan Chase (NYSE:JPM – $38.36) for two dollars per share, or $28 below the last recorded share price. JP Morgan also also got $30 billion in non-recourse funding to protect its assets. The price was well below the Bear Stearns 52-week high of $133.20.

Bloomberg says the rescue was part of a government effort to rescue jobs, homes and personal savings in conjunction with the $200 billion subprime crisis. In fact, the rescue effort did nothing for jobs; 13,300 were lost in the buyout. It also did nothing for shareholders. Worse yet, the deal will likely qualify as a tax-free reorganization, so shareholders won’t be able to claim their losses. Ouch!

The next set of bailouts were Fannie and Freddie. Fannie Mae (NYSE: FNM – $0.420) and Freddie Mac (NYSE: FRE – $0.2500), the U.S. mortgage giants, are government-sponsored enterprises. Fannie Mae is a derivative name for the Federal National Mortgage Association, and Freddie Mac is derived from the Federal Home Loan Mortgage Corporation.

Together, the two held about half of all mortgages, for a whopping $5.4 trillion in debt. The eventual burden, to American taxpayers, could be as much as $450 billion (or more, no one dares speculate on the real outcome).

The two were put into conservatorship (another word for government control) on September 7. The government committed up $200 billion, or $100 billion each, to cover any losses (courtesy taxes paid by you and me), and another $5 billion to cover their mortgage securities. The government also announced the end of all payments for both common and preferred stocks. The shares will continue to trade, but this distinction is irrelevant to investors who have lost billions, since shares are first in line for losses and last in line for profits, and recovery of the stock will likely take decades (if the government doesn’t wholly assume ownership).

Shareholders will also be stripped of their rights to vote for or against company proposals, which means shares could be further devalued by the perception that there is no shareholder control.

Next comes American International Group, or AIG (NYSE: AIG – $2.21), a major American insurer with tentacles in every aspect of the financial market. The government bailout, announced on September 15, was cited as giving common shareholders the short straw but was expected to encourage the stock market (specifically index futures).

On Wednesday, September 17, the Dow Jones index opened down from its Tuesday close of 11,059.02 by three points. At 11:26 a.m., (CST) it was down almost 354 points. So much for inspiring confidence. The AIG bailout has the New York Fed lending up to $85 billion to the company in exchange for a 79.9% stake. This prevents bankruptcy, but as economist Marco Annunziata notes, the “punitive” interest rate on the two-year loan makes it eminently clear that this is not a rescue effort but a form of financial rendition, leaving the company “unviable while ensuring that its obligations will be met.”

This last bailout also helps AIG’s trading partners (investment banks), creditors and policy holders. AIG, even more than Fannie and Freddie, has its fingers in so many market segments that no one is sure of the net positions involved or their liability. David Wyss, S&P’s chief economist, readily admits the bailout will not help shareholders.

So far, the only entity to escape government intervention is Lehman Bros. (NYSE:LEH – $0.13), an investment bank which has filed for bankruptcy. As I write this, the government is considering bailing out U.S. automakers to the tune of $25 to $50 billion. Why did Lehman fail the “buddy” test? I guess we will never know, but some pundits speculate a Lehman bailout would have been either perceptibly over the top (in the eyes of the public) or tap city for the Fed. Others cite the fact that Lehman was relatively small and its failure had been anticipated for months, whereas AIG came out of the blue and would have impacted financial markets like an "extinction level event." I’m going to speculate that Lehman executives weren’t willing to play Fed handball on the government’s court.

As for the real reason behind all these failures and bailouts, I’m simply going to quote the late George Carlin, who said of politicians and the wealthy elite: "It’s a big club and you ain’t in it. You and I are not in the Big Club."

These latest moves are simply a way for the real players to take you and me out of the market. We don’t make enough and we don’t spend enough. We are financially (and socially) irrelevant. As Hervé Kempf writes in his new book, How the Rich are Destroying the Earth, the real threat to the common man is not terrorism, but wealth, which seeks to protect its privileged status by limiting access to wealth-building tools.

What the market doesn’t realize is that the un-wealthy make up 10 percent of all individual trading volume (in large and small-cap stocks). Our footprint is even bigger as institutional investors. In 1996 alone, Americans put $235 billion into mutual funds. Our institutionalized investments also make up 75 percent of hedge funds with $25 billion or more in assets. We are also heavily vested in commodities.

The flip side is, their plan to drive us out is gradually working. In 1950, individual investors owned 94 percent of all stocks. In 1980, the figure had declined to 63 percent. More recently, the combination of bailouts and a nose dive in both hedge funds and commodities means that those of us who applied for admission to the Big Club are no longer properly attired. We have lost our shirts. 

Disclosure: I don’t own stock in any of the entities mentioned.

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The Real Message Behind the Bailouts
Photo: Mike Licht,, Creative Commons, Flickr