Bailouts and Socialism of Stupidity
Sep. 17th, 2008 01:05 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
leblonОдин мой друг, ушедший из физики в финансы и теперь заправляющий собственной компанией, периодически присылает по емайлу новостные листки этой своей компании. Сегодня утром еще один пришел, и вот что в нем говорится, между прочим:
So far the government bailouts total well over $600 billion. The largest ones are $300 bn (Federal Housing Authority), $100 bn (Fannie and Freddie each), $85 bn (AIG), $30 bn (Bear Stearns) and various other guarantees and essentially unsecured loans. For comparison, the Iraq/Afghanistan war has cost about $600 bn since it started in 2003.
Taking AIG as an example, the government decided to lend $85 bn in exchange for an 80% stake in the company. On Monday, before the stock price of AIG declined about 60%, an 80% equity stake was valued at about $11 bn based on the market price. The government paid nearly eight times the market price for its equity stake.
The plan is to sell off pieces of AIG to repay the loan. If the market valued AIG correctly, this means that the taxpayer will have to absorb a loss of about $74 bn. If the government's valuation is correct, the taxpayer will benefit slightly from the interest payments as the loan gets repaid.
This is a classic example of providing wrong incentives. AIG's investors enjoyed the benefit of AIG's risky business practices while things were going well. If AIG had gone bankrupt they would have been exposed to the risk as well (stock and bond values reduced to close to zero).
The government bailout transfers much of this risk to the taxpayer by keeping AIG afloat and its stock and bond prices well above zero. The taxpayer is forced to suffer the consequences of AIG's business practices without getting any of the benefit. This provides strong incentives for companies like AIG to make risky decisions, enjoy the benefits, and let the general public take the consequences.
The government's actions may best be described as Socialism of Stupidity. If you (the taxpayer) didn't make enough bad financial decisions such as buying more house than you can afford, investing in leveraged sub-prime mortgage portfolios, etc, the government will redistribute some stupidity from individuals and entities that have enough to you.
So far the government bailouts total well over $600 billion. The largest ones are $300 bn (Federal Housing Authority), $100 bn (Fannie and Freddie each), $85 bn (AIG), $30 bn (Bear Stearns) and various other guarantees and essentially unsecured loans. For comparison, the Iraq/Afghanistan war has cost about $600 bn since it started in 2003.
Taking AIG as an example, the government decided to lend $85 bn in exchange for an 80% stake in the company. On Monday, before the stock price of AIG declined about 60%, an 80% equity stake was valued at about $11 bn based on the market price. The government paid nearly eight times the market price for its equity stake.
The plan is to sell off pieces of AIG to repay the loan. If the market valued AIG correctly, this means that the taxpayer will have to absorb a loss of about $74 bn. If the government's valuation is correct, the taxpayer will benefit slightly from the interest payments as the loan gets repaid.
This is a classic example of providing wrong incentives. AIG's investors enjoyed the benefit of AIG's risky business practices while things were going well. If AIG had gone bankrupt they would have been exposed to the risk as well (stock and bond values reduced to close to zero).
The government bailout transfers much of this risk to the taxpayer by keeping AIG afloat and its stock and bond prices well above zero. The taxpayer is forced to suffer the consequences of AIG's business practices without getting any of the benefit. This provides strong incentives for companies like AIG to make risky decisions, enjoy the benefits, and let the general public take the consequences.
The government's actions may best be described as Socialism of Stupidity. If you (the taxpayer) didn't make enough bad financial decisions such as buying more house than you can afford, investing in leveraged sub-prime mortgage portfolios, etc, the government will redistribute some stupidity from individuals and entities that have enough to you.
