I don't believe in Santa Claus.
At least I didn't before Treasury Secretary Henry Paulson announced a $700 billion federal bailout plan for troubled financial firms on Sept. 21. Since then, I've been shopping for Christmas stockings and looking for signs of flying reindeer.
Although federal relief for ailing private sector companies is nothing new - just ask Lee Iacocca - the instances and magnitude of that relief in recent months make me think that government officials have been hitting the holiday eggnog a little early.
Never before in the history of the United States has there been such an outpouring of generosity for failed businesses. This year alone, the government has rushed to the aid of IndyMac Bancorp (OTC:IDMC), Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE), American International Group (NYSE:AIG) and Bear Stearns (there may be others, but I was running out of commas). If the trend continues, the U.S. might as well be called Pottersville. (For some further commentary on a couple of these companies, read Winners Of The Fannie/Freddie Bailout.)
Last Guys Finish Nice
Of course, who gets federal money and who doesn't is something best left to the official government Magic 8-Ball it would appear.
Bear Stearns, the same firm that declined to participate in a Fed-brokered bailout of the Long Term Capital Management hedge fund in 1998, received a 28-day credit line guarantee from the Federal Reserve Bank of New York on March 16. Lehman Brothers (NYSE:LEH) and Washington Mutual (NYSE:WM), on the other hand, were told to take a hike.
Now, I'm sure there's an explanation for these arbitrary acts, but I'd wager it's about as illuminating as the adult conversations on the cartoon "Peanuts."
Big Package for a Big Problem
According to President Bush, the latest plan to save struggling financial companies (the largest ever) is "a big package because it was a big problem."
"My first instinct was to let the market work," said Bush, noting that he changed his mind after being briefed by experts on the subject. One of those experts, Paulson, believes the $700 billion plan is the lesser of two evils.
"I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said.
Taking it to the Wall Street
While that may be true, it seems many Americans are fed up with what's beginning to look like a taxpayer-sponsored lottery for losers. On Thursday, hundreds of protestors assembled on Wall Street in New York to hear AFL-CIO National President John Sweeney and United Federation of Teachers President Randi Weingarten as well as others decry federal intervention.
And, apparently, it's not just labor unions that have a problem with Paulson's plan. A recent Rasmussen poll suggests that even the investing community, which accounts for 62% of the nation's voters, is split, with 36% in favor of it and 36% opposed. Among non-investors, the numbers are even worse, as only 15% support the proposal, whereas 41% are against it.
In The New York Sun, Jim Rogers, a well-known market commentator and author called the plan "astonishing, devastating, and very harmful for America," while former Speaker of the House, Newt Gingrich, went so far as to question Paulson's motives.
"I think you have a Goldman Sachs chief of staff to the President and the Goldman Sachs secretary of the Treasury, and they convinced the President that the American people ought to send $700 billion to Wall Street," Gingrich told NPR, referring to Paulson and Joshua Bolten both of whom worked for Goldman Sachs (NYSE:GS) prior to assuming their government posts.
Regardless of what kind of package ultimately gets approved - and you can bet your bottom dollar (aka three shares in Lehman Brothers) that a plan will be approved - the price to taxpayers will be steep.
Writing for slate.com, Juliet Lapidos compared the bailout cost to "12 Bill Gateses," adding that each man, woman and child in the U.S. would be responsible for roughly $2,300 - bad news for my 5- and 8-year-old, who will be filling out job applications this weekend.
"That's right around what we each paid, on average, for gas and oil in 2006 ($2,227) and a bit less than our average personal tax burden ($2,432)," Lapidos wrote. I hope Santa leaves a lump of coal in my stocking this year - maybe I could use it to heat my home. It looks like it's going to be a long winter.
To learn more about what caused these problems to begin with, read our related article The Fuel That Fed The Subprime Meltdown, and How Will The Subprime Mess Impact You?