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2008 - the year of the Bailout
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With apologies to Barry Ritholtz, the year 2008 may eventually be known as the Year of the Bailout. The stock markets did not have a very good year and on the economic front, all the talk was of a recession before we even had an official recession.
Then we had an official recession.
So what do we do as a nation? We hit the panic button.
Ritholtz also said in an interview from 2007 that everyone is a free market capitalist when the stock market goes up, but as soon as the market goes down, everybody has their hand out. Well, that was certainly the case this year. The government took unprecedented steps to hand money out to failing companies in 2008.
Here are the biggest doles in the Year of the Bailout:
- Bear Stearns - JP Morgan Chase and the federal government bailed out Bear Stearns when the financial giant neared collapse. JP Morgan purchased Bear Stearns for $236 million; the Federal Reserve provided a $30 billion credit line to ensure the sale could move forward. Price Tag - $30 billion
- Fannie Mae / Freddie Mac - The near collapse of two of the nation’s largest housing finance entities was yet another symptom of the subprime mortgage and housing market crisis. In an effort to prevent further turmoil within the financial market, the U.S. government seized control of Fannie Mae and Freddie Mac and guaranteed up to $100 billion for each company to ensure they would not fall into bankruptcy. Price Tag - $200 billion
- AIG - When AIG was unable to secure a private-sector loan, the federal government intervened by seizing control of the insurance giant. Less than one month after the initial bailout and just days after AIG announced it had already drawn down $61 billion of its loan, the Fed stepped in with an additional $37.8 billion to bolster AIG’s securities lending business. In November, with the insurance giant continuing to report heavy losses, the Feds revised the terms of the bailout and purchased $40 billion in AIG preferred shares. Price Tag - $150 billion
- Auto Industry - In late September 2008, Congress approved a more than $630 billion spending bill, which included a measure for $25 billion in loans to the auto industry. These low-interest loans are intended to aid the industry in its push to build more fuel-efficient, environmentally-friendly vehicles. The Detroit 3 — General Motors, Ford and Chrysler — will be the primary beneficiaries. Price Tag - $25 billion
- Troubled Asset Relief Program - The Bush administration has proposed a rescue plan to ease the current crisis on Wall Street. If approved by Congress, the Treasury Department will be authorized to purchase up to $700 billion of distressed mortgage-backed securities and other assets and then resell the mortgages to investors. Price tag - $700 billion
The TARP initiative led to a host of companies changing their corporate structure in order to get a piece of the Bailout. Goldman Sachs, Morgan Stanley and American Express became Bank Holding Companies and GMAC is seeking to do the same thing. Gotta get while the gettin’s good.
What is not listed on this? A bailout for the people of the United States, that’s what. I’m not an economist and I am not a political pundit. What I am is a chart reader first. But in looking back at 2008, I could not ignore that even with all these bailouts, the stock market is still at its lows for the year. Sure, these were not intended to save the stock market - they were meant to save companies that were too large to fail.
So where do we go from here? Well we are certainly not tracking how the bailout money is being spent, that’s for certain. The auto industry bailout was a topic of great debate because congress is finally finding that the US people
I believe 2009 will see continued government spending, but not likely in the form of bailouts. The talk is that there will be an economic stimulus package that could tally up to 1 Trillion Dollars. The political theory is that the Democratic White House and Congress will try to spend their way out of a recession. The economic theory behind the stimulus is that the government must increase spending when private spending falls. This is a controversial theory for certain, but that is sure to be a moot point.
Government spending will increase because the president and congress have the votes to get is passed.
Now whether or not this leads to increased taxes or increased debt is another issue.
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