Sunday, March 1, 2009

Let the Big Boys Fall!

Citigroup and AIG are back for more bailout money.

The latest Citigroup bailout involves an odd exchange of the preferred stock, that Paulson bought with TARP money, for common stock. This at least waives the mandatory 5-8% dividend required from Paulson's cash infusion. It also means we move that much closer to Citigroup's nationalization—thrown into the same heap with Fannie Mae and Freddie Mac. The Treasury department will convert up to $25 million of preferred shares to common, but only up to the amount of money that Citigroup shareholders will do the same. Time will tell how this plays out.

AIG, well, they just happen to need another $30B. No doubt they'll need still more later.

If a successful business were to get hit by a random calamity, I could see the possible sense of bailing them out. I might not agree but at least I could digest the logic. But this is insane. The financial giants are failing because of poor decisions and poor corporate management including, but not limited to, ridiculously high executive salaries. They need to be chopped up, and any valuable assets they have can be sold to banks that have done well, who managed to responsibly navigate the financial recklessness over the last decade.

Our credit needs can just as well be met by a new generation of banks. Banks (and insurance companies) thrive perfectly well in a free market setting and should not require government subsidies. New ones will come forth to replace the old. Citigroup and AIG have demonstrably failed as corporations. All that keeps them alive now is lobbying efforts for congressmen to divert tax money toward their undeserved sustenance.

UPDATE [3/10/09]: in the face of an increasing sentiment that failed banks should be allow to fail, Bernanke defended that they would *not* be allowed to fail. This is, actually, a first step.

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