Bailout or Boondoggle
Like most of us, I have to write down the numbers in a trillion dollars to count the zeros.
($1,000,000,000,000) I think that’s enough zeros.
There are too many zeros to remember easily. It is an amount that is at the very edge of my capability to imagine. I do have experience borrowing money for various projects in my business through the years. It is this experience that I have been using to try to understand the current actions of Congress, Treasury and the Federal Reserve in bailing out banks, financial institutions, and possibly the U.S. auto makers.
A phone call from a friend got me thinking. He reminded me of my first sizable project where I needed financial support from a bank to make the deal work. I brought the project to a bank that knew me well and was familiar with my modest, but solid, early success with smaller projects.
The bank made a development and construction loan for my 300 house project. They also made me collateralize the loan with all property owned by both my wife and me. They limited the expenditures I could make building homes ahead of actual sales. They tied the interest on the loan to any raises in the prime rate that took place during the term of the loan. Their interest would not be lowered if the prime rate was lowered. These were the terms and restrictions placed on a business venture proposed by a successful profitable business.
If I did not meet the loan terms and went into default the bank could take our house and pretty much everything my wife and I owned. I took the loan, bought the land, built the houses and made the deal work despite a recession that occurred shortly after the project started. The reason the deal worked in those tough times 34 years ago was because I had personal responsibility for the project and would have lost everything if it failed.
I am searching for the personal responsibility clauses in the trillions of dollars that are being provided to banks, insurance companies and now probably to the auto industry, all of whom are in trouble because of various levels of mismanagement.
My friend who called to remind me of how things used to work is taking a full page ad in the Washington Post outlining to Congress terms that should be included in any Bailout using TARP money or any money from the Treasury, Federal Reserve or FDIC. He has asked me to review and comment on the particulars of his proposal.
I’m urging my readers to watch the Washington Post for the full ad later next week. It has some interesting thoughts concerning personal liability being provided by those executives who are being handed billions to correct their mismanagement. The billions are being provided by elected officials who have a dog in this fight. My friend proposes among his suggested terms that a CEO of a company which receives a loan will not receive a salary that is more than the President of the United States, until the loan is repaid.
His other suggestions are worth considering by those Congressional committees dealing with these matters. When the ad runs (probably Dec. 3) give it attention and let me know what you think. What we think should be given careful consideration by our representatives. It is after all our money they are lending.
The current financial problems have brought back experiences of financial challenges from the recesses of my memory, in HD sharpness with full color. At the heart of every successful workout were individuals taking responsibility for those issues in troubled water. All workouts do not have successful conclusions and those individuals with responsibility must accept the terms of failure as well as the rewards of success. Many have lost their grasp on this basic tenet at the core of why Capitalism has worked so well in providing opportunity for many who were willing to work hard and take individual responsibility as part of every deal.
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Comments
Buck,
Fantastic commentary and Amen! My only comment is to take you one step further. Corporations are not receiving this money to correct mismanagement as you pointed out. They are receiving this money to cover up mismanagement, which is to say that many of the issues that caused the failures are not required to be corrected. That is a far greater concern because that means that the money is more likely being wasted to delay the inevitable rather than allowing the economy to take the hit and move on.
Again, great writing and please keep them coming.
Heath
Great commentary Buck. You have a great style. Did you ever think that you would agree with Thomas Friedman NYT Weds Nov 26th? CAROL