A Need for a USA Bailout Penalty?

I have a few friends in the United States and they are constantly emailing me with all sorts of updates regarding the ‘State of the Economic Nation’. One of biggest trends that came out over the weekend from all the information I was sent was a concerning, but perhaps, realistic ‘common man’s’ view of the world. Summed up in a one line statement, it would read something like this:

Why should we (the USA) use public money to bail out rich investors who took too much risk without any sort of penalty ? They still drive their rich cars, live in their rich houses while 90% of America can’t even afford to stay in their homes. How is this fair ?

On the face of it – it seems like a fairly good argument to make and one that does hold some underlying truths. Wall St did take far too many risks primarily in order to push up salary bonuses and generate spectacular portfolio returns while also ‘returning shareholder value’. It did this with the full knowledge that more and more risks were being taken than what would have normally been permitted. Everyone pushed a little harder, and took a little more risk than they usually would which ultimately ended in the highly volatile and reactionary market conditions we have at the moment. The question is, who ultimately is responsible?

This is a two-fold argument and depending on which side of the coin you are coming from – it will differ. The key to apportioning any blame is to really focus on the downfall of the market and why the downfall occurred. Should the regulators have moved faster and questioned the huge profit gains more regularly and with greater scrutiny they did ? My response to this question is yes – but, in saying that I argue that realistically pre-emptive mechanisms should have been in place in the first instance to identify and question the risks investors were taking. This would have included a greater review of internal risk strategies by regulators of financial institutions, and a greater level of market disclosure on there open positions.

The failure of regulators to act, and to act quickly, has been perhaps the driving force behind the entire financial systems downfall. The reason ? I like to refer to an age old adage:

Give someone an inch, and they’ll take a mile.

The truth of the situation is that by the regulators failing to adequately manage, assess and hold each financial institution accountable for there increased risk taking strategies – they allowed the market to implode because investors felt they could take as much risk as they wanted. For the record, I am in no way implying that the management of these financial organisations shouldn’t be held just as accountable – they should be. They owe a duty of care to act in the best interests of their shareholders and to maximise shareholder value, and by increasing their appetite for risk they directly put shareholder interests in the firing line. But, if regulators had of forced investors to disclosure more and regulated more proactively – then perhaps this “huge” appetite for risk may have been reduced to a “mild” one.

A reoccurring theme in all the notes I have been sent is not that a USA bailout strategy shouldn’t go ahead, but rather, what taxpayers should get out it. I argue that USA taxpayers should get much more out of any sort of bailout plan than what they are currently getting (which is arguably nothing). The $700 Billion USD should allow the US Government to secure stocks in any banks that want to utilise the bailout and then when market conditions stabilize and improve – the government can sell these stocks for a profit. It really makes sense and it provides some net interest benefit to taxpayers for using almost $700 Billion USD on the financial markets instead of using it for infrastructure and health services in the USA. 

I think the USA Treasury has simply created a knee-jerk solution to a very complex situation – something that the USA is very good at doing. The Treasury should have proposed and tendered the plan for a 1 week period to achieve more commentary from industry professionals and government, than simply try and rush a bill through Congress which is now being stalled. I think an immediate reaction is necessary, but not one that is rushed and may have serious implications down the track if it is not thought out correctly. 

To conclude I ask you this:

Would you want government to spend $700 Billion of taxpayers money on a decision that was put together in 2 days?

I certainly wouldn’t.