May
19
Bailout Investments? Where are My Returns?
May 19, 2009 | Comments Off
Some banks are returning the money they got from government. Promised returns may not show up. Should the government invest Taxpayer’s money?
We do invest already, in a variety of ways. First of all, let’s define the bounds of the idea of investing. Dictionary.com first definition is “the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.” That is the one I am sticking with, while excluding intangible or difficult to measure ideas of “investing in our future through education”, or “investing in our health”. While noble goals, they are beyond the scope of this article.
The Troubled Asset Relief Program (TARP) is the most recent example of investing. The government invested $700 billion dollars. However, we have had many other investment based bailouts, from the AIG crisis to the Car crisis in 2009 and everything in between, with bailouts now measured in the order of trillions rather than billions of dollars. Investment based bailouts are not new either: they have been used many times in history, some of them used in the Great Depression. The Social Security Administration invests the excess contributions into government backed securities – an entity investing into their own structure. Even some of the thirteen original colonies that preceded the United States of America used an investment/ownership based bailout when they converted from Charter Colonies to Royal Colonies.
One of the ways in which government officials sell bailouts ideas to the public is by promising the possibility of returns on the investment. The idea being that when you buy a troubled asset that no one else wants to buy, you stand the chance that the asset will recover and will be worth more than the amount of money you paid for it. A difficult idea sale when you think that the best investors decided to avoid the asset and now the government tells you they are a sound investment. The only reason I could start believing the government that they are indeed a sound investment is because the government has some powers to force people to buy from his own investments, and also has the power to make life easier to the companies they own.
Some of the over five hundred (500) financial companies that received bailouts on the current crisis are trying to return the money to the government while their stock share prices are still low. They feel confident that they will soon be in a stable financial environment and they do not want the government having a governing interest on them. Can’t blame them, as it is difficult to avoid a conflict of interest from the government when they both want to make their property profitable and their citizens (clients of their property) get the best possible value.
The problem here is that by returning the money, the government is left out of any potential earnings they would have had in the future. Essentially the government is being forced to sell their best investments while keeping the not so good ones: the ones that will not produce earnings or may even go belly up, wiping out the taxpayer’s money invested on them. Not a good investment strategy.
An individual investor would be outraged if the companies they owned forced them to sell out their stake. Then again, they probably can, if a majority of the voting shareholders (as is the case in these kinds of investments) did. In reality, the government has little option but to accept the payment for their shares (unless they want to invent any new laws against that).
It seems that this bank bailout will not provide too many returns. However, let’s see the other side of the coin: at least we are cutting our losses. We took a big loan to invest all this money, in the way of Treasury Bonds. Not only we will pay interest on that loan, but our currency can devaluate and our economy may suffer inflation. Getting some money back may allow us to pay off some of the loans we have (or avoid taking more debt in the near future).
The big question still remains: is there any way in which investing the taxpayer’s money makes sense? I did supported and still support, Bill Clinton’s idea of investing some of the Social’s Security over contributions on stocks rather than in the U.S. Government (see below). However, I would imagine that most people would not be so happy with it right now when the market is considerably down from its 2007 high. The natural reaction of people is not to invest when things are undervalued and invest when they are overvalued.
In my experience with investments I have found that even the most educated people are incapable of being right all the time. In fact, some of the smartest people end up broke now and then (ask Trump, Jim Cramer, or Kiyosaki). Individual, still able people, may recover from going broke, but a government could be in a more vulnerable situation if it goes broke, thus the risk of investment is greater than the risk of any individual investing. For that reason, I would rather see the government not investing, not even in themselves as it is being done in the Social Security Administration.
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