We are working overtime here at AllBusiness to continuously improve our site as a manufacturers’ resource, and I’m dying to tell you about the newest developments. But right now there can be only one topic for discussion, and that’s what’s come to be called “The Bailout.”
For starters, “bailout” is an unfortunate term. “Economic rescue package” would be more appropriate. But since bailout is the label we have, I think it’s important to think about what the word means.
Visualize a boat that’s filling with water. Visualize seamen with buckets, bailing the water out so the boat can stay afloat.
We are all in that boat.
For all the unfamiliar terminology, what’s happened isn’t that difficult to understand. Consumers bought houses with loans they couldn’t afford to pay. Lenders packaged those loans, along with good loans and other financial instruments, into “securitized assets” which they then sold to other financial institutions – like the insurance company AIG.
When a huge company like AIG insures something and then has to pay a claim, it can always sell some assets to cover the claim. But, a significant number of their assets – the securitized assets – are currently worthless, because no one will buy them. They are, in financial terms, “illiquid.”
The government has already bailed out AIG, and thank goodness. AIG insures, to give just one example, all the airlines in the world. And no airline is going to let one of its planes take off without insurance in place. So if AIG had gone under, we would soon have been without air transportation. It could get that bad.
Big banks have gotten into a similar situation by, for all practical purposes, becoming insurance companies. They have done so with what are called “credit swaps.” A credit swap amounts to a promise to reimburse a company that owns a securitized asset if that asset becomes worthless. But right now, if the companies that engaged in these credit swaps actually tried to collect their money, that money would not be there. No one ever dreamed this would ever happen, but it has.
Here’s why the bailout should go forward. If the U.S. government buys securitized assets of dubious value, two things will happen. First, everybody will calm down. Second, the domino effect will be halted, which means that banks on the local and regional effort will be able to function normally. And third, over time, the government could actually make money, because over time, the securitized assets will rise in value.
After the savings and loan debacle of the ‘eighties, the government set up the Resolution Trust Corporation to do something similar, and over time the RTC did make a profit.
I urge you to vocally support the bailout, and send an e-mail to your representatives in the House of Representatives and the Senate urging them to compromise and get something done.. This isn’t about fat cats – in fact, a coalition of liberal Democrats and conservative Republicans (!) has ensured that there will be compensation caps for executives whose companies benefit. It’s about keeping our economy afloat.
P.S. For once, the factions in our government are cooperating, and I have little doubt that a compromise will soon be reached. Just send the e-mail!