An Unfortunate Air Of Plausibility

In Cincinnati, and elsewhere, another identity-theft scam is making the works.  Only this time the bogus offer is not to help a Nigerian diplomat, it’s to get money from a phony program supposedly put in place by President Obama.

The emails offer people the opportunity to participate in a program where the federal government will supposedly pay your summer electric bills.  All you need to do is provide your Social Security number and bank routing number, and your bill supposedly will be paid.  Of course, there is no such federal program, and once you provide your Social Security number and bank account information the scammers will empty your account and take you for all you’re worth.

What’s sad about this isn’t that crooks are preying on innocent saps — that’s been happening since the dawn of mankind — but that people are being duped by the ploy because it has the air of plausibility.  With all of the stimulus programs and bailouts over the last four years, wide swathes of people evidently find it entirely believable that the federal government will pay your utility bills, just like it bailed out banks and GM and made stupid loans to companies like Solyndra.

Don’t you find it troubling that rational people could believe that such a program might actually exist?  We’re rapidly becoming a nation of greedy suckers.

Lessons From The Blockbuster Bankruptcy

On Thursday, Blockbuster Inc. filed for bankruptcy.  The retail video rental chain, which employs about 25,000 people, is close to $1 billion in debt and is getting hammered by Netflix and other companies that offer different approaches to delivery of movies and entertainment options to consumers.

I haven’t been to a Blockbuster store in years, but I pass one on my commute to work every day, and there has been a noticeable decline in traffic at that store.  Consumers obviously prefer the mail order/on-line alternatives to driving to the nearest Blockbuster store, rummaging through the shelves in hopes of finding a worthwhile video to watch that night, and then paying late fees when they forget to return the movie in timely fashion.

The lesson of the Blockbuster bankruptcy is that the tastes and practices of American consumers are ever-changing and often influenced by new technology — which is why so many people are skeptical when the federal government tries to pick winners and losers, subsidizes particular industries or lines of business, or otherwise attempts to influence consumer choices or the direction of the American economy.  Blockbuster was once a mighty company, with busy stores in every shopping mall.  People who looked at the company in its heyday probably thought that, of course, Blockbuster would be profitable indefinitely.   When something better came along, however, Americans left the Blockbuster model behind without a second thought.

At least no one is suggesting that we should bail Blockbuster out.

Taxpayer-Subsidized Political Contributions

General Motors recently filed documents with the Federal Election Commission disclosing that GM contributed some $90,000 to political candidates.  The GM spokesman quoted in the linked article seemed irked that anyone would think there was a problem with this, saying that GM isn’t going to “sit on the sidelines” while other companies shovel cash at political candidates in an attempt to influence policy.  So, GM will make contributions to candidates who support “a strong auto industry.”

The problem, of course, is that the federal government (that is, U.S. taxpayers) own 61 percent of GM and are subsidizing its operations.  While that is the case, GM shouldn’t spend one penny toward political contributions of any kind.  Any money GM earns should be devoted to paying off its debt to taxpayers and making the company more attractive to investors when GM tries to make a public offering in the near future.

It also is problematic that GM is, in effect, using taxpayer money to pick and choose candidates to support, with the inevitable acid test being whether they support “a strong auto industry” — meaning, of course, candidates who supported the GM bailout and continue to think we should do whatever is necessary to prop up the sagging, poorly managed, uncompetitive domestic auto industry.  In short, even though public opinion polls show that Americans now strongly oppose the bailout culture, our tax dollars are perversely being spent by GM to encourage the continuation of that culture.  It’s just another reason to make a change in how things are being done in Washington, D.C., and in Detroit.

Saying No To California

I’ve posted before on the ongoing fiscal problems in California, which faces massive budget deficits (see here and here, for example).  Predictably, the politicians responsible for running the state have been unable to summon the political fortitude to make the combination of spending cuts and revenue increases necessary to balance the state’s budget — even though the state has taken $8 billion in federal stimulus dollars and shamelessly employed the most brazenly bogus gimmicks to increase revenue for this year.  Equally predictably, California is now turning to Uncle Sam for help.  California is asking the federal government to eliminate the “unfunded federal mandates” that apply, to guarantee California’s debt instruments against default, and to increase Medicare reimbursements, among other things.

What’s interesting about the linked story is not that California has its hand out to the federal government — after all, with so many big banks and car companies and mortgage companies and other entities getting bailouts, why shouldn’t states join in the fun?  Instead, what is interesting is the rationalization of California politicians about why the federal government should bail out California, too.  California is the economic engine for the entire country, one of them says, and therefore it is in the national interest to help California get out of the ditch.  Another complains about federal regulations that impose costs without providing funding.

Has California looked in the mirror lately?  In reality, California’s penchant for extreme “environmental” regulations and ludicrous “consumer-friendly” laws have imposed enormous costs on doing business, which is one of the reasons so many companies have fled the state.  Those regulations are classic “unfunded mandates.”  And, those regulations have affected commerce in other states, because businesses that want to sell a widget to the California market don’t want to build one set of widgets to sell in California and another to sell in the other 49 states.  Rather, those businesses build one product that complies with California’s draconian regulatory regime and costs more for everyone else as a result.

I like California and have many friends there, but I think the state should be forced to deal with its crisis without getting federal bailout cash.  California’s current problems are entirely self-inflicted.  Any state that has 9,223 former state employees earning state pensions of more than $100,000 per year (to cite only one example) has been poorly governed and still has cutting to do.  If the fiscal crisis causes California legislators to finally realize that California residents who want to attend California’s colleges will have to pay a bit more, that state workers will have to take salary cuts and receive leaner benefits packages and be laid off, and that the state should take a hard look at some of its regulations and laws that have driven away employers, then the fiscal crisis will have served a salutary long-term purpose.  Americans in states like Ohio should not have to subsidize the bad management and profligate spending that has characterized California politics for decades.

Bailout Fatigue

The government will be distributing another $3.8 billion to GMAC, the former GM subsidiary that makes car loans and home loans, but mostly, bad loans.  Although the U.S. government already has given GMAC $12.5 billion in an attempt to shore up its balance sheet, the company is still experiencing massive losses.  This latest cash infusion from the government will leave U.S. taxpayers as the majority owner of the company.  It doesn’t seem like the wisest investment of our tax dollars, but no doubt the Treasury feels that having thrown $12 billion into GMAC, another $3.8 billion is chicken feed.

I’ve posted about our bailout activities on numerous occasions — such as here and here — but what I find most interesting about this latest bailout is the seeming lack of any real reaction to it.  It is as if we have heard about so many bailouts that we have become numb to another failed company, another expenditure of a billion here and a billion there, and other capitalist enterprise largely “owned” by the government, which purportedly will some day be repaid for its “investment.”  The outrage at the ineptitude of the corporate kingpins who ran the companies into the ground with risky and ill-fated business activities, and the outrage at the bad deals the government is striking in agreeing to make the bailouts, seems to have vanished.  We all apparently are suffering from bailout fatigue.

In the meantime, let’s all hope that GMAC’s continuing problems aren’t an early warning sign of the dreaded double-dip recession.

Jesse Jackson’s Modest Proposal

Jesse Jackson says that the United States Government can’t be a “tightwad” now.  Yes, that’s right — after the federal government has spent hundreds of billions of dollars in borrowed money on TARP funds, the “stimulus” package, “Cash for Clunkers,” bank bailouts, home ownership incentive programs, GM and Chrysler bailouts, and countless other examples of unbridled government largesse, Jesse Jackson says it is time to finally open the purse strings!  Otherwise, state and local governments may be forced to actually lay off workers to reflect lower tax revenues, and California college students who have enjoyed heavily subsidized tuitions might actually have to pay something close to what their college education actually costs!  What a cold world it would be if those things were to happen!

I had no idea that Jesse Jackson had such a subtle and keenly developed sense of humor.  Nearly 300 years later, Jonathan Swift’s A Modest Proposal finally has some competition in the satire category.

Botched Bailout

The Special Inspector General’s report on the bailout of AIG is pretty damning. It concludes that the bailout — which was engineered by the U.S. Treasury and Federal Reserve and occurred on the Bush Administration’s watch — involved some gross overpayments on certain credit default swap transactions. In many instances the Federal Reserve “made whole” the counterparties to troubled investments where the counterparties would reasonably be expected to take significant haircuts on what were, after all, extraordinarily risky transactions gone bad. One of the counterparties that made out very well was Goldman Sachs, which just recently reported enormous “earnings.”

The Special Inspector General’s report on the AIG bailout just confirms, once again, that when the government intervenes in a “bailout” scenario it is the taxpayers who inevitably end up getting fleeced. I appreciate that, at the time, there was significant concern that AIG’s collapse would have been tipping over the first domino in a long line. Still, you would like to think that the Bush Administration and the Federal Reserve would have had sufficient savvy, moxie, and guts to negotiate fair compromises with Wall Street firms and international firms that were looking to profit from bad deals.

Bailout, Then Bankruptcy

CIT Group, a commercial lender, has filed for bankruptcy, 10 months after it received $2.3 billion in bailout money.  The bankruptcy means that the federal government — and, ultimately, taxpayers — are unlikely to recover any of the bailout funds.  With the bankruptcy, the preferred stock and warrants that the federal government acquired in exchange for the bailout money will be pretty much worthless.

I think it is fair to ask what the American taxpayer received in exchange for the bailout.  In this instance, the answer appears to be “not much.”  CIT staved off bankruptcy for 10 months, and its bankruptcy will be of the “prepackaged” variety that will allow the company to shed certain liabilities — like the warrants and common stock held by the federal government — but continue to do business like it has been doing business.  Bondholders will still have an interest in the company and, most notably, the CEO who joined CIT in 2003 and apparently pushed CIT to get into subprime mortgages and student loans still has his job.   Thank goodness!  No doubt that will help to make every taxpayer feel better that their share of the $2.3 billion has vanished on the wings of the wind.

I recognize that a case can be made that the federal government had to step in and help banks and other financial companies to ensure that the crisis of confidence that occurred after the fall of Lehman Brothers did not result in a general collapse of the financial markets.  Still, we shouldn’t kid ourselves that the bailouts were without cost.

And Another Thing . . . .

One other point should be made about the Chrysler bankruptcy issue. Currently, managers of investment funds are measured against a simple performance standard — in effect,they have a fiduciary duty to make as much money as they can, in compliance with the law, through investments that fall within their defined investment area. For example, managers of high-yield debt investment funds have a fiduciary obligation to maximize the legal return on their investments in high-yield debt, by making wise choices in their initial investment decisions and then pursuing every penny of return if the issuer of the debt goes into bankruptcy.

What happens, then, if a manager of a fund that invested in Chrysler debt caves in to government pressure and takes much less than the fund might have recovered through a bankruptcy proceeding? Is that person thereby breaching his or her fiduciary duties? If an investor brings a lawsuit claiming a breach of fiduciary duty, would it be a defense to say: “The President made me do it?”

Capitalism may seem cold-blooded, but the mission of a fund manager to maximize the legal return of an investment is a simple, straightforward obligation that can be assessed and measured. If you start to introduce other variables to the equation — politics, the environment, community goodwill, and so forth — you make the equation much more complicated. If people want to investment in “green” investment funds, or labor-friendly funds, they can do so. Most people, though, simply want their investment managers to provide as much money for their retirement as possible. If those managers allow themselves to be bullied into accepting less than they have a right to obtain, they aren’t really doing their job.