Tag Archives: Bailouts

Crony capitalism, Dodd-Frank style

In a cronyism twist, new regulations from 2010′s Dodd-Frank legislation will set aside certain businesses for special government oversight because they are too big to fail. (The official term is Systemically Important Financial Institution). This arrangement may devolve into a special benefit for the designated businesses because it will tell the public that the corporation has the government’s backing.  From the American Enterprise Institute blog:

Now think about that when you hear the great hew and cry of the folks who purport to be worried that the big banks are too-big-to-fail (TBTF). They denounce the funding advantages these banks get because of the markets’ belief that the government will not allow them to fail… Who could resist buying insurance from a firm the government will not allow to fail?

TARP Watchdog Blasts Treasury on Bailouts

Mark Modica from the National Legal and Policy Center has written the following article, regarding how a watchdog for the government’s bailout, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), has recently directed a devastating critique against the US Treasury’s methods of channeling billions of taxpayer dollars into bailed-out companies.

The Detroit News quotes the SIGTARP report as stating, ‘While taxpayers struggle to overcome the recent financial crisis and look to the U.S. government to put a lid on compensation for executives of firms whose missteps nearly crippled the U.S. financial system, the U.S. Department of the Treasury continues to allow excessive executive pay.’ The report goes on to mention that executives at bailed-out firms, “…continue to rake in Treasury-approved multimillion-dollar pay packages that often exceed guidelines.

What’s Good for General Motors May be BAD for the Country

Matt Mitchell at the Mercatus Center writes an article about the bailout of GM and the cost to taxpayers:

Marketplace recently did a segment on the federal government’s announcement that it was getting out of the car business and would be selling off its stake in GM over the next two years. Marketplace reporter Nancy Marshall-Genzer first turned to Cato’s Dan Ikenson who noted that taxpayers would likely “need to assume a loss of $15 to $20 billion.”

Taxpayers Lose Billions on GM Bailout

Craig Eyermann at MyGovCost writes about the recent sale of GM stock by the U.S. Treasury:

The U.S. Treasury just concluded the sale of 200 million shares of GM stock back to the company for $27.50 per share. The federal government had acquired the stock for roughly $54 per share back in 2009 when it intervened in GM’s impending bankruptcy. The federal government then has just lost 5.3 billion dollars on just that portion of its “investment”.

Canada Follows US Lead on Refusal to Sell GM Stake

Mark Modica at the National Legal and Policy Center writes an article about the Canadian government’s stake in General Motors, and what the proper role of governments are when dealing with private businesses:

Whether you think the auto bailouts were conducted in the most ethical matter or not, it is hard to argue for the continued involvement of governments in the sector. Leaders in both the US and Canada should be asked why they are so certain that GM share price has no downside and is without risk if they continue to display the reluctance to exit their stakes and a close eye should be kept on the financial figures coming out of GM for possible fudging (like stuffing truck inventory channels or getting help from government-owned Ally Financial) as the company continues to have powerful political motivations.

Cronyism Car Wreck

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This article is reprinted from the Economic Freedom blog.

In 2008, the federal government bailed out two major automakers – General Motors and Chrysler, along with their financial groups that offered loans. At the time, it was said that these bailouts needed to happen to prevent a crisis, and that these auto companies would pay back the taxpayers in time.

The companies got tens of billions of dollars to keep operating. Disaster averted? No. Chrysler and GM certainly benefited, but the taxpayers are now footing the bill. The Treasury Department has admitted that taxpayers will lose a staggering $14 billion from the bailout. At least, that was what they said last month. New estimates have just been released, according to the Detroit News:

The Treasury Department dramatically boosted its estimate of losses from its $85 billion auto industry bailout by more than $9 billion in the face of General Motors Co.’s steep stock decline.

In its monthly report to Congress, the Treasury Department now says it expects to lose $23.6 billion, up from its previous estimate of $14.33 billion. (emphasis added)

$23 billion is an enormous price to pay for those companies to continue functioning, and that wasn’t even the total price tag. Ford has benefited from being the American automaker that didn’t take bailout money, but few people remember that Ford actually got a $6 billion loan guarantee under the same program Solyndra did.

These government loans and guarantees waste resources and are another example of government – rather than consumers – directing the economy and deciding what products and services should be produced instead of consumers.

Is it the proper role of the government to take money from individuals and give it to certain industries for their survival? The market should decide which companies survive and which ones don’t. Instead, cronyism is benefitting a specific group at the expense of everyone else.

Cronyism is great for the companies getting bailed out, and the politicians who get their support. Getting someone else’s money is always nice, and so is giving someone else’s money away. But having your money taken so that a politically well-connected industry can avoid bankruptcy is not nice, especially when it costs tens of billions of dollars. It’s about as much fun as getting into a car wreck.