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The US Congress and Fed should understand that the billions they are pumping into sick companies are not working wonders. They’re not working at all!
So what’s the most discussed oxymoron in the world of business? Bail out! And really speaking, if it wasn’t for all the proscrastinating Hamlets of the corporate world, we wouldn’t have losers triumph atop beggarly citadels. “It is certainly correct to let businesses fail that are poorly managed, rendered obsolete... or if they could not face the challenge of competitors. Creating more debt, will only lead to more problems down the road,” advises Lok Sang Ho, Director, Center for Public Policy, Lingan University, Hong Kong.
Alright, we know we might have hurt a few sentiments here, but keeping emotions aside, the plantiff proceeds as follows... American International Group (AIG), the world’s largest insurance group that took a writedown hit of $11 billion in FY2008 alone. But that was just the beginning of the troubled road. Since last year, the US government has given a mind-blowingly demonic $174 billion to AIG. We will discuss later where all that money went, but for starters, here are some numbers that prove why bailouts don’t work. After all that was given to its, the insurer posted a gut-wrenching $61.7 billion loss in Q4, 2008, the largest in American history! And to prove that the bailout funds have been dumped straight into the Fed’s bin, here’s a number - today AIG’s market value stands at $0.95 billion, having lost $107 billion since March 1, 2008! (Wonder where the $174 billion disappeared!!!) But the American government just doesn’t care; the oxymoron is a tad too dear! So what has been their latest reaction? Well, another $30 billion in fresh capital issued...!!!
So back to the question of where the $174 billion go. Well, reportedly, many claim that $50 billion of that went to two dozen US and European companies, many which include sick ones like Merrill Lynch, Bank of America and Lloyds Banking Group (which separately received a murderous $353 billion on March 8, 2009, as bailout from the UK government, for a 75% stake).
And are we forgetting the world’s largest bank - Citi, led by our very own, Indian-born Vikram Pandit. Citi, till date has received $45 billion in bailout package from the US Treasury. And today, what is left of the company is just a fast dwindling $5.64 billion in market value! (For the records, since the past year alone, Citigroup shares have tumbled by 96% on the NYSE! Some mercy do the gods in America have...)
Now, let’s talk about the Detroit giant - General Motors. Wagoner in his letter to the American Congress wrote, “By lending GM money, you will provide us with a financial bridge... This will allow us to keep operating and complete our restructuring...” (Right Rick, and then we can all go and meet Paris Hilton!) The hearts in the Congress melted, and GM received a total bailout package of $18.88 billion between December 29 and December 31, 2009. So didn’t the ‘bailout creamed with benevolence’ help Rick?
Well, today, GM’s condition has gone from bad to worse (worst?!) and its Mcap has fallen to a measely $0.89 billion! Further, Rick Wagoner has requested for another $30 billion from the Fed! (Oh! whatever happened to those billions?!?!) Commenting on GM’s worsening condition, Jack Welch, Former CEO, GE, once wrote, “The automakers’ boards should take the courageous step of putting their companies into bankruptcy!” ‘Better bankrupt than dead...’ Didn’t some wiseman say this before? (He wasn’t from the Fed or the Congress; was he?)
Steven Philip Warner
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Source : IIPM Editorial, 2009
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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