NOTE: I am copying sixteen essays from my old blog ("Random Notes") to this blog. Some are cited in other essays, but most are simply essays that struck me as interesting while I was going through my search for essays to fix broken links.
We have heard that the financial industry, or some members on on their last legs. They have too little liquidity, they have bad investments and are about to fail. And the government has told us we have to save them.
If this were, say, a baseball team, the solution would be to scrape together every last dime, get a top notch manager, a few top players, advertise heavily to get the fans back in the seats, and then hope television and merchandise revenues rise to cover expenses and pay off old debts.
And a real business would run that way. (While Washington whinges about CEOs who earn millions while losing money, paying millions for a CEO who cuts losses from hundreds of millions to just millions is worth a few million dollars.) A real business in trouble would hire the best CEO it could find, strive to keep its best employees, maybe cut some deadwood, try to build up sales, perhaps through advertising, and see what it could accomplish.
Except that Washington is trying their hardest to prevent this sensible plan. First, they have capped CEO salaries meaning that companies most in need of top management can't pay them anywhere near market value. In addition, thanks to anger over "wasting money on junkets" (made by politicians who waste more money on junkets than anyone), not only can CEOs not be provided with perks in lieu of the salary laws prohibit, they also will probably need to justify every trip or any effort to entertain clients in order to avoid the wrath of Washington. On top of that, with Kerry upset about corporate sponsorship and entertainment expenses for employees, not only are many forms of advertising likely to be prohibited, but many of those perks which make jobs more desirable to top employees are forbidden.
In short, Washington is doing everything it can to keep these companies from recovering.
The one thing they have yet to do is prohibit these companies from firing employees to save costs. But how long will it be before TARP is amended to require retention of employees? Or lucrative severance packages? Or at the very least, administrative approval before firing? Does anyone think that is unlikely?
In all honesty, I always thought TARP and all bailouts are a waste. However, if we must have a bailout, can't we have one which is not designed with class envy and vote garnering in mind, and create one which actually gives troubled industries a chance to recover? Right now, signing on to TARP is akin to committing suicide for most firms.
Originally posted in Random Notes on 2009/02/25.