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Warren Graham's Legal Blog: Hey, Dude, Where's My Bailout?
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Location: New York, New York, United States

I am a practicing lawyer who lives and works in Manhattan, and specializes in Bankruptcy, Corporate Restructuring and Creditors' Rights, Commercial Litigation and Real Estate Law. I grew up in the New York City Area, and am a graduate of the University at Buffalo (B.A. 1976) and Fordham University School of Law (J.D. 1980). I have a wide variety of interests, but am particularly interested in history, politics, economics/finance and religious affairs, and am a frequent writer on a variety of those topics, and others. On a personal note, I'm a 54 year old man, married for 27 years, with two daughters, ages 24 and 20, respectively. Legal topics of interest may be found on my blogsite,, while non-legal commentary may be found at The content of these sites will be centralized and easily accessed locations for both legal and non-legal analysis and commentary, as well as a description of my legal practice for clients and potential clients. Keep checking back, as I expect the content to change and grow regularly.

Tuesday, December 16, 2008

Hey, Dude, Where's My Bailout?

Yesterday, the Federal Reserve Board revised its target rate for the Fed Funds Rate down to 0% to ¼ %. This represents an historic low (in more ways than one) for a quasi-governmental entity charged with exercising independent monetary (as opposed to fiscal) policy of the United States. The Fed, in addition to the reduction of an interest rate already priced in to the government paper yields, took the unprecedented step of issuing a statement to the effect that it would keep its rates low for the foreseeable future in order to fight the endemic weakness in the economy, and that it would use “quantitative easing” (whatever that means) to implement emergency measures to stimulate the economy. It has now thrown everything but the kitchen sink at this problem. I can’t imagine what the additional measures might be. I daresay that I would not be much surprised to see the Fed soon offer to hand every American a bag of cash, rewrite all our mortgages, give us all new, higher paying jobs, offer us unlimited credit lines (guaranteed by Uncle Sam), so that we can go back to decadent overspending, re-grout our bathroom tiles, sweep our floors and pleasure our wives.

I live in New York; yet I could smell the sweat pouring from Mr. Bernanke’s pores all the way from Washington. The desperation implicit in all these statements, which have no precedent in the Fed’s 95-year history, is shocking to behold.

The upshot of all this is a recognition that everything has been done to date by the Fed and its partner, the Treasury Department (more about that later), has utterly failed to alleviate an economy in serious recession.

In addition to the near-certainty that these measures (even the ones we can, at this juncture, only guess at), will fail, nobody seems to consider the long-term effect, both financial and yes, constitutional, of these endless attempts to rescue this economy from the natural, and indeed, necessary difficulties occasioned by the outrageous excesses of the last ten years. I have written extensively on this topic, and will not bore my readers with a rehash here. I must say that it pains me to advance this argument, as I have many friends and family members who are suffering from the financial turmoil in which we find ourselves. Nevertheless, the only way back is to swallow the bitter pill and wait for the inevitable recovery. The longer the government tries to ameliorate it and stave off the agony, the longer that recovery will take. Moreover, when the dust clears, we may well find that America, as we know it and loved it is no more.

Anyone paying attention has long since realized that capitalism as an ideal is something of a quaint and nostalgic concept in 21st Century America. I am not overly troubled by that; the robber barons of the 19th Century and unregulated securities markets never served us well, and need to be reined in. Nevertheless, until recently, we still recognized a concept known as private enterprise. Corporations, even public corporations, were expected to succeed or fail based upon the competence of management and the desirability of the product or service offered to its buyers.

Nobody, a century ago, would seriously have advocated a governmental salvation of the buggy whip industry for the purpose of saving jobs. Yet the President and his minions, in the waning days of an otherwise listless and sleepy (if that’s not oxymoronic) administration, propose to throw money at failing industries, so that it can pass off the mess to Messrs. Obama & Co.

Our Treasury Secretary, Mr. Paulson, making no pretense at acting in concert with the Fed, (presumably with the President’s approval—although who knows these days?) has thrown sacks of money at financial institutions, without any meaningful conditions. These institutions, our officials say, were “too big to fail,” even though their conditions were entirely of their own making. These disasters were a result of unprecedented financial gluttony at all levels, and of the SEC’s and other regulators’ mind-boggling ineptitude (perhaps also with the President’s approval) at questioning transactions which, on their face, violated fiduciary responsibilities to shareholders.

What have these financial institutions done with the money that John Q. Taxpayer has “leant” to them? Have they started making loans to the public? Not a chance. Rather, they’ve borrowed the money and put it in the drawer, so they might say that they are “adequately capitalized,” given the current “mark to market” accounting standard.

Exactly how has this benefitted the American Public?

Now, in the face of overwhelming public opposition (some polls put it at 90%) and the refusal by our duly elected representatives, the executive branch of our government, acting on its own, has determined that it must unilaterally save us all from ourselves, and bail out the “Big Three” automakers (I put “Big Three” in quotes, because their combined net worth is a small fraction of that of Yahoo).

Let us first ask ourselves the question of whether such a scheme will succeed: Any attempt to pump taxpayer dollars into an industry that (whether we like it or not) is not selling its products is an exercise in futility and, moreover, a complete and utter waste of what little remains of the public weal. It may be a hard truth to face, especially given the potential for the substantial loss of jobs, both in the auto industry, and those other business who depend upon it. Nevertheless, it is also true that a number of foreign owned auto companies, which also provide employment and benefit to other businesses, are holding their own, in an environment which is, to say the least difficult. None of them, to the knowledge of this writer, is on the verge of bankruptcy or of exhausting its cash. The distinction if, of course, obvious: labor costs. And while one might be hard-pressed to blame the UAW for looking out for the interests of its constituency, one has to wonder whether its leadership has a clue as to what those interests are. The conventional wisdom (which, for a change, is probably correct), is that the UAW has confidently called the government’s bluff—a “no-brainer,” to be sure—in the expectation that, come late January, a more labor-friendly administration will be on the job. But the inevitable conclusion is, that in an environment of increasing unemployment and fear of unemployment, coupled with the general unavailability of credit terms, the public is simply not about to start buying cars, especially given the $2000 labor cost differential and the uncertainty about the future of the “Big Three.”

The second question is whether this scheme is appropriate. One has to start with the problem of the Fed and the Administration exceeding their respective briefs. The Fed is not supposed to be in the business of “rescuing” the economy. Rather, it is charged with the responsibility of adjusting rates and increasing or decreasing the money supply to walk the tightrope between inflationary pressures and a weakening economy. Instead, the Fed has decided to become the lender of last resort, pouring vast sums of money (which remains unaccounted for) into financial institutions with no obligations to put that money out as loans either to business or to the public.

The Treasury Department’s conduct is even more outlandish. In blatant defiance of the will of the public and of Congress, the Administration is determined to ram the auto bailout down our throats. It’s easy for the government to do this; it has, after all, a printing press. You and I, alas, do not. What is the consequence of this proposed bailout (the details of which, as of this writing are either unresolved or being kept under wraps)? Endless sums of freshly minted money being thrown at financial institutions and the auto companies can only have two results: ultimate hyperinflation (caused by an excessive money supply), or the mortgaging of our future and probably that of our children and grandchildren for what is doomed to be a futile, though well-meaning gesture.

It may be trite and cliché to say so, but this kind of governmental meddling is a “slippery slope.” Firstly, it justifies nearly every kind of business is justified in asking for a governmental bailout, if it can successfully argue that significant numbers of jobs are at stake, and that it represents a “vital” American industry. Secondly, in taking a stake in those companies it chooses to save, the government has cynically relegated the idea of private enterprise to an illusion. The nationalization of American enterprise, believe me, is not what we want. The Government is already far too intrusive in our lives. It should, rather, make do with the regulatory powers it already has, and actually enforce them.

Larry Kudlow, on CNBC, daily argues for a “prepackaged” bankruptcy for the automakers, followed by a termination of the union contracts, but, as is usually the case with the fatuous gasbag (in this writer's opinion) that is Larry Kudlow, he does not have any understanding of what a “prepackaged” bankruptcy is, how long it takes to put one together and what is required to terminate union contracts.

Once all the “important” industries are bailed out with increasingly valueless currency, we can all get on line for a bail out. But be warned: there’s no such thing as a free lunch; especially when Uncle Sam is “buying.” At the risk of quoting the villain John Wilkes Booth:
Sic Semper Tyrannous!

Copyright 2008

Warren R. Graham


Blogger Nellie T. said...

I agree with you, but would go much, much farther. Congress does not have the power to authorize taxpayer funds to be invested in private enterprise. And Paulsen does not have the power to take the funds (unconstitutionally) appropriated by Congress and use them for purposes Congress did not authorize. No where in the Constitution is either the legislature or the executive branch given the power to invest in private companies, or choose which private companies should be invested in and which should not. I seem to recall something about Equal Protection and the concept of Limited Power. And what is most shocking is that there has been no public outcry over what Congress and the Treasury have been doing. This is not a matter of Democrats versus Republicans or liberals versus conservatives - the blame falls on all in government --to Bush, to Obama, to McCain, and to Democrats, Republicans, and Independents. - Nellie T Schulz

7:11 PM  
Anonymous Anonymous said...

Actually I read TARP (Troubled Asset Relief Program) and it completely boggles the mind that our Current Treasury Secretary gave out the funds with basically no strings attached. It highlights some of the utter failure of the soon to out administration's view of "hands off business and the market will regulate itself". (Right. If you believe that one then you will also believe that your kid won't play video games when you leave the house.)
The bottom line is that we are in uncharted waters and not only here in the United States. Globally we are faced with what some have deemed as perhaps the worst global economic picture in decades. Now I for one am not a doom and gloom purveyor, but yes rough waters are ahead.
What will tomorrow hold? who knows. But one thing for sure is that whatever rules you thought you knew will soon be as obsolete as the buggy whips Warren mentioned earlier. I personally look forward to whatever the brave new world that we will find once someone figures out what the new rules will be. Just remember what the American Currency is based on, "The good faith and credit of the United States". Also remember that most all global currencies are now no longer backed by bullion, they too are based on faith and credit or some variant. So remember that if the rules no longer apply, change the rules.

9:17 PM  

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