Bailout bypasses lesson
I have been watching the developing government bailout of the investment banks and other financial institutions involved in the sub-prime mortgage mess with growing anger and amazement. It is becoming increasingly likely that the federal government will pour billions, if not trillions, of dollars into saving and stabilizing countless numbers of brokers and investors who are in financial difficulty because of the widespread fraud in the mortgage markets.
How is it that people who made unwise investments or advised other people to make unwise investments are going to be subsidized by taxpayer dollars? I can understand, although not necessarily agree with, the notion that residential borrowers who find themselves either in or on the verge of foreclosure should be helped by the federal government. In many cases, these borrowers seems to have been victims of fraud and misrepresentation.
But I do not see why brokers and investors who sold and profited from these mortgages and the securities collateralized by them should be given a government handout. Yet this seems to be a very real possibility.
Although both the United States and British governments deny any plans concerning bailing out investors in the sub-prime market, rumors are flying that talks on this exact topic are now ongoing. The justification for such a bailout would appear to be that without it, investors will be forced to realize large losses and the markets will be destabilized.
But why does this possibility of loss exist in the first place? Isn’t it because the involved brokers and investors were either greedy or imprudent? Will the federal government also make up losses for investors who made stupid investments in other markets? Even more to the point, if those who are now in trouble because of investing in high-risk mortgages are bailed out, what incentive do they have to stay away from such risky investments in the future?
I have read with some interest the stories about the J.P. Morgan purchase of Bear Stearns, one of the central players in the sub-prime fiasco, at a low price financed by the Federal Reserve. I find it fascinating that the investors in Bear Stearns, particularly those who work for the company, are crying foul at this government-financed sale because the price is too low.
Many of these employee-stockholders have been earning seven- and eight-figure salaries for years based upon the companies financial activities. Are they willing to pay back the salaries they received in earlier years, salaries dependent, in part, on sub-prime lending and brokerage? I doubt it. The fact is, without the partial federal bail-out it’s very possible that the company would go under and their investment would be worthless.
In the past decade, Americans seem to have forgotten that high-risk investments are high-risk precisely because you may lose your money. That’s why such investments carry high rates of return. When you gamble, you have to accept the possibility of loss.
It would be inexcusable for the government to ask the tens of millions of Americans who do not invest in such stocks and bonds now to pay taxes to save those who have been gambling on such investments. Perhaps, next time, those who suffer losses in this financial debacle will behave more sensibly. It’s a lesson that needs to be learned.