Who should we bail out next?
When I first heard that the FDIC was going to insure retailer gift card balances, I was pretty upset. I know that gift cards represent a major retail purchase these days, particularly at holiday time. But, if a retailer squanders their cash, I didn't think that the government should bail them out.
After I read the position, it makes some more sense to me. If the retailer keeps the gift card cash in an insured deposit institution, the insurance coverages passes through to the owner of the gift card, rather than to just the retailer.
Will a struggling retailer have the discipline to keep their gift card receipts in a separate insured account? Probably not as the pressure on them builds. If they don't, there isn't coverage (as I read the rule).
But, the press doesn't cover this nuance. In fact, I think that there is a growing pressure to keep bailing out industries and consumers. It's got to stop. If we use our precious tax dollars for a bailout, it must be on terms that represent us all as investors of the last resort. We should get our money back first, with a preferred return. And, we should be able to dictate that companies can't pay dividends or current and past sky high compensation. In other words, the kinds of terms that any private equity fund would impose on a distressed investment.
With this in mind, I am very concerned about two things:
1) An auto industry bailout. The unions are saying that they don't want to give up anything as part of a bailout. Luckily, that position doesn't seem to have support among Obama's advisors. In fact, the only way we should put up money to help the auto industry is if the business is restructured, with new management, a different equation with the unions, and a commitment to R&D on more energy efficient cars. Maybe we should focus on loan guarantees once these are in place, rather than an equity infusion. Unfortunately, the auto industry is in such trouble that I worry that a bailout will be too expensive. Clearly, all stakeholders have to feel pain in order for the taxpayers to cut a check.
2) A bailout of consumer mortgages. I don't see how this can work. Every consumer is a different situation. Some have been thrifty but are still unfortunate. Others have leveraged themselves to the hilt and now are in too deep. Most are somewhere in between. Who is going to sort out who gets saved and who doesn't? And, how can you restructure these mortgages once they've been securitized? Changes to a mortgage can impact hundreds and thousands of investors who may have profited during this mess but didn't necessarily take unusual risks (knowingly). Instead, I'd like to see this sort of bailout aimed at giving the mortgage companies an incentive to restructure mortgages to more reasonable terms and giving homeowners some time to move out of homes that they can't really afford.
And, it seems that the Bush administration is content to run out the clock and let the Obama team try to figure out the next steps. Maybe this is a good thing. With all the moves the government has made, I think we should take a breath and let the markets settle out and seek its level. We need to stop the expectation that each day they'll be someone new receiving a bailout.