Wednesday, September 17, 2008

Only the Big Guys

Get a helping hand.

Lose your home to foreclosure and you are irresponsible. Maybe the government can throw you a bone - a loan workout or a 90 day foreclosure reprieve but that's it! Run a large company into the ground and walk away with a $47 million package. Funny how corporate lawyers can find ways to get out of everything it seems - except nullify these over generous severance packages. It is amazing! Almost as amazing as the government getting into the insurance business. But that is what we see today with AIG. Here is snippet from the Star Ledger article titled Government steps in to rescue AIG -

Another day, another bailout. The U.S. government stepped in Tuesday to rescue American International Group, one of the world's largest insurers, with an $85 billion injection of taxpayer money.

Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

The move was similar to government's seizure on Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.

"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Sen. Charles Schumer, D-N.Y.

"We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets," the statement said. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."

Schumer is probably correct that the alternatives are worse. But the government can only prop up so many businesses. The first ones to falter will be the ones that survive. As the list grows longer there will be less that can be done.

Additionally, maybe since the government is taking over all these business the executives should no longer be showered with eight-digit severance packages. They are basically government entities - the executives should get government level salaries. The President of the US makes $400,000 - that should be the limit for all government supported companies. There are no more risks - why should there be rewards!

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