Bailouts – Changing the Variables of Business

Before the Government goes bailing everyone out, they should consider the guys they don’t have to bailout and the impact it will have on their businesses. 

Note:  forgive this simplistic scenario but you’ll get the overall point.  Let’s say you own a bank and you chose not to give out risky mortgages.  And let’s say you also chose not to buy up other banks risky mortgages.  You also choose not to invest your profits into mortgage bonds because you don’t know which are risky and which aren’t. 

If you were a bank and you chose not to do those three things then you would be called an “idiot” by nearly everyone in the industry between say 2003 – 2007.  Most of the other banks you were competing against were making millions of dollars on loans you refused to make.  But, let’s say you managed to keep your bank open and were still turning a profit, not at the levels of other banks but still a profit.

Now, it’s 2008 and you look pretty smart.  You are still turning a profit while your competitors are hurting and even going out of business which means their customers are coming to your bank.  Great you are set!  Wait, your competitors have hired lobbyist to fly to Washington to try and get the government to help them out.  The government is broke so they say no but your lobbyists are smart.  They start scaring everyone into thinking that if their clients fail then the whole system will fail and everyone (meaning voters) will suffer and blame those in congress.   They also get newspaper columnists to write articles scaring the public into believing this scenario.  Pointing out that “Joe Blah Blah” is at risk of losing his job and his money.

So Congress jumps on board.  Now, the government is pouring money into your competitors even though they made bad business decisions.   Your competitors survive and the bailout makes potential customers and investors more likely to actually throw their money into your competitors instead of your bank.  Guess what?  The Variables just changed and you were penalized for not being an “idiot”. 

You go out of business and your competitors gobble up your bank only to make the same mistake again in 5 years.  The executive boards and managers of those banks avoid any real damage and go on to repeat their mistake once again.  After all, they made millions and when they started to face losses…government bailed them out.  What’s the downside? 

Or take that scenario and say you are an automaker or a builder or an airline.

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