Rewarding Failure
Aug 21, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As the stock and bond markets continue to exhibit great strength, it’s time to examine some of the current administration’s policies. Specifically, why does the government seem to reward failure by taxing everyone else? I can think of three instances of this absurd practice.
- The first instance involves the TARP. The government authorized hundreds of billions to prop up all the major banks last year. All or virtually all these banks used enormous leverage to increase returns. When times were good, the banks made very healthy profits. When their portfolios were either severely marked down or face losses, they ran to the Feds to bail them out. As a result of this and due to the fact that the FDIC had to bail out several “bad banks”, FDIC ran out of cash. So how does it get replenished? By raising the fees on everyone else of course! So, the so called “good banks” get punished for failing to take excessive risk by seeing their margins shrink.
- Next came SIPC. The Security Investor’s Protection Corporation, better known as SIPC, was created in 1970 to protect investors in case the firm they did business with went under. So, if you owned 10000 shares of Microsoft with Lehman Brothers, SPIC will guarantee that those shares will still be there even after the firm declared bankruptcy. Although SIPC does not guarantee the value of these securities (meaning, they will not insure that the price you paid is equal to the current price; that’s the risk of investing), they will guarantee against securities that were never purchased, as was the case with Bernie Madoff. Generally, insurance covers up to $500,000 worth of securities. Unfortunately, in the case of Madoff, claims overwhelmed the size of the SIPC coverage. So what did the authorities do? They raised the fees on everyone else. I can tell you that my own Broker Dealer has been paying about $150 per year for coverage. We have now been informed that our fees are going to go up to over $8000!
- Finally, we have the “cash for clunkers” program. Under this plan, people that purchased cars that are basically “gas guzzlers” can get up to $4500 in rebates if they purchase a new car and trade in their old one. However, if they did the right thing and purchased a fuel efficient model, then they receive absolutely nothing!
Why does the government continue to reward failure?
August 26th, 2009 at 4:29 pm
Jody,
First off that is insane that your fees are going up by that much through SIPC.
Secondly, as I don’t completely agree with TARP I do feel something was necessary to help avoid a panic regarding the banking sector after Bear/Lehman/IndyMac faliures. My concern is merely based off of the scenario that happened during the Panic of 1907 as a run on the Trust Companies. JP Morgan had to strike a deal between the larger trusts that didn’t take excesive risk to bail out the smaller ones because of the run that was already occuring. Curious as to your thoughts as to what should have been done as opposed to TARP.