Why is the government bailing out these companies?
- In case, you have been in a coma the last few months, the US Stock market has recently gone in the toilet. The problem, however, started over 30 years ago. We have had too many people chasing too few jobs, therefore real wages have been declining since the mid-1970’s. To stay afloat more people have had to take on more debt. Once interest rates started to rise to hold down inflation, people’s budgets went belly up: costs are rising and income isn’t. In short, people have been living beyond their means for decades and the debt-bubble is bursting.
- Now, I’ll answer the question. Better yet, I’ll give a example:
In one notorious case, a small hedge fund agreed to insure UBS, the Swiss banking giant, from losses related to defaults on $1.3 billion of sub-prime mortgages for an annual premium of about $2 million.
The trouble was, the hedge fund set up a subsidiary to stand behind the guarantee — and capitalized it with just $4.6 million. As long as the loans performed, the fund made a killing, raking in an annualized return of nearly 44 percent.
But in the summer of 2007, as home owners began to default, things got ugly. UBS demanded the hedge fund put up additional collateral. The fund balked. UBS sued.
-Reuters
So should they do it?
- No, and here is why, no company should ever be so big that it cannot fail. That is not capitalism.
- Honestly, I’m not a big fan of paying for other people’s mistakes. Also, it sets up a bad precedent. If my company goes belly up will the government bail me out too?
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1 Comments until now.
Thank you for dropping by and leave great comments at bonoriau. I’m really hope the down turn of USA financial with recover soon cause it really effect my investment.
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