More Beggars Wasting Money

I’ve spoken previously about beggars wasting money. Loyal Crastinate reader Joseph brought this story to my attention. Apparently, Citigroup, the same Citigroup that the government is giving a $20 billion bailout package to, is keeping their sponsorship of the new New York Mets stadium. This sponsorship is a $400 million deal over 20 years which comes out to $20 million a year. That means that, to some degree, the tax payers are paying for the new Mets stadium. What else should we, the taxpayer, pay for? How about a new theme park? I know I could use some fun after this ridiculousness.

Damn Beggars Wasting Money

My charity goes to charity organizations. It doesn’t go to beggars on the street. Reason being is that I don’t trust the people on the street. If I give them a dollar, how do I know they’ll use it for their needs (food, shelter, ect…) and not their wants (alcohol, drugs, etc…). With charity organizations, my money (hopefully) goes to people who will use the money in the most beneficial way.

I bring this up because I came across two distinct examples of beggars wasting money today. The first comes from the auto industry who begged Congress today for some of the bailout money that is being handed out. Apparently, the company CEOs flew to Washington in their corporate jet. According to the Consumerist post, a first-class flight would have cost $800 while the private jet for GM alone costed $20,000. The gaul of these CEOs who have messed up the American auto industry to flaunt their wasteful spending is almost comical.

The other example came from my friend Joseph who pointed me to this article. I had heard that the Triborough Bridge in New York City was being renamed to the RFK Bridge after Robert Kennedy. With New York City asking the federal government for financial aid and the rumors about putting tolls on ALL the bridges to reduce the deficit, I would expect Bloomberg (New York’s mayor) to be pretty tight on what the city is spending money on. Renaming the bridge isn’t a big deal. It’s a name. Apparently, it’s more than a name. It’s a $4M cost to change all the signs. Couldn’t we wait to rename this bridge?

Why can’t we sell the name of the bridge? The Google Triborough Bridge. Sounds good, and profitable, to me.

Paulson Switches to Stock Injection Plan

Treasury Secretary Henry Paulson announced today that there is going to be a change in the $700 billion bailout plan. In the bailout bill, it was written that the government planned on buying up the bad assets of banks as to wipe them off the books of banks and add them to the government’s books. There was an option, that Paulson is now saying they will exercise, that instead of buying up the bad debt, they will buy shares in the banks, essentially injecting the banks with lots of cash but not alleviating them of the bad debt. For further explanation on all of this, listen to this great This American Life that explains the financial crisis for those of us who aren’t in the field.

While the market is down 300 points in the first couple of hours because of this news (amongst other bad news), I think overall this is a great decision. Let’s be straight. The taxpayer is still getting screwed by the lack of regulation in certain financial markets which allowed banks the freedom to be much riskier with our money than they should have been. But at least in this proposed approach, the taxpayer is not getting the bad debt.

To paraphrase the This American Life episode I mentioned above (you really should listen to it, it’s great), the previous plan of buying up the bad debt is like having someone come in to your house and clean out all the garbage out of your basement and you have no obligation to this person. They come in, they clean, and they leave, free of charge. With this new approach of buying stock in the bank, it’s like having someone move into your basement and start paying rent. It’s your job to keep that place clean, and that tenant can put pressure on you to do what needs to get done to get the basement cleaned up. That tenant can even kick you out if you don’t clean up (analogous to shareholders voting in a new board which would fire the management team). On top of that, the government will be getting preferred stock, which means that if the bank goes under and the assets are sold, the government will get back their money before the common stockholders get any money back.

So, I think this is a good thing. But only time will tell.

Free Market Bailouts is an Oxymoron

One of the courses I’m taking this semester in my MBA program is Business Ethics. As you can expect, discussions in today’s class focused somewhat on the recent events in the financial sector. Specifically, the bankruptcy of Lehman Brothers and the government bailout of AIG. Here is my dilemma with some of the opinions I hear floating around my school and in the papers.

The government just bailed out AIG. This approach signifies a move towards a more socialistic economy where the government controls more services that cater to public interests. I don’t necessarily think the government wants to be more socialistic, but by definition, this bailout is a move in that direction. I am basically hearing two different opinions. One, is that this bailout was a bad idea. The free market determines winners and losers and by bailing out losers, we are significantly decreasing the benefits of a free market. The short term pain will be rewarded by long term efficiency. The other opinion is that the government bailout was necessary because the system isn’t perfect. More regulation is necessary to allow the market to evolve without having it go too far and self destruct as we are seeing now. By having government bailouts, we can sustain the status-quo as well as add regulations and put a focus on business ethics so we can avoid a situation like the one we are seeing today.

The problem I have here is that I believe in the free market and yet if I was running the Fed, I’d probably bail out AIG as well. It’s the lesser of two evils. So what is the solution? How can we sustain a free market society without having the effects of company mismanagement hurt the general public too much?

Since I am in internet related businesses, I look towards the model of the internet for many of my solutions. The internet, for the most part, is the closest to a true free market economy that we can achieve. And some of the most successful internet companies are also the most ethical (examples: Google, ebaY, Amazon, etc). What this tells me is that in a true free market (or as close as you can get), the ethical companies are the successful companies. The free market rewards companies that look out for the general public.

With this argument in tow, it would seem that I would be fine with letting AIG, and Bear Sterns for that matter, collapse because the free market will bring along a more efficient service to take their place. The problem is that the world of finance is not a free market. If AIG collapses, we won’t see a new player take its place quickly. The barriers to entry are enormous. The consequences of a large company failure are far-reaching. Consumers and their needs are an afterthought in these companies. Money is what drives decisions. And normally, corporate social responsibility (CSR) would be connected with money-making decisions to ensure the best return. In finance, however, that is not typically the case.

Do I want the government to bail out companies? No. Do I think it’s necessary at times? Possibly. I think the best solution would be  a move towards less regulation and allow consumers to be more involved in the industry. By easing up on regulation and empowering consumers, you can level the playing field a bit and create more of a free market in the finance industry. That way, when some companies get greedy and make bad decisions, they’ll collapse, but it will be ok. Other companies will swoop in and take their place without much upheival. What do you think?