Bailout, a success story

[CaptainPanic]

In 2008, the Aegon insurance company sensed trouble, and asked for a bailout. They got 3 billion euro from the Dutch state. This helped the company, and they survived. Now, the company is healthier, and has finally paid back the last part of the bailout. And the interest.

 

In addition, the Dutch news (in Dutch) reports that for 3 years, Aegon was not allowed to pay dividend to its shareholders. This was part of the agreement. In short: the state bailout came first, then dividend.

 

In all, Aegon got €3 billion and repaid €4.1 million in principle and interest. (source)

 

So, if it works out well, bailouts help the economy (the company survived, jobs were secured) and it helps the tax payers, because the companies pay a hefty interest. Obviously, the state decides to take a risk, which means that the large interest is completely justified... and any investor would ask the same, if not more.

 

Why then, if the bailouts will eventually will be paid back with interest, are they reported to 'cost tax-payers money'?

Unless a company that is bailed out is inherently unhealthy and will collapse regardless of the bailout, this doesn't seem like a bad move by governments. And I'm actually a little angry at a lot of Dutch media, which reported it as if the government bailed out companies by giving them money (a gift), rather than giving a loan. 36% interest in 3 years time really sounds like the Dutch government actually made money from this deal, rather than lose money.

 

What about bailouts in your countries? Any chance they'll be paid back? And do you know if these are loans or gifts?

[imatfaal]

Captain

 

re quoting your source - highlights mine

 

In all, Aegon got €3 billion and repaid €4.1 million in principle and interest. (source)

 

 

I will take that deal every time - by my sums that's just under €2.996 billion profit. No wonder these guys in finance get good bonuses!

Edited June 15, 2011 by imatfaal

[John Cuthber]

Those guys probably read the rest of the story to earn their bonuses.

"AMSTERDAM — Aegon NV, a Netherlands-based insurer that has the bulk of its operations in the United States, says it has repaid the remaining €750 million ($1.08 billion) in aid it received from the Dutch state during the 2008 financial crisis."

It's clear they paid a lot more than 4.1 million.

My guess is it's a typo, but the data really isn't there in that web page.

[Marat]

Any finance capitalist will tell you that having to come up with liquidity and loan it to someone at less than the interest rate which would normally be required to match the risk of the enterprise seeking the loan is a loss. You should instead have kept the money to benefit from it yourself or loaned it to another equally risky enterprise for the proper commercial rate of interest required to offset the risk. What happened in the bailouts, even if they were paid back with interest, is that the taxpayers' didn't get interest value for their money, and their money was tied up in keeping a private profit machine for rich people in existence instead of going to provide better schools for the children of ordinary people. That's a loss.

 

The economy will be boosted by a stimulus no matter where it is applied over the wealth hierarchy, and where you choose to apply the stimulus will depend on whose fingers you want the boost to stick to on its first pass through the economic system, rich people or poor people. The economy could just as well have been saved by a stimulus to the bottom rather than to the top, with the government intervening to rescue mortgages on the verge of default and to seize corporations about to default by paying the owners their real value -- at the depths of the recession nearly nothing, since they were about to go bankrupt -- and then to take them over and run them in the public interest. The result would have been that instead of all the profits of those companies now going to rich shareholders as dividends and to corporate CEOs as massive bonuses, the government could have directed those profits to benefit those for whom the extra money would have been vastly more beneficial, the poor and the middle class. A $10,000 bonus to a family unable to afford to send its children to university and wearing coats because the winter heating bills are too high would be worth a trillion times more in producing real human happiness than the same money being devoted to increase the wealth of a billionaire by one-onehundred-thousandth.

 

Everyone knows this, but capitalism, as the reigning system of production, constructs whatever ideologies it needs to delude everyone into not acting on the obvious if that is to capitalism's disadvantage. Logically, the political outcome of the recession of 2008 caused by hyperspeculation as a result of the excess capital accumulation caused by 30 years of neoliberalism and the taxpayer bailout of Wall Street should have been public socialist rage against Wall Street, the speculators, and capitalism. Instead, in the smartest judo-throw ever contrived, capitalism transformed the target of that rage into its opposite, and formed out of the public's dumb anger the Tea Party, which once again promotes neoliberalism! Miraculous!

[padren]

Bailouts "can" work, but examples of successful bailouts does not necessarily provide a clear blueprint for successful bailout strategies.

 

First - while it sounds like the terms of the bailout were well thought out (and sound terms are a requirement for success) we don't know how many variables of the success are tied to the circumstances of Aegon. Everyone seeking that much capital will have a very sound proposal for how to pay it back: it's only hindsight that makes a specific instance seem brilliant or doomed from the start.

 

Second - bailouts become susceptible to same market forces (including bubbles and blind-spots) that all investments are when bailouts are treated as investments. Even if the terms are only beneficial to a company when the alternative is bankruptcy the mentality of the "we loan you this, then we BOTH do better" makes it really easy to become biased to the variables in play. They are the same sort of psychological factors that cause bubbles to run as long as they do.

 

 

I do think that bailouts have to be considered as a tool in our arsenal for dealing with economic crashes, but I think it's equally important that we equally feel dirty and disgusted by their use. No matter how brilliantly the strategy, terms and due diligence are executed, there is risk, there are market impacts, and there are citizens on the hook for the bill whether they believe in the investment or not. Granted, there are always people who have outright childish ideas about their taxes (cut planned parenthood - so we can save my medicare!) and people who simply disagree (was the Iraq war a good investment?) but just because it's a necessary evil doesn't mean the practice should be conducted without regard for the necessary impacts on citizens.

 

When done right: It's an exercise in increasing temporary risk to mitigate the damage that would ensue otherwise; success means you managed to "not lose" but it shouldn't be considered "winning" as the entire venture would never be undertaken if not for the leverage caused by the duress to third parties to begin with.

[Marat]

It's disturbing that society finds it can accept the risk of large-scale damage to the economy and profound human misery to poor and middle class people if capitalists require downsizing of their operations, thus generating massive unemployment, or if capitalists want to call in tardy mortgages and hurl families out onto the street. But the risks at the top, that capitalists themselves may have to pay when the risks they take turn out badly, are deemed intolerable. Interestingly, when the risks capitalists take turn out well for them, they simply keep all the profits for themselves, rather than putting a large share of those profits into a public insurance fund to cover the costs of bailing them out in the future, if necessary. It is so much easier to keep the profits and just bill the tax payers to provide an insurance policy for capitalists which imposes no fees on the insured. Privatizing profits; socialize losses -- there's a game you can't lose.

[padren]

It's disturbing that society finds it can accept the risk of large-scale damage to the economy and profound human misery to poor and middle class people if capitalists require downsizing of their operations, thus generating massive unemployment, or if capitalists want to call in tardy mortgages and hurl families out onto the street. But the risks at the top, that capitalists themselves may have to pay when the risks they take turn out badly, are deemed intolerable. Interestingly, when the risks capitalists take turn out well for them, they simply keep all the profits for themselves, rather than putting a large share of those profits into a public insurance fund to cover the costs of bailing them out in the future, if necessary. It is so much easier to keep the profits and just bill the tax payers to provide an insurance policy for capitalists which imposes no fees on the insured. Privatizing profits; socialize losses -- there's a game you can't lose.

 

If capitalists didn't provide those mortgages in the first place how many people would be sinking endless earnings into rent instead of home equity?

 

 

Self interest is a powerful influence for some people, and I would certainly say that more regulation is required to prevent "too big to fail" catastrophic failures; but blaming some ominously homogenous class of "capitalists" doesn't do any good. About 90% of the "little guys" who start small businesses tend to fail within the first three years - usually with a huge percent of the invested capital lost.

 

The thing is: the only way someone can try to succeed in starting a business is by arranging agreements with others - and that requires capital. If I want to start a farm and promise "when we harvest, you can have a share of the crops" to get help with the labor, I need to convince those people I am not one of the 90% that will fail. However, if I offer them money for time labored then they know they'll be compensated, and if I run out of capital I know I need to lay them off. There are too many ideas, too many possible ventures, and far too many risks to arrange labor by anything other than capital on any large scale.

 

Whether you start a business, build a house, or want to pay professors to teach your kids in a college the only effective scalable option is capitalism.

[Hal.]

Gambling ! The result ? The next race has started already !

 

 

[Marat]

Padren: Of course everything you are saying is right from within the perspective of capitalism. But the fundamental question is whether capitalism is the proper system to be using in the first place. Most people are not naturally entrepreneurs, and their goal in life is to concentrate on friends, family, hobbies, and the search for meaning rather than money. To support this orientation toward life they need stability more than anything else, so the 'nest' which forms the setting within which they can love and nurture their family, enjoy their friends, and develop a sense of leading a fulfilled life is safe and secure. For this they are eager and willing to work, but they don't want to share in the boom and bust cycles created as the side-effects of capitalist millionaires struggling to become billionaires. They cannot live their small-scale lives focused on value and meaning if they are constantly threatened by unemployment, downsizing, wage cuts, competition, financial deceptions, exhorbitant interest rates, exploitative wages and prices, the demand that they pull up stakes and move to keep their jobs, that they suddenly undergo retraining if they want to continue working, inadequate insurance coverage, risk of catastrophic medical expenses, and their inability to pay for a university education for themselves and their children. What we have is a society built not for the majority of people who live in it and their real human needs, but one designed to facilitate capitalism's interests and nothing else.

 

There is of course no monolith of capitalists, but still, the commonality of the class interests of people living by capital investment rather than by their labor in minimalistic taxes and poor labor regulations at the cost of inadequate social programs and workers' suffering functionally defines them as an essentially unified group.

[Hal.]

Their was a very interesting European law which developed all throughout the boom years , which meant in essence that a company could not get money put into it by a government if the company got into difficulties , as this could be seen as favouring a particular player in a market . So , this became unlawful . When companies started to go bust all over the place , suddenly , money was being put into them to keep them afloat . In my opinion , they , whoever they may be , will use a law to exclude competition from a market or to set the competition up for a cheap takeover when it suits them , whereas , when the shoe is on the other foot , as the expression goes , memories of the rules will fade .

[padren]

...What we have is a society built not for the majority of people who live in it and their real human needs, but one designed to facilitate capitalism's interests and nothing else.

 

There is of course no monolith of capitalists, but still, the commonality of the class interests of people living by capital investment rather than by their labor in minimalistic taxes and poor labor regulations at the cost of inadequate social programs and workers' suffering functionally defines them as an essentially unified group.

Those factors need to be addressed certainly - but I don't know how you could do this without capitalism. Every social safety net involves capitalism, as market based values for "goods and services" (including labor) forms the basis of all capital transactions that provide those safety nets.

 

As far as the "small scale lives" thing goes, those people do want stability, but they want as much as they can get while maintaining stability. They do happily invite risk in order to increase their resources so they can focus on family better. Every time you purchase something on credit you are increasing your risk, lowering your stability, and (hopefully) you'll have it paid off while benefiting from whatever the credit was used for without that risk threatening your stability. However, as far as job security goes - while I would believe that the majority of factors that threaten job security are "top down created" so the top can profit more, there are also a lot of real-world factors that make security impossible. We do need to do a better job at ensuring labor has the capacity to negotiate fair and equitable contracts, but that still falls within the capitalist model.

 

Also, managing resources in general is a difficult job, and capitalists with lots of capital (resources) who do a bad job do tend to loose it in a hurry. Pushing numbers around so that you don't loose billions of dollars (or billions in food, or any other resource if under any non-capitalistic model) is actually very stressful and difficult labor. Not everyone who moves money around is providing productive valuable labor - but we would be screwed without those who move money around so that labor can be productive, and no economic model can change that reality.

[Marat]

Since the point of the social safety net is not to make profit by investing capital, but just to help promote humanitarian values by investing capital at no direct profit to the investor, which is usually the government or some charity, I wouldn't say it was capitalistic. It does produce some returns for the general economy, such as when a scholarship is invested in a bright young student at 0 return for the charitable investor or government, and that student, because he is educated, becomes much more productive for the society than he otherwise would have been. But this is not like capitalist profit, which doesn't go toward the common good but just toward private interest.

 

It is certainly true that the capitalist is more efficient at bringing resources to economic demand than a command economy would be, but it is in fact extremely inefficient at producing the ultimate commodity of 'human happiness,' since the needs which demand satisfaction in capitalist society are only contingently backed with sufficient capital commensurable to the human importance of those needs. Instead, those needs are satisfied only if and to the extent that there is money to interest the capitalist in fulfilling them, and for the most desperate needs in society, such as those among the very poor for shelter, food, clothing, and medical care, there is no money so there is no satisfaction of need.

 

The capitalist system is thus an astonishingly irrational system still to be in existence after Max Weber defined modernity circa 1900 as the era of rationality, since it deliberately fails to serve the most important needs over the less important needs, and leaves desperate needs utterly unsatisfied unless it coincidentally turns out that the market value of satisfying them can be met by the people who have those needs. The result is that capitalism is always massively inefficient in serving human interests, since the vagaband who lives in a dumpster needs a good meal and decent shelter a trillion times more desperately than a billionaire needs a Picasso painting, and yet the resource distribution system of capitalism insanely ensures that the much lower human need to buy the Picasso is met more often, more securely, and more easily than the much higher human need for a roof over one's head and a Big Mac. This is literally crazy, but its ubiquity and familiarity keeps most people from noticing it.