Bailouts Worked in 2008 and Are Needed Now
March 21, 2020
The Trump Administration should provide massive support packages — or bailouts, if you prefer — to airlines, energy producers and other key components of our economic infrastructure. Otherwise, we could face a depression, not a recession. And it’s high time to dispel the myth that the bailouts of banks and auto companies in 2008–09 were huge mistakes and somehow “rewarded” executives and shareholders at taxpayers’ expense.
Steven Mnuchin, the Treasury Secretary, has said that without sweeping government programs, 20% of American workers could lose their jobs. That’s what happened in the 1930’s. In the Great Recession of 2008–10, painful as it was, about 10% of Americans were unemployed.
The government should exact a steep price for its support, of course, but it should not use its leverage to punish companies. Airlines and oil-drilling companies did not cause this crisis. Most executives have managed their firms responsibly, from a financial point of view.
Airlines have spent a lot of money on share buybacks. However, they could do that because they have generated large profits. They are facing a crisis not because of their buybacks but because their business volumes have collapsed. Although the merits of stock buybacks are debatable, in my opinion, many companies in numerous industries engage in them. Buyback programs are anything but taboo.
In any event, a modern economy needs airlines and oil producers to keep functioning. It’s imperative that the government act quickly to support these industries.
Myths About the Bank Bailouts
Many Americans remain angry about the bank bailouts, but that’s because they don’t understand how they really worked. Many conservatives have grossly mischaracterized these programs. And, unfortunately, Senators Bernie Sanders and Elizabeth Warren misled Americans about the bank bailouts during their Democratic primary campaigns. The two progressive candidates implied that these programs were not necessary and cost taxpayers lots of money.
But the government had to preserve the banking system to protect the economy from going into a free fall. If several large banks had failed, the economy would have frozen, as it did in the 1930s, and we would have suffered a second Great Depression. We would be cooking over wood fires in caves.
Furthermore, the bank bailouts were a very good deal for the taxpayers. The U.S. Treasury earned over $20 billion on the bailouts — within 18 months. The government charged high interest rates on its investments in the banks. The Treasury also received stock warrants, which are options to buy shares at a stated price. The warrants turned out to be highly profitable, as the banks recovered and their share prices rose. (The financial-sector bailouts included AIG, the insurance firm, as well as several large banks.)
The bailouts prevented most big banks from disappearing (some had to merge with others), but nevertheless, their employees and shareholders suffered a lot of pain.
Wall Street Paid a Steep Price
I worked at a major bank during the crisis. We endured four waves of layoffs over 12 months, and the investment bank, my area, cut about a third of the staff. The stock price fell 90%, which hit both shareholders and employees.
That’s because many staffers were paid partly in shares, which often didn’t vest for years. As a result, they lost large amounts of their previous years’ compensation, which they had not yet received. For many employees, the value of their retirement accounts, which included shares in the company, plummeted. So they faced a double whammy…even if they kept their jobs.
This is not to ask for sympathy for Wall Streeters. The point is that the bailouts did not create some huge financial windfall for bank employees. In addition, the government tightened regulations and raised capital requirements for the banks, as it should have. The 2008–09 bailouts had plenty of strings attached, despite critics’ claims to the contrary.
Bailout Terms Should Not Be Punitive
The government should charge a stiff price for its support, and it should ensure that firms use any funds appropriately. However, the U.S. should not use this crisis to punish companies or to impose structural changes on them. As in 2008–09, the government should charge a hefty interest rate on any loans or other investments it makes in firms, and it should obtain warrants to purchase shares.
Imposing some restrictions on companies’ behavior would be reasonable, such banning stock buybacks or dividends until the companies repay the government. However, the government should not abuse its leverage. In particular, progressive Democrats in Congress should not use this crisis to impose their particular wish list of changes in corporate governance standards.
Warren’s Draconian Conditions
Sen. Warren has proposed eight conditions for government support. Three of the conditions would be highly intrusive measures:
- Banning stock buybacks permanently
- Prohibiting any dividends or executive bonuses while the companies receive federal funds (which is reasonable) and three years thereafter
- Providing at least one board seat to workers, and perhaps more, depending on the size of the aid package
These proposals seem punitive. They are guaranteed to provoke opposition from the firms that need help. However, these companies are dealing with a global crisis that they did not create. Including such conditions might also trigger Republican attacks and slow down the passage of the necessary legislation. We don’t have time to waste on that kind of squabbling.
Sen. Warren would also require companies receiving assistance to provide a $15 an hour minimum wage for their workers. Although that’s a laudable goal, the correct approach to achieving that aim is to pass legislation raising the minimum wage on a national basis for all companies.
This is a time for the government to help companies, not to bash them. Let’s avoid the sledgehammer approach.
