> "bailouts ... tend to keep things in the hands of the same people"
yes, this is the crux, a gross unfairness. common folks get harsh punishments, while financiers and corporate executives get away with major thefts and get to keep the fruits of their transgressions.
i'm all for harsher punishments for actions that lead to greater damages to more lives (in this case, taking a little bit from lots of people). with greater power must come even greater responsibility. tear up the corporate veil.
and let's be vigorous in reassigning assets so as to support a functioning market for better management.
There is a middle path, where creditors are converted to shareholders and shareholders are massively diluted.
Effective control of the company will be placed in the hands of people who re-capitalize the company, and they will definitely not let the old management stick around.
Relative to bankruptcy, this has the benefit of allowing the company to continue operating. It also deters future recklessness. Probably should have happened in 2009, but didn't.
It did happen in the UK. Banks that took bailouts traded shares for cash with the Treasury (this is a layman's understanding at least). RBS notably became 84% publicly owned.
The real scandal is the government selling back the shares for less than they paid for them (when RBS was on the brink of collapse).
Did the Treasury improve the bank operations for the better? It’s difficult to imagine that they’d do the same jobs as private creditors, considering
1. The Treasury decision makers stake in the longer term performance of the banks is low
2. The Treasury has money as an institution of government, even in a downturn, and has come to possess through political means. Private creditors have some come to possess, and more importantly keep/remain solvent during a downturn, the money they have to lend through means and methods more closely related to the effective operations of the banks.
Not that every private creditor who ended up in control would do a better job, but on the whole firms would be more effectively run in the long term. Especially when it comes to avoiding risky leveraging situation as we’re in now.
Not a britbong, so my understanding of how everything works over there might be wrong
I respectfully disagree with point 1 - our Treasury, at least, which I imagine works along similar lines to the HM Treasury, realises the important social role healthy, and well-capitalised banks play.
A piece is missing. RBS creditors were not "bailed-in" by having their debt converted to equity. Instead, they were offered guarantees (functionally, though not in name).
RBS was a classic bail out. Creditors were fully protected, and shareholders retained a substantial interest in the surviving entity (in this case 20%).
that's interesting, but it's unclear whether or not that would target the wrongdoers precisely enough. executives, some (maybe all) board members, and some principal shareholders (maybe all principals) are the likely instigators of decisions like this. those are the folks to punish.
and on the flipside, it's not clear that all creditors deserve potential upside beyond their promised fixed income (and many probably don't want the added risk and responsibility of equity over debt).
you'd also want to claw back related gains from executives, board members, and principal shareholders.
maybe the benefits should accrue to non-executive employees and to customers instead.
Liquidation (shut it down, fire everyone, sell all the stuff) is one (rare) outcome of bankruptcy. The more common is some form of reorganization, debt re-structuring, etc. The "middle path" you mention.
Bankruptcy is good. It generally prevents un-needed and chaotic liquidations.
Bankruptcy courts almost always try something similar to that before closing a company. Both kinds are called "bankruptcy", but they have completely different results, what makes this all very confusing.
Anyway, it's not a new idea, and not something that needs any pushing, it's the usual way to handle company failures.
I'm largely mirroring a comment I made below. Re-organization under Chapter 11 is so costly and disruptive that threatening it has been used to extract public bailouts [1].
This is one of the reasons that Dodd-Frank included a TLAC provision, which was heavily watered down throughout the Fed's implementation process.
The bankruptcy code is really boring, but a lot of high-stakes politics plays out there. Like the tax code.
> creditors are converted to shareholders and shareholders are massively diluted
I don't know much about large-scale economy and business, but if I ever decided to learn it would be to learn why this is not completely the norm. I simply cannot comprehend the existence of "free" bailouts.
Dodd-Frank included a thing called "TLAC", which is this. A lot of politics happened.
In the US we have a "notice and comment" process on proposed regulations. You can see the politics play out in the comments on the Fed's proposed TLAC rules. If you read them, you run the risk of becoming cynical about our political process.
Great point, and very relevant to 2009, wherein the automakers would have likely not been replaced by American companies. But, in the case of United States airline companies, they would very likely be replaced by other American companies if they were not adopted by the creditors.
While many in a crisis that most harshly affects the poor will agree with you, the US at least has a very "pro business" government which is very unlikely to bite the hand that feeds them (their own hands, really, as many are themselves either come from highly placed positions in business, or are going there, or are very closely connected to them).
If at any time the US comes close to having a government which might threaten to "punish" en-masse (as opposed to a token example here and there) the financiers and corporate executives you speak of, there's likely to be bloody opposition.
I'm reminded of a passage from Jack London's The Iron Heel[1], about a war between the working class and the ruling class, in which the latter answer a threat with these words:
"This, then, is our answer. We have no words to waste on you. When you reach out your vaunted strong hands for our palaces and purpled ease, we will show you what strength is. In roar of shell and shrapnel and in whine of machine-guns will our answer be couched. We will grind you revolutionists down under our heel, and we shall walk upon your faces. The world is ours, we are its lords, and ours it shall remain. As for the host of labor, it has been in the dirt since history began, and I read history aright. And in the dirt it shall remain so long as I and mine and those that come after us have the power. There is the word. It is the king of words--Power. Not God, not Mammon, but Power. Pour it over your tongue till it tingles with it. Power."
Even if a revolution ever does occur, after all the blood spilled (which is certain to be copious), it's the self-serving demagogues and opportunists which will manage to grab on to power, as they always do, and it's unlikely that in the end a more just society will emerge. We'll just enter a different nightmare.
great literate reference, but the forgone conclusion of who wins is only in poetic terms.. you do not know, and no one else does either.. this is reality, and reality has mass, cause-and-effect, luck and providence.. your words amount to armchair resignation -- I take a different path.
I think it's wrong that revolutions have always ended poorly. In particular two specific examples are the magna carta and the english bill of rights, which certainly made things at least incrementally better for the median englishperson. Of course, neither of those reforms came about at the end of the gun, so one wonders...
Moreover, Jack London was kind of writing very romantically at the time. He had gotten quite fat off the profits of his bookwriting. But It's not entirely clear that he really had sympathy for the working class, well according to the accounts of the laborers on his villa, anyways.
your point is well taken, but i doubt the wealthy here in the US have the wherewithal to take it to bloodshed when their high status depends on mollified underclasses (diversification globally notwithstanding).
but yes, power corrupts. the more widely distributed it is, the more stable societies are. that's the aim.
yes, this is the crux, a gross unfairness. common folks get harsh punishments, while financiers and corporate executives get away with major thefts and get to keep the fruits of their transgressions.
i'm all for harsher punishments for actions that lead to greater damages to more lives (in this case, taking a little bit from lots of people). with greater power must come even greater responsibility. tear up the corporate veil.
and let's be vigorous in reassigning assets so as to support a functioning market for better management.