Is the U.S. going overboard on bailouts?
Industry and government officials say the handouts are cheaper in the long run than doing nothing. But critics say they encourage bad behavior by removing the consequences.
How far will the bailout binge go?
So far this year, the federal government has put up nearly $30 billion to avert a major financial default by the investment bank Bear Stearns Cos.; committed to investing as much as $200 billion in preferred stock of the loss-plagued finance giants Fannie Mae and Freddie Mac and at least $5 billion in their mortgage securities; and agreed to provide an emergency loan of $85 billion to American International Group Inc. in return for an ownership stake of as much as 80% in the stricken insurance giant.
Tuesday's helping hand to AIG bailed out not only that company, which was contemplating a bankruptcy filing as early as today, but also countless trading partners of the firm, including investment banks that had failed to raise the massive loans themselves.
Thus far, only one major supplicant for federal assistance has been turned away: investment bank Lehman Bros. Holdings Inc., which was refused a bailout by Treasury Secretary Henry M. Paulson Jr. last weekend and filed for bankruptcy protection Monday. Meanwhile, Congress is contemplating a loan program of $25 billion to $50 billion for automakers.
This year's bailouts add up to an unprecedented surge of direct financial intervention by the government in the nation's private sector -- a cornucopia of handouts and guarantees dwarfing the rescue of the savings and loan industry in the 1980s, which ended up costing taxpayers some $124 billion.
In each case, industry and government officials have justified the bailout as cheaper in the long run than doing nothing. But critics contend that bailouts often encourage bad behavior by relieving underperforming industries of the consequences of their ineptitude.
In addition, sometimes the government can end up as an investor in companies that are the target of regulatory action, creating a conflict of interest. The government's potential ownership of AIG could put policymakers at cross-purposes with their own efforts to regulate a variety of financial transactions in which the company participates.
The situation is bound to raise thorny policy issues for the next president, who is likely to face further demands for assistance from mortgage lenders, home builders, automakers and other struggling industries. Economic and legal experts say Congress and regulators need a set of standards for how to treat industries and companies with their hands out, especially when the requests come in an atmosphere of crisis.
