Two years after the collapse of Lehman Brothers and what rightfully should have been the death of American International Group, U.S. capital markets face a crucial question.
How long will it take before we see some semblance of robust free-market capitalism return, where the value of an asset is based on what bona fide market participants will pay for it, the cost to borrow money is based on a company's fundamental financial strength rather than its ability to access a government safety net, and corporations are free to fail no matter what their size?
No one can say. And the longer it remains this way, the more entrenched the status quo becomes.
Consider AIG. Is it a failed financial institution? Yes. Is AIG systemically important? Yes. Will U.S. government officials force it into receivership now that the Dodd-Frank Act gives them the tools they say they lacked two years ago? Of course not. Why? Because doing so could send the markets back into a tizzy, which the government has decided isn't allowed. Heaven forbid any AIG bondholders should ever be forced to take a loss.
Here's the kind of thing that passes for free enterprise now. Last month a fellow named Michael Carpenter, who is the chief executive officer of Ally Financial, got on a conference call with securities analysts and gushed with delight about the $3.5 billion price that General Motors had just agreed to pay for the subprime auto lender AmeriCredit. Based on that transaction, he proclaimed, Ally might be worth $30 billion.
GM, which owns a 6.7 percent stake in Ally, is Ally's former parent.
"I love the AmeriCredit deal," said Carpenter, whom some might remember from his days as the head of the securities firm Kidder Peabody. "I don't have any doubt about our ability to repay the U.S. Treasury. So I think it's great."
The federal government so far has spent $17.2 billion to bail out Ally, the lender formerly known as GMAC. Taxpayers hold a 56.3 percent stake in the company, which says it may hold an initial public offering next year if it can't find a buyer.
What a spectacle. Here you had the CEO of a thrice-bailed-out zombie bank, drooling over how much a government-owned carmaker was going to pay for a publicly traded subprime lender, and using this price as a yardstick for his own bank's paper worth. In a sane world, Ally would have been liquidated already. Any capital it's able to raise is money that otherwise might go to more deserving enterprises.
That pretty well captures the essence of Bailout Nation. In this economy, the strange has become the new normal.
Home prices continue to be propped up by the Treasury's unlimited support for Fannie Mae and Freddie Mac, along with low mortgage rates fueled by the Fed's easy-money policies. That's good for homeowners' balance sheets, but not for renters who might like to buy a home. Two years after the government placed Fannie and Freddie in conservatorship, there's no sign they'll be wound down anytime soon.
Savers and pension funds can only dream of the day they can pocket a reasonable yield again without having to take unwanted risks. Who in their right mind would lend money for three years to IBM for a measly 1 percent annual coupon? It's anyone's guess what new bubbles or blowups all this might lead to.
The largest banks, such as Bank of America and JPMorgan Chase, still have too-big-to-fail guarantees, or at least that's the logical perception. While most of those lenders have repaid their bailout cash, the majority of small banks that received money from the Troubled Asset Relief Program have not.
Hundreds of small banks remain grossly undercapitalized, unable to raise new funds, and yet continue to operate. That's partly because the Federal Deposit Insurance Corp. doesn't have enough money or staff to seize all the banks that it should.
Meanwhile, executives who lie about their companies' financial condition still have little to fear. Criminal prosecutions for such transgressions are rare. On those few occasions when the Securities and Exchange Commission sues a large company for fraud, chances are that its bosses will get off scot-free or, if they're unlucky, with a wrist-slap.
It's no wonder many investors now conclude the whole game is rigged. It would be easy to limit the blame to government and crony capitalists. Ultimately, though, we are responsible for the leaders we choose. As long as the American people remain unwilling to bear the full economic consequences of the last financial crisis, there will be no end to the bailout culture. The lords of finance still have us right where they want us.
Jonathan Weil is a Bloomberg News columnist.
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