Uncategorized30 Sep 2008 05:06 am

“Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.”

“… a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending.”

cnn article

2 Responses to “Bailout vs Bankrupcy”

  1. on 01 Oct 2008 at 1:42 pm gilles

    If 70% of the banking system is bankrupting… the lesson will be hard to learn…

    But I understand : there should be more stringent conditions to these bailing funds. More than a cap (How much ?) to the CEO salaries !

    In fact, when you go bankrupt, you sell your assets to pay your lenders, at a reduced price. So it is not possible, it seems, to separate the good and the bad lending contracts ? It it was possible, we could effectively flush the bad lenders, after protecting the basic assets of the small savers (60 000$ in Canada, if I remember).

  2. on 01 Oct 2008 at 4:24 pm georges

    If a company goes bankrupt, I believe it’s possible to separate the profitable divisions from the unprofitable ones. The creditors will sell off whatever is profitable and just dump the rest. They will try to recover as much as possible.

    If this happened to banks, there would definitely be disruptions. Do these disruptions justify a trillion dollar bailout? Hard question, but it’s important to consider the greater long-term good, and set aside the urge to punish.

    It seems to the ignorant neophyte that I am that the problems were caused by government effectively forcing banks to lend money to subprime borrowers and then allow those banks to aggregate those loans and sell them as AAA investments.

    I don’t like the idea of government forcing companies to do something unwise, then subsidize then, but in exchange for these subsidies, the government gets to cap their CEO’s pay and make up all sorts of rules about what they must do and what they can’t do. You might as well nationalize the banking industry while you’re at it.

    1999 article on good government intentions, paving the road to the current situation

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