Why the bailout buffet is closed for business

Financial firms that are operating on a shaky footing might need to prepare for a long, cold winter. For a variety of reasons, it seems highly unlikely that there will be any more government bailouts in 2009, particularly when it comes to the financial services industry.

For the past few months, institutions that were deemed TBTF (Too Big To Fail) have been lining up at the government trough; some, like AIG, have even gone back for seconds. In return for all the administration's efforts to lend support to the financial services industry when it was teetering on the brink, President Obama's reward has been an unending stream of accusations -- everything from being socialist to being anti-business. His poll numbers have suffered, and entertaining another bailout at this time would open his administration up to more criticism than it would be worth.

A large part of this criticism is based on the apparent obliviousness of Wall Street. With Wall Street manipulators raising the price of oil, Wall Street money managers like Bernie Madoff fleecing retirement funds, and Wall Street executives paying themselves million-dollar bonuses for running failing companies, most of the general public is ready to see someone's head on a platter. If he allows the government to bail out another financial institution, that head will be Obama's.

With this in mind, it seems likely that Obama will allow the financial services community to eat its own cooking for awhile. The first sign of this was the administration's handling of CIT, in which the Treasury carefully engaged the equipment leasing lender in bailout talks, then sent them scurrying back to the so-called "smart" bankers on Wall Street who supposedly know more about running financial institutions than the government. For the time being, if Wall Street won't save one of its own, the government won't come running to the rescue.

The second justification for holding back on bailouts was delivered by the New York Attorney General's office, whose report detailed the unfair compensation culture at many of the banks that received government bailouts. The A-G's findings showed that some of the banks gave out total bonuses that were higher than the company's net income or total earnings in 2008. It's hard to see how that type of behavior is in the best interests of shareholders, especially when these same banks received TARP funds that may have kept them from going under.

The final reason for the government to keep a cap on bailouts lies with the American consumer. Unless consumer spending picks up significantly in the next few months, non-financial companies are likely to need significant help next Spring. In the meantime, the government will have to give taxpayers some time to get over their bailout fatigue. By 2010, Obama hopes to have legislation detailing firm rules for winding down the largest financial institutions; such laws would allow those institutions to fail in an orderly manner and help alleviate the need for bailouts. Yesterday, Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.) introduced a bill to do just that.

Obama is hoping that the bailout through bankruptcy approach used to assist General Motors and Chrysler will prove successful enough to allow similar arrangements with a small number of companies in other major U.S. manufacturing sectors. GM-styled bailouts will likely be more acceptable after the marketplace is allowed to absorb the shock resulting from the failure of at least one other major financial institution.

Will another large financial institution fail? Well, many of the largest financial firms still have dubious assets on their books that, just as with CIT, have only a matter of time before they create additional losses for their owners. Expect those losses to begin showing up in a big way through the first quarter of 2010. But don't expect a bailout; the wolves who have been howling against government intervention are about to get their wish.
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