Good Investments?

by Dave Schuler on September 25, 2012

Barry Ritholtz has an amusing post that looks at the bailouts of AIG, GM, Chrysler, Citigroup, and Bank of America from the point of view of an investment counselor looking at the portfolio of some new clients:

George and Martha, a wealthy older couple, comes into my office. They are not happy with their current stockbroker. Concerned about their future, they ask if I would have a look at their portfolio.

Certainly, we do these reviews all the time. As it turns out, this review would be very different from what I am used to. We sit down to discuss their investments, and perusing their 12-figure account, I almost fall out of my seat. The portfolio is festooned with every risky stock of the past five years. I have to restrain myself from sarcastically asking “What, no Facebook IPO shares?”

Instead, I simply say “Please tell me a little bit about yourselves.”

“We grew up hardscrabble, were self-reliant, always helped out our neighbors.” They are hard working people, and their wealth was accumulated after the war. They tell me they diligently built a portfolio of hard assets – gold, real estate and bonds. They took appropriate risk, were frugal in their spending, and diligently saved money.

It was perplexing. What they were describing about their approach to saving and investing was nothing like the portfolio mess I was looking at.

And oh, what an unholy mess it is: Many of the highest risk, lowest return assets ever to grace a broker’s pitchbook fills their portfolio. Sketchy private equity deals, dubious preferred stock, low rated corporate bonds.

Read the whole thing.

Of course, the bailouts weren’t executed as prudent investments seeking return but to prop up failing companies for fear that their failure would take out other, healthier companies along with them. Minimizing loss rather than maximizing gain.

I do think that the firm of Paulson & Geithner Capital Management has a lot to answer for. Were the claims of imminent disaster exaggerated? (That’s what Sheila Bair says.) Most importantly, was the means selected to bail out the various companies the only or even the most efficient? Judging by performance I don’t think that the strategy that was pursued was sufficiently tailored to the nominal objectives, particularly in the cases of GM and Chrysler. It’s a persistent belief of mine that human beings are complicated but that you can make reasonable inferences about somebody’s relative priorities based on what they’re willing to settle for in a deal.

What does that say about the objectives of the Bush and Obama Administrations in bailing out the two auto companies? Obviously, it wasn’t getting a financial return on the investment. Equally obviously it wasn’t securing the interests of investors or preserving employment in the industry, either.

{ 5 comments… read them below or add one }

Icepick September 25, 2012 at 9:01 am

Of course, the bailouts weren’t executed as prudent investments seeking return but to prop up failing companies for fear that their failure would take out other, healthier companies along with them.

Yes, we wouldn’t want to remove the rotting gangrenous parts of the patient for fear that it might harm the healthy bits!

Steve Verdon September 25, 2012 at 10:08 am

Of course, the bailouts weren’t executed as prudent investments seeking return but to prop up failing companies for fear that their failure would take out other, healthier companies along with them. Minimizing loss rather than maximizing gain.

Paging steve…steve, please pick up the white courtesy phone, steve please pick up the white courtesy phone….

While there are arguments to be made for minimizing risk, the idea that this is a winning strategy in the long run is not it. The idea that once the situation is stabilized we’ll address the long run problems is a pipe dream. But hey, we saved the financial system….just so we can watch creep up to the edge of the “abyss” again and totter there until the taxpayer is once again fleeced.

Dave Schuler September 25, 2012 at 10:39 am

Just to restate my position on the bailouts of GM and Chrysler, I think the companies should have been allowed to reorganize under Chapter 11 bankruptcy. I also think that the warnings of doom for the entire auto industry were highly exaggerated.

I think the warnings were quite correct for the UAW. Chapter 11 for GM and Chrysler would have spelled its doom. Bailing out UAW contracts (not even UAW members but contracts) was the actual objective.

Tad September 25, 2012 at 3:48 pm

While I agree that they failed to both serve the interests of investors and/or preserve employment in the industry; I am not sure that I agree that it was not their intent. I do things for ‘good’ reasons all the time, that I fail to accomplish my goals does not change my original intent. It just means I failed, or that I was wrong, etc.

I think the administrations actually believed the doom sayers and wanted to prevent being the president who oversaw the collapse of the american auto industry. The ‘solutions’ they utilized simply failed to accomplish their goals. This is not to say that I think there is a solution that would have accomplished those goals, I don’t.

steve September 26, 2012 at 7:39 pm

@Dave- Who was going to provide the DIP funding?

Steve V- As I recall, the GM deal resulted in 1/3 of the workers losing their job, the union got $.40 on the dollar, bond holders $.29 on the dollar. Not a great deal for the union. What do the bondholders take home absent govt. involvement? When do they get it?

Steve

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