Is Big Three Bailout Plan Another ‘Ponzi’ Scheme?

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It’s understandable if some Americans find themselves confused as they try to understand the financial headlines making news this morning:

• An enormous “Ponzi” scheme, allegedly perpetrated by a long-trusted Wall Street legend and former chairman of the NASDAQ, continues to make headlines since becoming public four days ago.

• Other news articles focus on the possibility of news coming from the White House about a Big Three bailout plan.
  

After I read articles on both matters, I began to wonder if there is a difference between the two or if the Big Three bailout plan is just another “Ponzi” scheme?

Bernard L. Madoff’s scheme used the classic “rob-Peter-to-pay-Paul” principle that involved taking money from new investors to pay off earlier investors until, eventually, the whole scheme collapsed.  According to a Securities and Exchange Commission news release issued Thursday, Madoff admitted his firm was insolvent and had been for years, and he estimated the losses from this fraud were at least $50 billion.  Soon after the news broke, a laundry list of victims, ranging from individual investors and charitable organizations to hedge funds and banks, began to surface.

Similarly, the automaker bailout scheme — it doesn’t really deserve to be called a “plan,” does it? — appears destined to make victims of American taxpayers.

Having already robbed current and future taxpayers of hundreds of billions of dollars via bailouts — all within the span of a single calendar year — for the likes of Bear Stearns, Fannie Mae, Freddie Mac, AIG and CitiGroup, the federal government appears poised to do more damage.

According  to a Wall Street Journal report, the Bush Administration is trying to determine how much money it will take to help the car companies, and is discussing a rescue totaling $10 billion to $40 billion or more.  Further, the newspaper reports, one possible source of funding is the Treasury Department’s $700 billion fund set up to rescue the financial industry.  We should learn today whether this robbery is successful.

So why shouldn’t we allow the federal government to rob Peter (a.k.a., “taxpayers”) to pay Paul (a.k.a., “the Big Three”)?  Myriad reasons exist.

In a piece published today, The Heritage Foundation’s Andrew M. Grossman offers his anti-bailout opinion:

The U.S. auto industry is in dire need of a shakeup. All of the Big Three are beset by plummeting sales and market share, high labor costs, aging fleets, and a surfeit of innovative automobiles in the pipeline. With General Motors, and perhaps Ford after it, fac­ing looming liquidity crises, staying the course is no longer an option.

In a well-written letter to the editor published in the Las Vegas Sun yesterday, North Las Vegas resident Bob Jack offers another point of view:

Sen. John Ensign was totally correct to have asked President George W. Bush to show some courage in light of the U.S. automaker bailout proposal. The use of the $700 billion Troubled Asset Relief Fund (TARP) for an auto industry bailout is a breach in faith with the American people.

TARP was intended to be used to ease the financial and credit markets, not to bail out other U.S. industries. In the event TARP is misused by the Bush administration in this manner, then Ensign and other members of Congress, with the courage to deny the auto industry bailout without significant UAW concessions, should investigate what legal recourses are available to bar the Bush administration from using TARP funds for this unauthorized purpose.

Finally, Nobel Prize-winning economist Joseph Stiglitz offers yet another viewpoint.  In a piece published Friday in the Financial Times, he wrote:

It is more plausible that confidence will be restored if the industry is freed of the burden of interest payments and is given a fresh start. Modern cars are complex technological products and the US has demonstrated its strength in advanced technology. US workers, working for Japanese carmakers, have shown their hard work can produce cars that are desirable. America’s managers too have demonstrated their managerial skills in many other areas.

The failure lies with the managers of US carmakers and America’s financial markets, which failed in their oversight and encouraged short-sighted behaviour. The “bridge loan to nowhere” - the down payment on what could be a sinkhole of enormous proportions - is another example of the short-sighted behaviour that got us into this mess.

It’s time for all of the “Pauls” in this country — including people in both the financial markets and in Detroit — to realize “Peter” is tired of being robbed.  And Peter is running out of cash.

-- Bob McCarty Writes