A Very Private Bailout
by Daniel M. Ryan
by Daniel M. Ryan
I was the beneficiary of a bailout — a very private bailout. For about two weeks, I had gotten into day trading; naturally, given the current turmoil, I had sidled into trading busted-down financial stocks. I started off with the proceeds of shares in a junior gold-mining company, which I maladroitly sold near the bottom. Those proceeds were my stake, as it were. As is often the case with inexperienced newbie traders such as myself, I found that same mining stock rocketing up after I got rid of it.
Nevertheless, my frenetic trading had largely caught up with that mining stock — until I bought some Washington Mutual hours before the FDIC folded it. I had 2000 shares, bought at about $1.80/share, worth $1.69 each by the close of trading on Sept.25th. By the time Washington Mutual was suspended right after Sept. 26th's opening, my shares had a market value of less than $400 for the entire 2000. To put it bluntly, I was wiped out.
This kind of story is often typical of day traders with a temporarily hot hand. Like so many others, I got decimated. While WaMu was still suspended, though, I was arranging a private bailout. Incredibly, it worked.
The Structure of the "Bailout"
By last Tuesday, I had secured enough funds to launch into what could politely be called "salvage trading." As part of my day-trading efforts, I had made some money off post-bankruptcy Lehman Brothers shares before WaMu's final plummet. As of Tuesday, my plan was to do the same for the now-bankrupt Washington Mutual. The two trades I made consisted of one overnight trade, held from Tuesday morning to early Wednesday morning, and a day trade that lasted most of Wednesday's trading session. I closed the second and final one just before regular trading ended Wednesday. After doing so, I found that I had not only preserved the bailout money, but had also made an additional $4000. Despite the slaughtering my portfolio had endured, I now had enough (over and above the bailout money) to buy back my original stake in that same junior-gold-mining company. I did so, and I also put the bailout money in an issue I don't plan on selling anytime soon. Both of these purchases were made just before 4 PM Wednesday, ET.
I described this injection of new money as a "bailout" for a very good reason. In order to rate it, I'm obliged to give up day trading for a while. I started off as a speculator, bumped myself up to day trader, all-but-destroyed my stake as a result, and now am back down to a "mere" speculator. Since Wednesday's close, I have not made another trade.
As to why it worked, luck had a lot to do with it, but I focused on what I did properly before blowing myself out of the water. More to the point: despite me recovering my original stake, I didn't make the mistake of chalking up my WaMu disaster to an unlucky break. Instead of risking decimation of new money after old, I've benched myself.
The above story is an example of how bailouts in general tend to work better when done through the voluntary sector. As Ludwig von Mises explained in Bureaucracy, a bureau has to be run on fixed rules administered impartially. What would be a bespoke bailout package in the private sector would be plain favoritism if done by the State. The need for bureaucrats to be procedure-bound and impartial means that my particular talents, and limitations, would have to be deemed irrelevant had I even had the hope of qualifying for any kind of government bailout. (I know; I'm merely fantasizing here.)
Bureaucracies can be considered good or bad, but that overall evaluation is typically based upon the overall rules administered. A bureaucracy charged with, say, welfare aid tends to be sized up as "well-meaning" in the whole. A bureaucracy administering evil rules leads straight to The Banality of Evil. What does not vary from bureaucracy to bureaucracy is the need to be procedure-bound and categorical. The duty of impartiality and the requirement of smooth running demand it. Bureaucracies that administer emergency aid programs are notorious for administrative nightmares, as this rundown clearly illustrates.
There's no reason to expect the current financial-services bailout package to be a program that the GAO need not look closely at. The overall odds, as informed by the theory of bureaucracy, suggest that any hurried rescue plan will be administered sloppily. The originally-three-page bailout plan is now the size of a novel — and I'm sure you can find at least one D.C. insider who's glad that it didn't expand to the size of a Russian novel.
In addition, it will further habituate Wall Street and Banker's Row to more "emergency money" from the taxpayer. As this habituation continues, the financial-services industry begins to resemble a college from the early 1960s — with the role of Mommy and Daddy being played by the always-mulctible United States taxpayer.
Unfortunately, anecdotes such as mine tend to give rise to hopes that a bailout can work if it's modified to be more bespokeish: to take account of the particular strengths and weaknesses of each foundered firm. Leaving aside the question of what each firm's strengths and weaknesses are — my own implosion has inclined me towards grumblish notions about J.P. Morgan Chase's "strengths" — bespokery might as well be a neologism for favoritism when the State enters the picture. State aid is inherently ridden with agency problems, which bureaucracy tries to keep a lid on. Those agency problems cannot help but be exacerbated by the fact that the root of said aid is tax funds, confiscated by law. "Johnny Tax Hike" knows it.
On the other hand, private bailouts tend to be goal-directed. They can be crafted to take account of individuality without blanketing an industry with regulations. They're not hamstrung by the need to take precedents into account. They also tend to separate viable firms, which got themselves in a bad spot, from firms that are better left to bankruptcy. The most likely source of such bailouts would be people with the hard-won expertise to sift salvageable from unsalvageable, and the (perhaps fiduciary) duty to deploy funds shrewdly. Finally, private-sector bailouts use funds acquired voluntarily — not funds that have been confiscated.
If the bailout process is so needed at this time, plain citizens will see it and act on this need. Leaving aside donors, of whom the American people have a seemingly eternal supply, profit-seekers have a lot of incentive to seek to bail out firms at a discount. Warren Buffett, to take a single example, has already done so with Goldman, Sachs. He's one of many sources of bailout capital — especially if bankruptcy investors are included.
In a way, it's a pity that the rise of the American people against the Bush Administration's bailout plan has proven to be a mere impediment to its passage. Had the U.S. government backed off instead, we would have seen how resourceful Americans really can be during a crisis…including American "money grubbers" (which, according to at least one recent news report, include U.S. government mandatories themselves).
October 3, 2008
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