In September, 2008, with the financial crisis of that year triggered by the collapse of the mortgage-backed securities bubble shaking the foundations of financial institutions world-wide and an election in the U.S. looming which had the prospect of electing the most explicitly left-wing president in the country’s history, I wrote a Gnome-o-Gram titled “The AIG Takeover and Bankruptcy Socialism”, in which I introduced the term “bankruptcy socialism”. I have appended that original article, unmodified, to this post so you can see what I was thinking at the time and how things evolved subsequently compared to what I envisioned.
Although I wish for nothing more earnestly than the kind of optimistic outcome from the present disruption due to the coronavirus pandemic and the measures taken to deal with it, such as those sketched by TKC 1101 in his post “So What Is the POTUS Strategy?”, I also believe it is wise to look at other, darker strategies which may be put into place by those with agendas very different from the swift and complete recovery from the present troubles for which I, and most people, hope.
Among those who I call “slavers”: who wish to transform free societies made up of creative individuals interacting in a free economy subject only to minimal regulation and the rule of law into a hierarchical, authoritarian society where the “masses” are ruled by an élite class of “experts”, controlled by top-down dissemination of information, censorship, and taxation and regulation which make it impossible to challenge the status quo (which will, of course, be done for the very best of reasons: “social justice”, “equality”, “saving the planet”), there is a tradition, occasionally even said out loud, to “never let a crisis go to waste”.
Remember, for example, how just a few days after the terrorist attacks of September 11, 2001, what would become the PATRIOT Act seemingly burst, fully formed, from the skull of Moloch, and was enacted by Congress and signed into law on October 26, 2001, just 45 days after the attacks. I remarked at the time that this mephitic collection of police state wish list items was doubtlessly sitting in somebody’s drawer waiting for the moment it could be slipped through while everybody was chanting “USA—USA—USA!”, but these sentiments were dismissed as those of a flaming libertarian out of touch with the “new era” in which we were now living.
Well, we now find ourselves in another of those “new era” moments: one very different, but potentially more profound in both its immediate consequences and in the subsequent relationship between the ruling class and the governed.
- In less than 45 days, there is the prospect of going from historically low unemployment to levels not seen since the Great Depression.
- Major industry sectors such as air transportation (and its hardware and service support sectors); hospitality; restaurants; retailing except for a few sectors such as food, medicine, and fuel; and a multitude of service businesses are largely or completely shut down.
- A large fraction of the population are told to stay home, including those who cannot work from home. With very few exceptions, people have passively followed orders and done as they were told without questioning authority or resisting.
- Millions accept, without challenge, that government can tell them which businesses are “essential” and which are not; which will survive and which will fail; and who shall work and who shall be idled.
- Myriad businesses, from individual storefronts to Boeing, are counting the days until they run out of money and must default or declare bankruptcy absent some kind of bail-out. If this goes on for more than a few weeks, it is not inconceivable that tens of millions among the 30 million small businesses in the U.S. may go bankrupt. The situation for highly-leveraged large companies may be no better, not to mention the banks who provide the credit line these companies have drawn down to the maximum over the last two weeks as the crisis has deepened.
I shall not consider here whether the measures taken are necessary, appropriate, or sufficient, nor whether the crisis is overblown or underestimated. What matters here is what has been done and is being done, and its consequences.
Those consequences are dire. Forecasts over the last few days from major banks and financial institutions forecast Great Depression magnitude economic contraction and unemployment emerging in the next two quarters if the current trajectory is sustained. The consequences of this for financial markets, especially as slapped-together trillion dollar government interventions are thrown into the mix on a daily basis, can scarcely be forecast from day to day.
What this means is, it looks like we have a king-Hell crisis on on our hands: one which may lead to bankruptcies in numbers and scale never before seen. What thick and carefully-drafted plans might be being pulled out of desk drawers and readied for introduction as the crunch hits and voices rise for government to “do something”?
My fear is that it’s precisely the slaver wish-list agenda which has been rattling around in various guises since “Occupy Wall Street” in 2011 and has since manifested itself in guises such as Antifa, the Green New Deal, and the presidential campaigns of Bernie Sanders and Elizabeth Warren. We’re already hearing the first hints of bankruptcy socialism from Democrat politicians talking about conditions to be imposed on recipients of bail-outs.
Here is a bullet list of items I fear we might see in the “Economic Recovery and Corporate Responsibility Act of 2020”, which would be requirements for receipt of federal bail-out funds.
- Ceding 35–45% of equity to the U.S. government, either outright or by the issuance of warrants, rights, or other instruments. Existing shareholders are diluted.
- Adoption of a US$15/hour minimum wage for all employees.
- Employee-elected representation on corporate boards: 20% minimum.
- Environmental group representation on corporate boards: 10% minimum.
- Government supervisor representation on corporate boards: 10% minimum.
- Prohibition of dividend increases or share repurchases until all bail-out funds are repaid.
- Prohibition of executive compensation increases or stock option grants until all bail-out funds are repaid.
- Commitment to allow mandatory card-check union elections in all corporate facilities, even those in right-to-work states.
- Adoption of a carbon-neutral commitment by 2040.
In short, the entire agenda they’ve been hoping for for the last 30 years, all in one neatly-wrapped package and all at once, presented with a financial gun to the head of the enterprise.
This, I fear, is the reason for the relentless fear offensive being mounted in the media, far beyond their hopes to influence the next election. If the back of the economy can be definitively broken and those independent-minded business owners brought to heel, they can be permanently made supplicants to the state and beholden to those in power. And that’s how you get socialism without a revolution or expropriation: crash the economy and with the threat of liquidation imminent, businesses will sign over their liberty for liquidity.
Here is the original article from 2008.
“Gnome-o-Gram: The AIG Takeover and Bankruptcy Socialism” — September 17, 2008
We’ve now entered into the early phases of the grand liquidation of financial derivatives I wrote about last June. The most stunning—indeed flabbergasting—event so far has been the “rescue”, or more precisely effective takeover, of AIG, the largest insurance and financial services company in the United States by the Federal Reserve, which granted a two year credit line of US$85 billion secured by all of the assets of AIG. In return, the U.S. government receives a 79.9% share of AIG’s equity, diluting existing shareholders’ stake in the company by 4/5.
To my knowledge, nothing like this has ever happened before in U.S. financial history, at least not in the last century (you always wonder about railroad deals in the 19th century, but I don’t know if precedent exists there; in any case that was before the Federal Reserve was founded, and the financial system worked very differently in that era). Certainly there have been bailouts before, such as that of Chrysler in 1980, but even that deal, controversial as it was at the time, was, in inflation-adjusted dollars, less than one twentieth the size of the credit line provided to AIG and was a pure government loan guarantee: the government took no equity stake in Chrysler at all. In the case of AIG, the U.S. now has effectively nationalised the largest insurance company in the country, with not just a controlling interest but an overwhelming ownership stake of around 80%, and the whole deal was done overnight without, as was the case of the Chrysler loan guarantee, extensive debate in the Congress and the enactment of a bill explicitly granting the guarantee.
Now the thing about government actions, however exceptional, is that they have a tendency to become a precedent for future actions, and what I want to discuss here is what that could mean. I’ll leave to other commentators the details and immediate ramifications of this event, but here I’d like to ponder the potential consequences of the precedent created here, should this deal go through unchallenged (which is the way to bet, since there’s little political benefit to be had in appearing to oppose a rescue presented as averting a financial calamity).
Suppose you were a stealth candidate for the U.S. presidency who had carefully concealed your radical beliefs and connections. Suppose your election came during, and was in part due to, a growing financial crisis, perceived as spreading beyond the mortgage market and financial sector into the economy as a whole. Suppose your advisers envisioned a very different organisation of the U.S. economy than its present structure?
Well, all you’d have to do after taking office is to let the economy go over the edge, which could be blamed on the previous administration, which would force many large U.S. companies, heavily leveraged and hard hit by the ongoing derivatives collapse, to the brink of bankruptcy. No problem: the Federal Reserve steps up with an AIG-style “rescue” plan for all comers, creating the credit lines out of thin air and the government picking up an 80% equity stake in each. Without a single vote being taken in Congress, large sectors of the economy are effectively nationalised, with existing shareholders seeing 80% of their equity effectively expropriated by dilution. And the whole scheme is presented by the legacy media as a grand bailout, with the government stepping in to avoid a collapse resulting from excesses of the market system. Maybe they’ll call it the “Newer Deal”.
Now, isn’t this about the cleverest way you’ve heard to socialise a free market economy almost overnight? And do you want to be a shareholder of any U.S. company which would be vulnerable to such a “rescue” in the case of a sharp economic downturn?
I am presenting this as a cautionary scenario, which popped into my head as I was recovering from the initial shock of learning the details of the AIG deal. I do not mean to suggest that any existing candidate or political party in the U.S. envisions such a plan, only to observe that it now appears to be possible, and hence something the prudently paranoid investor should bear in mind. Neither do I intend to imply that Barack Obama is the “stealth candidate” I refer to above. Warren Buffett is about the shrewdest investor of modern times; I don’t think he’d be backing Obama if he believed Obama would contemplate such a thing.
Update: Yes, I am aware that the AIG deal does not involve direct transfer of 80% of the company’s equity to the government, but rather warrants which, if exercised, cause issuance of common stock with that effect. The presumption is that should AIG be able to raise sufficient funds to retire the credit line with interest, the government would let the warrants expire unexercised. But note that the Fed, in their press release, said “The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.”, and AIG, in theirs, said “In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG.”, both statements treating the warrant issue as an effective transfer of equity to the government. But even should the warrants expire unexercised in this case, an administration bent on a strategy of “bankruptcy socialism” (a term for which this article is presently the number one hit on Google) would certainly exercise the warrants to obtain the outright equity stake. They could, however, strategically do warrant deals with the pretense of allowing them to expire when the “present difficulties” were over and the credit lines retired, then exercise them all as the “Next Deal” (alternative name to that suggested above) was rolled out in an address to a joint session of Congress. (2008-09-17 21:19 UTC)