There seems to be a reluctance among many people to accept that the whole Bear Stearns thing constitutes a bailout. Let me try an analogy…
Let’s say The Cactus Corp. sells squirrel carcasses as fillet mignon. After a few years, The Cactus Corp. is a strong business with a market cap of $150 million. Eventually, a few of the customers realize that fillet mignon purchased from The Cactus Corp. tastes very, very different than fillet mignon purchased (at much greater expense) from a reputable grocer. After a few months, there are no buyers for The Cactus Corp.’s products.
Now, you may be thinking: The Cactus Corp. is worth nothing. But you’d be wrong. See, The Cactus Corp., like any other company, is going to have a big inventory… and health code regulations don’t just allow it to chuck its inventory onto the street. Worse, it has forward contracts to purchase as many more squirrel carcasses as folks who troll the highways can provide for the next few years. Which means that The Cactus Corp. is not worth nothing – its value is negative.
Now, the gubmint decides that guaranteeing a safe supply of food is important, and that The Cactus Corp. is an important part of that process. So they make the following offer to the guy down the street: “We know that The Cactus Corp. has negative value. But, if you buy out The Cactus Corp. for $2 million, you might still find some use for all those squirrel carcasses and make money. People do eat squirrel meat, after all, and you’re getting it very cheap. But we’ll also sweeten the pot – if you don’t make money, we’ll make up whatever losses you might have.”
When that happens, shareholders, officers, and employees of The Cactus Corp. will complain because they’re getting $2 million for an entity that not long ago was valued at $150 million. They’ll insist this was no bailout. But the fact that company no longer has any positive value whatsoever means that the $2 million is not just a bailout, its a gift. And its a gift to both those associated with The Cactus Corp. and to the guy down the street. And its a gift paid for by the tax payer.