One problem with living in Bailout Nation. As soon as potential investors realise that the Fed won’t let anyone fail, they have no incentive to take risk in advance of a bailout.
The government’s quick bailouts of Bear Stearns, Fannie, and Fred, in other words, may now be burning Washington Mutual (WM) and Lehman Brothers (LEH). Bank of America, Barclays, and others are potentially interested in buying Lehman, at least, but why would they do it until they get a Treasury guarantee?
The Wall Street Journal has an in depth story examining our financial meltdown. They make the following (intelligent) observation:
The recent government rescues may have backfired by making investors more wary of investing in capital-hungry firms. In the cases of Bear, Fannie and Freddie, federal officials’ strategy was to protect debt holders. But their interventions were also clearly designed to not to bail out their stock investors.
Now stock investors are worried that they could be wiped out if they pump money into firms that could fail. “It seems unthinkable to intervene for the benefit of shareholders,” says Mr. Meyer of Macroeconomic Advisers. “This is definitely a problem.”
Lehman provides the starkest recent example of the difficulty of raising capital. In early April it was able to raise $4 billion by issuing convertible preferred shares. Demand then was so strong that it increased the number of shares it issued. Since then, however, its share price has sunk sharply.. After talks fell through for fresh capital from a Korean bank, Lehman announced plans to shed assets and slash its dividend. Its share prices have continued to sink.
And now potential Lehman buyers Barclays and Bank of America are demanding government help before they take the risk of buying the firm. Who can blame them? Wait another few hours, and they’ll probably get it.
Business Insider Emails & Alerts
Site highlights each day to your inbox.