I want to tell you a story about an average American whose name is Fred*. Fred is an older guy, approaching retirement, who has spent his entire life working on his family farm in Nebraska.
He’s accumulated some wealth, although by the standards of the mega-wealthy it’s really a pittance, but he’s worked hard, lived frugally, and managed to accumulate some money. On top of that, Fred has been a smart, albeit conservative with the way he’s managed his personal finances, never borrowing a penny after he’d paid down all his debts at a surprisingly young age.
Fred, like “The Millionaire Next Door” described in the blockbuster book by the same name, drives an older automobile for which he paid cash, and even though he could easily afford a new car of almost any make and model, Fred doesn’t see the need to spend the money since his old car is running just fine. And, Fred kind of likes his 1997 Cadillac Deville. Even though it’s got 120,000 miles, it runs just fine and it was the first ‘luxury car’ Fred ever bought, even though he bought it used in 2002 at a really good price. Besides if he traded the car in on a new model, he’d only get $2,500 on a trade, and assuming he could be lucky enough to sell the vehicle outright to a private buyer, he might get $3,500. Fred, having a lot of common sense, figures he might as well keep the old car and drive it.
Then one day, Fred discovers to his dismay, that the old Cadillac needs major repairs. After getting estimates, he discovers the engine and transmission repairs are going to cost him almost $4,500; so, having some common sense, Fred decides it doesn’t make any sense to put $4,500 into a $2,500 car – so he sells the old Cadillac to a local used auto parts supplier for $1,000 and buys a different car.
Makes sense right?
Good thing Fred isn’t a congressman or a Washington Bureaucrat. If he was, he’d not only spend the $4,500 to make the repairs to the $2,500 car; while he was at it, he’d get new leather seats installed at a cost of $4,000, get a paint job added for another $4,000, and put new tires on the car at a cost of another $1,000. Congress would not only repair something that didn’t make financial sense to repair, they’d make unnecessary repairs as well.
Too bad no one in Washington summoned Fred and asked for his advice prior to the current financial industry bailout. Fred would have likely made far different choices.
To date, the AIG bailout has cost taxpayers $182.5 billion (Source: Bloomberg, March 23, 2009). As of last week, the total market capitalization of AIG was about $3.7 billion. If you’re not familiar with market capitalization, it’s calculated as the total shares of stock outstanding times the current share value. AIG has approximately 2.7 billion of shares outstanding at a share price of about $1.40 which means you could buy the company for $3.7 billion, yet the government has invested over $180 billion for their 80% stake.
So, the government has ‘invested’ $182.5 billion in a company that’s currently worth $3.7 billion and they don’t even own it 100%. Even giving the government the benefit of the doubt, if we look at the market capitalization of AIG on October 1, 2008 when AIG was trading at $3.95 per share, the market capitalization of the company was $6.65 billion, yet the government committed to giving AIG far more money than the company was worth.
Where was Fred when we needed him?
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*Fred is a hypothetical character used by the writer to illustrate his opinion. The hypothetical example of Fred and his life is used to help the reader picture what might have happened had a
different course of events been followed.
