Bailout: the Word of the Year 2008

Merry Webster, the dictionary, just released its "word of the year" statement. For 2008, ladies and gentlemen, the word of the year is bailout (http://theunquietlibrary.wordpress.com/)



Surprise, surprise? Not at all. Bailout made it to the top during the last weeks of the year thanks to US$700 billion that the US Federal Reserve pumped into the pockets of big money makers.



If you feel tempted to think that bailing someone out (or being bailed out, for that matter) is sort of trendy, think twice. A Word of the Year could mean that a stern judgment is being passed on the way things are being handled.



The recipients of the US$700 billion awards, hunger-makers as they are, are showing us that things are not going to improve. Not at least for the ones bailing them out, that is, the pedestrian tax payers. A point in case: one of these very clever winners, Citi Group, managed to get the US people come up with US$25 billion to its rescue so that it could cover its liabilities while pocketing its assets. Cam Harvey, from Duke University, finds this move to be very damaging:

"It wasn't that long ago that Citigroup was considered a "good" bank. Remember October 1, 2008? Citigroup announced it was acquiring Wachovia with the help of the FDIC. You had to be strong to do a favor to the government like that.
"Citi was also a recipient of $25 billion in the first tranche of the $125 billion TARP money. However, we know now Citi was not healthy. On Friday, Citi stock closed at $3.77 implying an approximate market cap of $19 billion -- just a few weeks after the Treasury had injected $25 billion in capital. This implied that the government was throwing $25 billion at something that was worth -$6 billion! It is the classic throw of good money at bad. I am fully aware that some type of intervention was necessary. Citi falling would have created even worse chaos in markets. But the recent injection of a further $20 billion and huge government guarantees on troubled assets is a spectacularly bad deal for the American (sic) taxpayer."

Stock market for dummies

Once upon a time, a well dressed gentleman arrived at a certain little town. After checking in at the only inn in town, he ordered an ad to be placed in the local paper. The ad was offering $10 for any monkey that could be captured alive.

The locals knew that the forest was full of monkeys; so they hurried out, got as many as they could and brought them to the gentleman. Just as he had promised, the gentleman paid $10 for each monkey on the spot.

As the monkey population in the forest dwindled the capture of the monkeys was becoming difficult and the locals lost interest in pursuing their newly found career. To re-energize the locals, the gentleman announced that he was raising his offer to $20 per monkey. The locals found a renewed vigor and managed to come back with more monkeys.

Consequently, there were even fewer monkeys now. The gentleman then raised the ante to $25 per monkey. A new wave of expeditions into the forest resulted and the last monkey was finally captured.

At this particular point, the gentleman announced that he was ready to buy any available monkey for $50, but there were no monkeys to be found in the whole forest. Pondering his monkey purchasing enterprise over, this well dressed gentleman left and asked his assistant to stay behind to consolidate his monkey empire.

A few days later, the businessman’s assistant summoned the locals and told them:

“Look. Come over here and see this huge cage. See? It’s full of all the monkeys my boss bought from you to complete his collection. This is the deal: I sell them to you for $35 and then, when he comes back, you can sell them back to him for $50 each, just as he said before he left. This monkey collection is extremely important to him.”

The locals pooled their resources and savings and bought the monkeys and waited for the gentleman to come back.

They have been waiting ever since. They never again saw the gentleman or his assistant. The only thing before their eyes was a huge cage full of monkeys they bought with their savings and retirement money.

This is how the stock market works.

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(Translated from a story that was circulated in Spanish through the internet by the guys at PDA-Toronto. Proof reading: Mary Outhwaite. This could be a story that was originally written in another language -English?- then translated into Spanish and now... once again!).

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