A Magna Carta for Government Bail Outs

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dennis peacockeby Dennis Peacocke

January 2009

In times of stress and crisis, people, organizations, and governments need a very clear set of rules or principles to measure all decisions against. Ultimately for governments, it is their Constitutions that serve this purpose.  Binding rules or limits help us to stay out of crises, help limit the negative effects of a crisis when we are in one, and help us “find the path” when we get lost in the moments of extreme pressures.  The current financial crisis offers us all a stark living example of the necessity of using clear sets of principles for all these reasons. It was the failure to use them that helped cause the tidal wave of financial mismanagement currently afflicting us. It will only get worse if we do not stop the “quick fix” decisions and regroup around principles.

What follows is more than a “solution;” it is a “lifeboat.”  It is a set of guidelines that, if not followed, virtually guarantee an even greater wave of financial destruction in the future. If that happens, our financial systems as we know them will not survive.  For all our sakes, especially that of our posterity and those others who are financially marginalized or dependent for their very livelihood upon the current financial system’s survival, to falter here is to fall into an abyss where no “lifeboat” will be sufficient.

Three General Principles of Governmental Financial Intervention:

Principle Number One

The opening “general welfare” clause of the United States Constitution offers the government both a “wide and narrow gate” for financial interventionism.  The “wide” part of the gate is the possibility of intervention itself.  The “narrow” part of the gate is that such intervention may truly only be for the general welfare, rather than any smaller part’s particular welfare. The benefits of that intervention must be carefully scrutinized and publicly justified in a compelling manner. Therefore, the government must immediately determine the industries and services whose disruption would constitute potential threats to the “general welfare,” and establish and require clear prerequisites and procedures to even apply for government aid for those entities.  Upon completion of these governmental studies and criteria, these findings must be published, examined, and publicly debated.

Principle Number Two

Any governmental financial intervention is using the taxpayers’ money, and their posterity’s money, as a public trust.  Therefore it must be used with minimum risk and maximum opportunity to be safely returned to the people.  Such investments therefore must come in the form of clearly regulated loans.  If those receiving the loans cannot, or will not, agree to the wisest available counsel for financial recovery, no public loan should be offered.  Financial intervention for the purposes of nationalization without public approval is entirely out of the question, since a public debt is being incurred which requires the return of the taxpayers’ money. Financially speaking, nationalized industries do not make a return on investments and have no incentive to do so. Governments do not create capital; they create the possibility of the private sector doing so in the future.

Principle Number Three

The general conditions upon which governmental investment can take place must be based upon the following specific agreements:

A.  Senior management must take specific, personal responsibility for the condition of their organization in terms of the mismanagement leading to the request for governmental intervention.  Specific mistakes must be publicly acknowledged with specific remedies given for the turnaround of the organization according to common sound business principles. The same general principles of financial austerity which apply to companies entering protective bankruptcy should apply to the loan recipients.
B.  Cuts in salary within the entire organization must be of equal percentages for all paid employees.  All raises, bonuses, or stock options must be frozen until the payback schedules to the government are met.  No existing company capital can be used to pay executive bonuses.
C.  All government financial injections must be incrementally executed based on the company’s achieving the performance-based business plan markers initially established before the loans.  Labor and management wage restorations or bonuses for incremental achievement will be reviewed and set by representatives of the employees, management, and the government=appointed officials overseeing the loan process.
D.  The governmental loan repayment plan requires that all loans be repaid at a set interest rate determined by industry-wide standards of comparable loans from existing private sector sources.  Only upon repayment of the principal and interest is the company freed of all loan-imposed obligations of governmental management. The government is not permitted to forgive loans without some form of public referendum.
If we as a nation permit current governmental officials to attempt to do this in “too big a hurry to do this right without a full congressional debate,” then it should not be done at all.  Governmental incompetency provides no real solution for private sector incompetency.  Beyond all that, it’s the people’s money, and that is……… the bottom line.