Bailouts: The Good, the Bad and the Ugly

The financial crisis in America is taking its toll on the stock markets and is continuing to threaten the stability of the credit markets going forward. We have seen the destruction of Lehman Brothers in 2008 and the takeover of Merrill Lynch by the Bank of America Corporation (NYSE/BAC). Add in the mortgage companies and the government has given out hundreds of billions in aid. This is a trend that is developing in bailing out companies and that could kill the country's finances.

The Bank of America received another $20.0 billion in bailout funds on Friday, adding to the previous $25.0 billion received. The acquisition of Merrill Lynch and its massive losses is hurting the Bank of America, especially at a time when the credit and mortgage markets are extremely weak.

While many would argue against bailing out corporate America, doing so is necessary; otherwise, we would likely see a collapse in the U.S. financial system and this would immediately filter through the rest of corporate America, possibly sending the country into a deep recession and probably a depression. So, like it or not, the bailout is necessary, in spite of the fact that it will cost taxpayers. There is no other choice but to continue to bail out vital sectors, such as financial.

Yet my concern is: where does it stop? What is vital? The auto sector is struggling with declining sales and crippling debt. Automakers recently received about $17.0 billion in emergency funds to stay afloat. At risk were hundreds of thousands of auto jobs, along with those in other auto-based businesses, and you can bet the number of workers goes way up. So there was no choice but to lend funds to the auto companies, in spite of despite their error in strategy of building gas-guzzling vehicles that started their downfall.

Then there are some of the biggest U.S. property developers that are also seeking financial help to deal with about $160 billion in maturing commercial mortgages in 2009. Failure to help these companies could send the housing sector into a deeper crisis. In my view, it's the same old story. These property developers had some amazing times and made tons of money. Their executives have made tens of millions of dollars in perks, but now times are bad and they want help to dig them out of the mess. Again, where does it end?

How about the troubled retailing sector, which has seen retail spending fall for six straight months? Could retailers be next for the handouts? Wal-Mart Stores, Inc. (NYSE/WMT) employs over two million people and, with retailing slumping, maybe it will be next? The reality is that the government should be careful with the amount of handouts, as funds are not limitless.

But, as the U.S. economy worsens in 2009, I expect more sectors to be in trouble and perhaps to look to the government for help. The fact is that it is difficult to bail out one sector and not another. Bailing out the financial sector is a must for the stability of the banking system. Yet, at risk in other less vital sectors will be jobs -- and you know, without a stronger jobs market, the economy would struggle to get out of the current recession.

The problem is that the government does not have a bottomless wallet.

Profit Confidential

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