ToledoTerminalRy wrote:
I would say Conrail was much less than the "bailout" or partial government takeover we are seeing today, it was more of a government assisted "boost back on your feet". Conrail only used 2.2 Billion dollars in about 6 years as now in our "Bailout" we are on the hook for over 3000 times that amount (7 trillion) in about 3 months! The government never really took over the railroads like they did with banks and want to with the automakers. Wasn't over regulation why the great depression went on for so long? Maybe that is why when the gov't introduced the Staggers Act (deregulation) it HELPED Conrail so much along with other railroads.
IMO -The railroads suffered from over regulation (govt), so do the automakers (unions). The only difference is that the automakers put themselves into this position by accepting union agreements. The banks were also "forced" into this position by the Govt but also helped along by each banks employees greed. The banks were encouraged to make A+ loans to people who could NOT afford an A+ loan.
Actually, USRA was a government-owned corporation. USRA took $3.3 billion in congressional appropriations over the years, and Conrail was re-privatized in 1987, so it was owned for 11 years by the government. Its 1987 re-privatizing IPO, which at the time set a record for its size (later surpassed by some dotcom IPOs) netted the government $1.9 billion in cash for the railroad, so the actual net loss to the taxpayer was only around $1.4 billion. At the rate Conrail was making money by 1987, if the government had retained ownership for 2 more years, it would have made back ALL of the taxpayer's money. But by 1987, Reagan was in his second term and was up against term limits, and he wanted the government out of the railroad business while a republican was in the White House. So it was a 'fire sale' of sorts, the $1.4 billion loss merely the cost of rushing the sale process, with the government exiting early "on principle". And then in 1999, the property was sold to NS and CSX for $10 billion, netting a hefty profit of for those initial investors who bought the railroad in 1987 for $1.9 billion.
The government actually did use a USRA-style takeover to handle GM, too. The government-owned corporation in this case was NGMCO, Inc. (the equivalent to USRA), but the GM bailout also had some unqiue 'features' that the Conrail bailout did not have, and that difference was driven by the era - when Conrail happened, the financial industry was not as deregulated as it is today. Deregulation in the finance sector added a whole new layer of problems for GM that did not exist with Conrail. NGMCO ended up taking a $50 billion taxpayer infusion, and the re-privatization IPO for GM only netted about $12 billion in revenue for the government, so the net loss for the taxpayer over the GM bailout was $38 billion. The government only held GM for less than a year, due to the political pressure of today being much greater than in the Reagan era.
After the cold war ended, alot of the unemployed mathematicians and scientists that used to build weapons systems went to work on Wall Street instead, creating exotic financial products built around complex mathematical algorithms. These products were known as derivatives. The use of these products was deregulated in the late 1990s, and some derivatives were used as a type of unregulated insurance policy. The unregulated insurance derivatives were called "swaps".
Normal forms of insurance, as most people know it, is heavily regulated. Within normal insurance, one of the long-standing regulations require insurance companies to maintain enough assets to pay out on all claims. Also, in the regulated insurance sector, a person can only insure an asset once, and the asset can only be insured by the owner. For example, I, and only I, can take out a single fire insurance policy on my house. Normal insurance also cannot be used speculatively. It is illegal, for me, to take out a fire insurance policy on your house, purely for speculative reasons, as I would then have a vested interest in your house burning down.
In Derivatives universe, a "swap" had basically the same function as an insurance policy, but it legally could not be called "insurance", because insurance is a regulated entity, and this form of private contract risk swapping was not regulated. So it was labeled a "swap" instead. In Derivatives universe, assets could be insured more than once, and assets also could be insured by outside entities purely for speculative purposes. This practice of someone buying insurance on someone else's assets, a practice that is illegal for you and me to engage in here on Main Street, was a legal everyday practice for the high rollers on Wall Street.
As GM began to stumble from mismanagement, the legitimate investors who had an ownership stake in GM went out and bought credit default swaps. They were essentially insuring their own investments, using this form of unregulated insurance. They were looking to get paid by insurance proceeds in the event GM went out of business and they lost their original investment. There were also other third party players who had no ownership or investment in GM who were buying credit default swaps. These people were simply gambling, speculatively, over whether GM would live or die. These speculators who purchased swaps now had a legal right to get paid by insurance proceeds, too, had GM gone out of business.
The bulk of this unregulated insurance had been sold by - you guessed it - AIG, and AIG had previously become a ward of the taxpayer, so the taxpayer would have been on the hook to pay off on all of these unregulated insurance claims. It was simply cheaper for the taxpayer to take control of GM, pump money into it to stabilize it, and avoid having all these unregulated insurance claims be triggered by GM's potential demise. The taxpayer was staring at funding between $300-500 billion in insurance claims should GM die, and only $50 billion to make sure GM lived on and never triggered the insurance. The takeover of GM became a no-brainer decision. The lion's share of the $50 billion spent on GM was used to buy up these insurance policies as "toxic assets" for pennies on the dollar, removing their loss magnification effect from the GM equation. By comparison, the union's underfunded pension issues was but a tiny fraction of the overall cost.
The impacts of credit default swaps simply did not exist back in the Conrail era, because the financial sector in this country was still largely guided by the post-depression regulatory structure. Conrail recovered over 60% of the taxpayers money, and cost the taxpayer $1.4 billion due to excessive railroad regulation, while GM recovered only 18%, and cost the taxpayer $38 billion due to a lack of regulations over exotic financial products.
The regulatory pendulum has swung from an over-regulated rail industry to an under-regulated financial industry, while the cost to the taxpayer has skyrocketed.
The entire area of unregulated swaps was operated by the investment bank/insurance conglomerates much like a ponzi scheme. Since there were no regs on maintaining sufficient assets to pay on all claims, most of the revenue from the sale of swaps was passed directly on to the employees of AIG in the form of excessive bonuses. The revenue was never retained for the proverbial rainy day. AIG often funded any claims made against the swaps by using revenue from new sales. And that fits the classic definition of a ponzi scheme. They were taking in money from new buyers to pay claims made by previous buyers. It was literally a "run on the bank" by all the people holding legitimate "insurance claims" from swaps underwritten on mortgage backed securities sold to investors that imploded the banks and AIG overnight. When the people with legitimate insurance claims came to collect, there was no "there" there to pay on all the claims.
And to think Madoff went to jail for his own investment-based ponzi scheme that was far less elaborate and far narrower in scope than Wall Street's insurance-based ponzi scheme, a scheme executed by players who are still walking around unprosecuted.
