Why Some Get a Bailout, Others Get Bluster

How the government decides which firms to help and which to let founder

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The government has bailed out a bunch of banks, so why shouldn't it bail out [fill in the blank]?That's what Detroit wants to know. And some faltering retailers. And American Express shareholders. Maybe General Electric, too. Oh, yeah, there are a couple million struggling homeowners wondering the same thing.If it seems as if the feds are bailing out everybody except you, well, that's not far from the truth. But there is still some logic to the government's machinations, even if that's getting washed away in the furious flow of cash from the beltway to select firms deemed worthy of a rescue.

The first priority is still stabilizing the financial system, in the hope that some semblance of normal lending to business and consumers will resume. For better or worse, the companies that get priority attention are those whose failure would be most catastrophic to the banking system.

Treasury Secretary Hank Paulson has been a stickler about the $700 billion financial rescue fund he oversees, which he refuses to extend to the Detroit automakers—or Circuit City, for that matter. One reason is this little provision in the law that accompanied the bailout money, which requires firms receiving aid to be "viable." That means they must have good prospects of returning to health once the government has helped them out.

But what about AIG? That's an insurance company, not a bank, and how can it be viable if it's on the verge of insolvency? Good question, which illustrates the point that there are, well, exceptions to the government's rules. Here's why some groups qualify for a bailout and others don't:

Citigroup


What it ' s getting: So far, nearly $50 billion in direct capital from the government, plus federal guarantees on about $300 billion of lousy, unsellable mortgage-backed securities that investors fear could wreck Citi's balance sheet. Why: Citi is a banking giant that's already weighing down other financial firms, just based on the shoddy performance of its stock. If big investors pull their accounts and there's an industrial-strength run on Citi, credit markets could seize up worse than they did after Lehman Brothers went out of business in September.

Is it viable? Yes, but government aid is surely helping. Citi doesn't face insolvency, but it's considered a massive and unwieldy company, with huge divisions that don't fit well with one another and global sprawl that's difficult to manage even during good times.

What taxpayers get: A huge bank with 3,000 branches and millions of credit-card customers stays in business. Theoretically, federal aid to Citi should trickle down to consumers seeking loans from the friendly bank with the big red umbrella as a symbol. Maybe, someday. Meantime, for its latest $20 billion capital injection, the Treasury will get Citigroup preferred stock paying an 8 percent dividend.

[See what incoming Treasury Secretary Tim Geithner, who helped orchestrate the Citigroup bailout, has to prove.]

AIG


What it gets: Cash from the government, in the form of loans, stock purchases, and other investments, totaling about $150 billion so far. Why: The huge insurance company is deeply enmeshed in the global financial system, holding a vast portfolio of credit-default swaps and other arcane securities at risk of default. If AIG became insolvent and couldn't pay its debts, the losses would ricochet through to hundreds of other banks and financial institutions, possibly inciting a panic, as one bank after another called in its debts.

Is the company viable ? Now it is. AIG almost certainly would have declared bankruptcy in September without government help, but a couple of months' breathing time has allowed it to start repairing its balance sheet and position some of its valuable assets for sale. The firm appears close to selling its huge fleet of leased aircraft, for instance. And most of AIG's insurance businesses are actually healthy and profitable.

What taxpayers get: One failed giant fewer to snarl the financial system with a massive portfolio of defaults. The government also owns about 10 billion shares of AIG stock, according to Briefing.com, which it bought at about $2 per share and can resell in the future for a profit, if AIG recovers. And the government is earning about 8.5 percent interest on about $60 billion worth of loans to AIG.

[See why AIG is soaking up so much federal funding.]

General Motors


What it wants: At least $10 billion from a fund that would include $25 billion or more for all three Detroit automakers and a number of threatened suppliers. Why: GM is essentially insolvent and likely to run out of operating cash within a few months. And many analysts believe that declaring bankruptcy, a reasonable option for many companies that can't pay their debts, would doom GM, because nobody would buy a car from a bankrupt automaker. GM is a mammoth company, and if it sank, there's no doubt the vortex would draw in a lot of other companies. But there's also an oversupply of car-building capacity in the United States, and it's hard to tell if GM's failure would threaten the entire automotive infrastructure—warranting government intervention—or just an older, less efficient part of it.

Is the company viable? Unclear, and that's a big part of the problem. Technically, GM doesn't qualify for any of the $700 billion bailout fund, because it's obviously not a financial firm. And so far, the company hasn't shown that it will become healthy if it gets any money. Lawmakers are reluctant to approve an automaker rescue partly because GM could end up asking for another one—and another—if management just keeps up business as usual.

What taxpayers would get: A bailout would be structured as some combination of loans and equity purchases, as with AIG and Citigroup, so taxpayers would ultimately get some money back, as long as GM survived. A bailout would also help preserve thousands of jobs—but it wouldn't necessarily help the automaker get more competitive, which is the best way to protect workers.

[See how bankruptcy could be good for GM.]

Distressed homeowners


What they would get: Either lower interest rates or a longer-term loan, which would effectively reduce the monthly mortgage payment by perhaps $300 to $400 for most people. Total spending could reach $50 billion or so, under some of the more popular plans being pitched to the incoming Obama administration. Why: Some analysts believe that aggressive action by banks could prevent 1 to 2 million foreclosures and accelerate the point at which the housing market—which is at the heart of our economic problems—bottoms out and begins to recover. And keeping people in their homes will help more consumers stay solvent, so they have money to spend to goose the economy. There are already some foreclosure-mitigation programs in effect, but they're mostly voluntary, with no overall federal mandate or umbrella.

Are they viable? Some homeowners are, especially those who still have a job but simply can't afford a sudden jump in their mortgage payment, due to an interest-rate reset, or others who were relying on refinancing to pay off debts but now have far less home equity. But some people bought far more house than they could afford and can't be helped.

What taxpayers would get: The aggregate payback to the economy is iffy, for a few reasons: If mortgage bailouts artificially propped up home values, that would just perpetuate the problem that caused the housing bust. Many of the most problematic mortgages are hard to reach, because they've been bundled into securities and sold off to investors. And homeowners who've been scrimping to pay their mortgages and don't qualify for a bailout might resent less industrious neighbors who do qualify. But helping people stay in their homes adds to social and economic stability and could help everybody a little by helping a few people a lot.

[See why it's easier to rescue banks than homeowners.]