Perry Glasser

Equity Shares, My Sweet Keister

In Business, Economics, Economy, Politics, Wall Street on October 25, 2008 at 1:24 pm

As the word economy circles the bowl, and such countries as Finland are simply going bankrupt, American Buccaneers are queuing before the Weasel-trough. The hope is to suck up some of the newest sugar, the notion that Citizens will “take equity positions” and thus save the perquisites of Buccaneers who in a better world would be facing hard labor in jungle penal colonies.
The idea is spun like this: in exchange for preferred equity shares, Citizens will receive a dividend and, at some future date when the equity shares will be worth more and the Easter Bunny comes calling, that position will be sold.
What could be bad? The idea has 3 selling points:

  • Corporation receive much-needed cash infusions at a time of crisis;
  • Citizens avoid the horrors of Evil Red Socialism, which would be like, you know, government ownership of key industries run for social benefit, a situation we cannot have because in America (just like Jesus and John Wayne would want) key industries have to be run for private benefit, unless of course the Buccaneers screw up, at which point we want public bailout BUT no public benefit;
  • As we navigate this rough patch in the ongoing growth that Wizards would have us believe should have no end, responsible Weasels may quietly restore a regulatory climate that will make the open seas a tad more difficult for unrestrained Buccaneer navigation. As former Wizard of the First Rank and Speaker in Tongues Greenspan testified yesterday, “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders.” Gee, Alan, you think?

Dollar$ notes that Citizens around the world are universally responding to the elixir of public equity of private industry by screaming into their phones, “SELL!”
As usual, blowing the smoke of Wizard and Weasel rhetoric away clears the air. The man behind the curtain has no powers we do not grant him ourselves.

The Cost.

The trough is filled with Citizen money. Only children and hermits recently emerged from caves believes the official Weasel Estimate of $700 billion. These folks could not lead a Boy Scout Troop out of a well-lit unlocked room. There are 300 million people in the United States. When the price tag creeps up to $1 trillion, our cost will be $3,000 for every man, woman and child in the US. Children do not work; for productive Citizens, figure the cost of digging Buccaneers a safe harbor is $5,000 each.

The Plan.

Selling equity to raise capital is what stock markets are for. Building a steel mill in your garage poses some challenges, and the capital required is far more than can be saved in a coffee can. Selling shares is a great idea, but Dollar$ suspects that forced sales to unwilling buyers (that’s you and me, Binky) are doomed. Someone, someday, will need to decide that the shares we are now buying need to be sold, but expect the future Buccaneers once again sailing on a deep sea of forced money to scream, “Nay!” They will pointedly ask, “What will be the effect of a forced sale of $1 trillion in equity?”
They will have a point. Somewhat like Georgie’s War on Goatherds, the current iteration of the bailout plan has no clear exit strategy.
Buccaneers are as likely to buy back their own preferred shares as they are to drink sea water. The key word is “buy.” One buys when things are cheap—not dear. If our Citizen equity has risen, what self-respecting Buccaneer will not prefer to payout 10 percent in dividends? If the shares go down…why Citizens get screwed as Buccaneers buy their way out of obligation? If our too-big-to-fail public portfolio cannot meet its dividend burden…who shall then bail them out?

Dividends?

Your local Weasel will protest that at least Citizens are getting something for their money, that juicy 10 percent dividend will flow into the Treasury for at least a decade.
Adjust your goggles—we are flying into smoke.
The US government is already a partner of every successful corporate venture in America. We call those dividends into the Treasury “corporate taxes.” It seems we already collect 36 percent of every corporate dollar in profit. In fact, over dinners of fine wine, aged steak, hash browns and creamed spinach, Buccaneers like to remind of us their noble role.
But remember: corporations collect taxes, they do not pay them.
From the Buccaneer side of a balance sheet, taxes are a cost of doing business. A cost of doing business is passed along to consumers. If you sell brownies and the cost of walnuts soar, you raise the price of brownies. If you sell airline tickets and the price of fuel rises, you raise the price of tickets. If your profits decline because taxes go up, you raise prices.
Look, Binky, the sad fact is that the only people who pay taxes are Citizens.
Ah-ha, some bright-light out there will point out that the price of brownies may be frozen by competition, and so profit margins will be shrunk even in the face of rising costs. Uhhhhmmm…maybe in an unfettered open market, the kind Weasels and Wizard and Buccaneers would like us to believe exists, the better to have us hand over our cash to them so they can lead us through the treacherous seas, but when “too big to fail” is the philosophy of the land, we are no longer in an open sea. We are in a bathtub.

DOLLAR$ Vision.

The bailout money we are paying to buy corporate equity in companies too big to fail will have never be recouped by the sale of that equity: there’s no market.
The dividends we are allegedly harvesting will in fact be paid by us in the form of higher costs.
Around the world, they shout SELL! for good reason.

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