Save me Superman: The Bailout Business

“I am not normally a praying man, but if you are up there, please save me Superman” said Homer J Simpson. That was fine, but when my friend Swami sounded similar, it caught my attention.

“Jigneshbhai, I need a bailout” Swami pleaded as we were having our customary coffee over the weekend. “I have been investing in stocks of so many businesses for the past 4 years and still have losses. I also took some personal loans for a few purchases. These stocks are not recovering. I need a bailout now.”

I was a bit amused over his plea, but resisted a smile. Perhaps Swami was serious.

“I will buy your stocks at a small discount if you want, in case you need money” said my broker friend, maybe sensing an opportunity.

Not quite agreeing with it, Swami retorted “Arre no, I need more money from you to buy more stocks. Hopefully they will make money, and then I will pay you later. Maybe you can charge me interest, but then, what’s interest among friends? Isn’t that what a bailout means?”

“Good, you are learning fast my friend” my broker friend commented with a sly smile. “But I am not for these kind of bailouts. I am for the creative destruction kind of bailouts.”

Puzzled and not quite understanding it, Swami said, “But big businessmen nowadays get bailouts. Why can’t you bail me out then?”

As usual, I was watching both of them slug it out on another issue this time.

“That’s because you bought the stocks of the wrong businesses. I will buy the stocks of those businesses if I see value, but will not lend you more money to put into already failed businesses and then wait in hope. I can bail out businesses, not businessmen.” Jigneshbhai said with a tone of finality.

I realized that the discussion was taking an ugly turn now.

“But General Motors and so many US Banks also got bailed out. European banks are getting bailed out. And now they are talking of bailouts in India also. So what’s wrong with it?” questioned Swami, not quite convinced and now getting visibly angry.

Jigneshbhai was getting into one of his moods now. Getting ready for what I thought would be the next round of conversation, I was all ears.

profitloss“Hmm. You know the difference? In some of those cases, the ownership of those businesses changed. They did not find any lenders or buyers, and because their failure would have caused larger collapses that would not be in national interest – well that’s what they said at least – the government became the investor of last resort. Not the best thing to do, but it was still ok I thought, due to exceptional circumstances. And they made a killing on it, by the way later. But in your case, you are not giving me any ownership” Jigneshbhai informed Swami.

“How can I give up my ownership? That is sell my shares? What will I do then?” Swami asked, quite disturbed by now.

Jigneshbhai got up to leave and said angrily “Nothing, do something else. Businesses start and businesses fail. Your investments failed. So if you can’t see it through, give up ownership of your share, take whatever money you get and go home. Else close it down. But don’t ask for bailouts.”

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