Management Consulting/organizational behaviour
The Great US Meltdown: Privatization of Profits, Nationalization of Losses
AIG, Bear Stearns, Freddie Mac & Fannie Mae required government bail-outs. Lehmann Brothers has
filed for bankruptcy. Merrill Lynch has been sold. Such grave situation of affairs reflects immense
failures in respect of management, leadership and regulation of these firms. The government, like a
knight-in-shining-armor, comes to the rescue and lends bail-outs worth a trillion dollars to these
companies. Consider the fact that only 12 countries in this world have a GDP more than $ 1 Trillion
and a country of more than 1 Billion joined this elite club only last year. This act of bailing-out using
taxpayer's money has been rightly called "The Bail-out of all Bail-outs". Also this raises serious
questions on the way money has been used to protect private companies, which was supposed to be
used for benefits of the society by large.
These bail-outs would certainly be a bitter pill to swallow for all those who argued that free market
capitalism was the best, and there should be no regulations at all in an unfettered market. And this idea
has been most certainly put to rest in the last few days with the US government curbing short-selling
and offering guarantees to money market mutual funds on 19th of last month, as it attempted to bailout
hundreds of billions of dollars mortgage debts. This follows the bail-out of three financial giants
early last month. The stocks soared in response to these actions. Though this certainly re-affirms the
requirement for regulations, but the question arises as to what extent this marks a shift towards more
It is a fact supported by many leading economists that history suggests that policy makers demand deregulation
during good times and bailing out in a big way at the times of crisis.
The present action does address the short-term problems of liquidity crisis and mid-term problem of
dealing with bad assets, but on the longer term regulatory issue, there is no strategic plan in place and
that is really problematic. What is required is a complete overhaul of present regulations and not just
more regulations. Moreover, the government rushed to rescue these firms without trying many of the
private sector solutions.
1 Is it fine to privatize profits and nationalize losses, is it right for organizational development ?
2 Was this a result of failure of leadership of these firms?
1. Is it fine to privatize profits and nationalize losses, is it right for organisational development?
As the United States Of America had to suffer sub-prime crisis during 2007-2008. Many home-owners defaulted in their payments causing Freddie and Fannie to suffer multi-billion dollar losses. The share prices tumbled by more than 90% and the investors around the world felt that these two firms might not be able to live upto the guarantees which they have to provide to the public.
It is somehow justified to “Privatize profits and nationalize losses” as the major companies(Freddie and Fannie) which required bailouts were US federal government entities and their guarantee was backed up by the federal government and in case of crisis the US government backed it with a gurarantee. Therefore the mortgage was a very safe option for the public.
It is somehow argued that to privatize profits and nationalize losses is not good for the Organisational Development of the companies as this might set up a bad example for the future. It encourages weak leadership and poor management. The organisations should access the risk associated with their functioning and should adopt a proactive approach to counter such problems. The assured government bailout would affect the organisational working which would otherwise have been different.
2. Was this a result of failure of leadership of these firms ?
The downfall of such huge companies is not just a failure of the financial system, but also a huge leadership failure. Excessive interest in personal financial goals as against the larger interest of the organization is one of the root cause of this meltdown. These days some managers are not that efficient and rely on reward and incentives. They believe that if they hire smart people, give huge incentives for personal results, the management of the firm would take care of itself. Under such circumstances, taking risks to achieve personal goals even if that puts others or..