Yes Virginia There is a Tooth Fairy – the US Government

Sorry to keep using metaphors related to my young son, but here we go again! And oh yeah we’ll get back to the reverse merger and smallcap world after this.

In a famous letter to the editor of the New York Sun back in 1897, a young writer asked: “DEAR EDITOR: I am 8 years old. Some of my little friends say there is no Santa Claus. Papa says, ‘If you see it in THE SUN it’s so.’ Please tell me the truth; is there a Santa Claus?” The famous response, written by newsman Francis Pharcellus Church: “Yes Virginia, there is a Santa Claus.”

Last night my 6-year old son was so excited to put his third lost tooth under this pillow and hope the tooth fairy would come to leave money and take away the tooth. While there have been many tooth disposal rituals over the centuries, today’s tooth fairy with her unique form of home invasion apparently arrived in the early 1900s. Recently when a friend asked my son if he believed in the tooth fairy, he said, “I think so.”

Well, my son, there is a tooth fairy. But today’s tooth fairy in our current economic crisis is the United States Government. What does the tooth fairy do? She gives you money for a worthless piece of enamel. Today’s government is ready to provide money for worthless pieces of paper. Yes there is and was a purpose- saving large institutions, whose own bad decisions and investments and pure greed resulted in the paper being worthless, from collapse and having many people lose their jobs. Yes some of us were scared after the collapse of Lehman Brothers when rumors circulated that venerable Goldman Sachs & Co. was in danger of dissolution.

But like any addictive drug, the bailout obsession is hard to resist. And once you start it is hard to stop. Some bailouts work – like the Chrysler bailout of 1979, which in the end resulted in the government making money from its loans. But that company had a plan when the bailout came. Many who are receiving funds now have no such plan. That is a little scary.

While it would be very sad to see jobs lost, as Congress debates the auto bailout, it is not clear to me how this is different from any other large bankruptcy situation similar to those faced by WorldCom ($103 billion in assets pre-bankruptcy), Enron ($65 billion), Texaco ($35 billion), IndyMac Bank ($32 billion), Delta Airlines ($21 billion) and most recently Lehman Brothers (nearly $700 billion!), which was left as the sole non-bailed out financial institution in this round. In bankruptcy, management is often replaced, debt is restructured, employee arrangements are adjusted and a new plan is developed to emerge with, as the accountants say, a “fresh start.” Or, if that is not possible, an orderly dissolution takes place.

A bailout does not provide any of these positive attributes. It simply encourages more of the same. Yes Congress is trying with the auto bailout to bring about changes. My take: the best way for these changes to occur is to use the protection carefully crafted by Congress over decades for troubled companies to seek relief from their debt burdens and get another chance through the bankruptcy process. Saddling our children with trillions more in government debt will not bring about change. Enough is enough.

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