Posted
by Bill Hoyt
May 6, 2009 at 9:11 a.m.
On the futility of bailouts
How to burn $7 Billion without breaking a sweat:
This revelation was buried within Chrysler's bankruptcy filings last week and confirmed by the Obama administration Tuesday...
"While we do not expect a recovery of these funds, we are comfortable that in the totality of the arrangement, the Treasury and the American taxpayer are being fairly compensated," said the official.
It's a good thing the American auto industry was saved back in December, that's all I can say. Because if it wasn't, Chrysler might be in bankruptcy and GM might be implementing a plan to wipe out their shareholders and turn the company over to its debtors, the UAW, and Uncle Sam. And we know from sworn congressional testimony(1) that these things would result in the end of America as we knew it. Or something. In fact, all $7 billion bought was 4 months for Chrysler at a cost to the taxpayers of almost two thousand million dollars a month. I wouldn't call that "fairly compensated," but hey, government guys are smarter than me and are expected to know these things.
But there is plenty of good news, though as is the press' habit they are making it out as a net negative. Chrysler is bankrupt, Chapter 11, but the only way out of their current troubles is bankruptcy, and so the sooner they get into it the sooner they can get through it. If they should manage to lose their current piratical management class in that process, they just might get back to profitably making cars people wish to buy.
GM is issuing so many shares (and reverse-splitting 1-100) that their current shareholders will be wiped out. But their shareholders deserve to be wiped out, and the company could do far worse than being owned and run by its employees. Hell, they already have done far worse, which is why it is functionally bankrupt in the first place.
It's even good news that Obama saw where this whole process was going and put the kabosh to it rather than stringing it along with more taxpayer money. Even he realizes that the taxpayers can take only so much such compensation. And there will be no similar newspaper "bailout."
It would be nice if Obama's willingness to cut off the life support meant that he learned a lesson that his predecessor never seemed to grasp(2) and which needs to be applied all across government: you do not avoid pain by putting it off, all you do it raise its price. If we had allowed Chrysler to go through bankruptcy in December, they would probably already be through the process. Instead, it still lies ahead of us and our children get to pay compound interest on $7 billion dollars in perpetuity.
Now if we could apply that lesson to the banks, we just might be able to avoid a Japanese-style, decades-long depression.
(1) Dominated by the critical issue of private jets.
(2) Or maybe he grasped it but was content to make the whole thing someone else's problem.
Comments
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alm77 (anonymous) says…
Hey, wait a minute. I thought the bank bailouts worked. My Citi stock is up, giving me a 32% (unrealized) gain.
But yeah, the problem with these auto makers is that their products suck. In capitalism, that generally means your company fails. I don't understand the need to keep them in business. Is this all about jobs and particularly jobs in swing states?
El_Borak (Bill Hoyt) says…
I don't think it's ALL about swing states, though that factors in. Part of it is pensions, which will be thrown back on the government after they are shed in bankruptcy, and part of it is watching out for certain communities that will be devastated because these industries are the major employer by an order of magnitude. One city losing 50% of its jobs is far worse than 5 cities losing 10%.
Part of it is that we innately know we need to to build cars, and subsidizing bad business is the easiest way we can think of to do that in the short run.
that_will_do_pig (Jenny Kratz) says…
Perhaps we could take tip from France, where Christine Lagarde, Minister of Finance, actually fired the leaders of some of their top banks, holding people accountable for the failure of such large institutions instead of putting billion-dollar, diamond encrusted band-aids on them. If we don't want huge institutions to crumble, thus crippling cities where they hold such a large stake in the labor force, could we at least look at how to restructure them and make them work?
The French have also weathered the global economic failure better than most of the other G-20 nations because they have such a stable benefits plan in place for their citizens--real Social Security benefits and unemployment assistance that has allowed much of its population to survive.
Of course, no matter how much I try to pay attention to the news and progress of this whole big economic mess, I was an Art History major... I can't pretend to know or understand much.
MyName (anonymous) says…
The reason why the auto industry is favored so much is because it's the end of a long job train starting with mining and steel and ending in auto parts and car factories and dealerships. But the reason they started to fail is not exactly that their product "sucks", though I think they were kind of lagging behind the Japanese. The American version of the auto industry was banking on a market where everyone wants lots of big autos. That also happens to be one of the areas with the fattest profit margins as people won't pay a premium for a 4 cylinder economy car, but they will for an SUV or coupe or some other car.
Needless to say, The oil shock hurt the big car business model *alot*. On top of that, I think they were expecting unrealistic growth. We're already approach a 1:1 person to car ratio in this country, which means eventually people aren't going to be needing more cars but are just looking to replace some of the ones they have. Finally, a car is a big ticket item, so it's the last thing people are going to be wanting to buy if they're cash strapped (like in a recession/depression scenario), which depressed sales for all automakers across the board.
The Big Three needed to change the way they do business a long time ago, and they didn't, which is the biggest reason why they're failing. But until we find something else that provides a long train of good jobs all along the supply chain, I think we're going to keep propping them up.
ladylaw (Terry Bush) says…
From another Art major - One reason France may be able to pay for so many benefits is that France's income tax is as much as 40% of your total income. Don't know how many people in the US will be happy about having to pay that much.... But the money has to come from somewhere........ http://en.wikipedia.org/wiki/Taxation...
El_Borak (Bill Hoyt) says…
MyName: "We're already approach a 1:1 person to car ratio in this country, which means eventually people aren't going to be needing more cars..."
This is probably the most important factor in the whole discussion, and yet it's one that is almost never mentioned. Nice catch.