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What’s good for General Motors would be good for the banks

Not your father's bailout: Deposed GM CEO Rick Wagoner
Not your father’s bailout: Deposed GM CEO Rick Wagoner

Barack Obama was halfway through his 18-minute address on the future of GM and Chrysler before he spoke the word everyone was waiting for: “Now, while Chrysler and GM are very different companies with very different paths forward, both need a fresh start to implement the restructuring plan they developed. That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger.”

So GM has 60 days to sing for its supper if it wants to claim a few billion additional dollars in federal aid, and Chrysler’s leash is even shorter: 30 days to consummate a shotgun wedding with Fiat, the only suitor in sight. By way of consolation, there is only Obama’s pledge that if you buy a Malibu or a Sebring and your seat heater breaks under warranty, the president will fix it. 

The surest sign of the auto industry’s decline is that its leaders were politically unable to leverage a deal that better suited their self-interest. Gone are the days when presidential cabinets were larded with auto executives like Charles Wilson and Robert McNamara; Larry Summers and Tim Geithner are from Wall Street, not Detroit, and no one could accuse them of failing to look out for their own.

Don’t get me wrong; reorganization bankruptcy indeed sounds like the best course for the car companies. The president made a nicely concise case for it: “I want everybody to be clear about this,” Obama said. “I know that when people hear the word ‘bankruptcy,’ it can be unsettling. So let me explain exactly what I mean.

“What I’m talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so that they can get back on their feet and onto a path to success, a tool that we can use even as workers stay on the job building cars that are being sold.”

This makes sense. Substitute “Citigroup and AIG” for “General Motors and Chrysler” and it makes even more sense. What the president has prescribed for the symbolic pillars of the old, manufacturing-driven U.S. order is precisely what economists from Nouriel Roubini and Paul Krugman to Joseph Stiglitz and V.V. Chari have called for in the financial realm under the headings of nationalization or bankruptcy reorganization. Take the pain now; toss out the discredited management regime; get the bad debt off the books; and get on with the future.

I’m sure there are those eternal optimists who would like to believe that pushing the automakers into Chapter 11 is a precursor to the more delicate problem of doing the same with financial companies. Didn’t Geithner propose just last week to give the feds authority to take over non-bank financial institutions? The trouble with this outlook–wish, really–is that this administration has already spent too much money and too much political capital denying the reality of the situation to change course now. If and when they are finally forced to go there, it will be a matter of last resort and likely far too late.

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Comments (5)

  1. Submitted by Glenn Mesaros on 03/31/2009 - 08:54 am.

    “Call it Uncle Sam’s hedge fund,” Robert J. Samuelson wrote in today’s Washington Post. “The rescue of the American financial system proposed by Treasury Secretary Timothy Geithner is, in all but name, a gigantic hedge fund.” “‘Leverage’—borrowing—helped create this mess. Now it’s expected to get us out,” he said.

    The Geithner hedge fund scheme supposedly allows the buyers of bank assets to borrow $6 for every $1 they invest, but the real leverage is 12:1, since the Treasury will also kick in a dollar for each dollar the buyers invest. For example, a private buyer puts up $5; the Treasury will then put in $5, for a total of $10 in cash up front, and then the Fed lends the buyer 6 times that amount, or $60. That gives the buyer a total of $70 to buy assets from a bank. This is called 6:1 leverage, but the private investor is really able to borrow $60 off a $5 investment, or 12:1. If the assets turn out to be worthless, the buyer will lose his $5, and the government will eat the rest.

    As the New York Times put it March 25, “the point of the exercise is to stir up a bit of greed and animal spirits, the lack of which has been holding the economy back.”

    You do have to admire the brilliance of whomever dreamed up this scheme to pay a bunch of greedy rich parasites to be even more greedy. We’ve all noticed the shortage of greed these days, haven’t we? After all, it’s not like we have banks and wanna-be banks lining up like pigs at the trough to gorge themselves on public money, and derivatives traders demanding huge bonuses for blowing up the world! None of that going on around here!

    Greed, we’ve got too much of already. What we need is some honesty, and some protection for the public. What the Obama Administration should—must—do, is to quit trying to lure gamblers back into the casino, and instead shut it down. The President’s job is to save the nation, not the cancer.

  2. Submitted by Annalise Cudahy on 04/01/2009 - 12:33 pm.

    I think Paul McCulley at PIMCO was the most prescient: The best economic solution isn’t politically feasible.

    When we’re talking about policy, I think it’s best to not simply criticize but to propose a genuine alternative. IF we are to wind up owning the largest banks in the nation, we have a very serious problem. I outlined here a few weeks ago the way around it, and it’s still on my blog: give it an appropriate framework for the long haul. In this case, I the insurance for the industry is the way to go, and offers a way that the money necessary could be paid back over time. I still have this up on my blog under “Underwrite”.

    Simply saying we have to buy out the whole financial industry is not constructive. It can’t happen blindly, and that should be obvious – there are major problems. Real policy has to take these difficulties into account. The ongoing fascination with Krugman is bizarre, especially since Krugman has never shown any interest in crafting real policy.

    I believe that the magnitude of this crisis is becoming apparent to just about everyone, finally. That’s good. Hopefully we’ll all take the next leap towards realizing the leadership and methods that got us into this mess are unlikely to get us out. If we know what we have to do, that’s great – so let’s focus on what makes it damned hard to get done.

  3. Submitted by donald maxwell on 04/01/2009 - 12:51 pm.

    Steve Perry has it right. Wall Street needs to be downsized, to something less than half its current size. Our real economy cannot support a financial sector so overgrown.

    Do we really count transactions by traders of derivatives and related junk securities as part of our national product?

  4. Submitted by dan buechler on 04/01/2009 - 05:56 pm.

    On an unrelated matter if you want to see some truly disturbing news google the website atlas shrugged. Bachmann is on it but much more importantly there is a great deal of antiislamic blogging and a full picture of a MN judge who ruled against gold n plump in favor of religious pray time.

  5. Submitted by Carol Overland on 04/02/2009 - 11:17 am.

    Yes, what’s good for GM is good for the banks. Bailed out bank CEOs: YOU’RE FIRED!

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