A Bit of Bailout Sanity
Posted by Jeff Pruitt - 3/31/09 @ 9:46 am - Filed Under National Politics
I’m not sure who’s on the administration’s auto task force but they actually have some common sense unlike our current treasury secretary Tim Geithner. In fact they should fire Geithner and put these people in charge of the bank fiasco.
About 6 weeks ago GM and Chrysler submitted their long-term viability plans. Neither of which showed they had any chance in hell of becoming viable in the long run. Here’s what I wrote at the time (more detail was in the full post):
Chrysler’s plan is lame. The document they released is about 4 pages long with next to nothing in detail. I guess they didn’t want to write the truth - they are bankrupt and have no hope of long term viability.
GM’s plan is much more detailed but the analysis is the same - they are bankrupt. Their US industry sales assumptions are ridiculous. They conveniently assume that the market bottoms out in the 1st Quarter of 2009 and gradually builds back up to bubble-economy numbers.
Now I’ll admit that I didn’t believe the government would say that these plans did not show viability. I fully expected this to be an exercise in futility where the government would say “see, they are now poised for success” or some other lame response. So imagine my surprise when I read this from the administration’s auto task force report:
The plans submitted by GM and Chrysler on February 17, 2009 did not establish a credible path to viability. In their current form, they are not sufficient to justify a substantial new investment of taxpayer resources.
Well, well, well - a little honesty is quite refreshing. And firing the jackass who ran the company into the ground was a good first step too, something Geithner has refused to do to his Wall Street buddies. But this is only part of the problem. I think everyone realizes that GM’s liabilities are simply too large and they must go into bankruptcy. But since the administration has been unwilling to restructure the banks I certainly didn’t expect to read this:
While Chrysler and GM are different companies with different paths forward, both have unsustainable liabilities and both need a fresh start. Their best chance at success may well require utilizing the bankruptcy code in a quick and surgical way. Unlike a liquidation, where a company is broken up and sold off, or a conventional bankruptcy, where a company can get mired in litigation for several years, a structured bankruptcy process - if needed here - would be a tool to make it easier for General Motors and Chrysler to clear away old liabilities so they can get on a path to success while they keep making cars and providing jobs in our economy.
People need to realize how important this statement is. Right now bondholders have been unwilling to take a loss in order to help these companies restructure. Their reasoning is that they don’t believe the government will allow these companies to fail - a classic example of moral hazard. They fully expect the government to bail them out and pay the bondholders at 100%. This is problematic for the auto industry because the unions (and others) are willing to renegotiate their contracts but only if the bondholders take some losses too.
The very best thing the government could do is put GM into bankruptcy and make the bondholders eat it. This would send a clear message to everyone that their junk bonds are no longer backed by the government and nor should they be. This will also force the private sector to begin restructuring their debt without government intervention. Of course it will shock the market to no end but unfortunately that probably needs to happen to get things back on the right track.
The only question I have is how can Obama listen to Geithner and this auto task force when their approaches to similar problems are completely diametric?
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8 Responses to “A Bit of Bailout Sanity”
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Jeff-while I agree that GM has been badly managed(for at least 50 years-not just since Wagoner)I don’t know where Obama and his crowd get the authority to force resignations of the Chair and several board members without either an ownership stake in the company or the force of bankruptcy under a federal judge.I don’t disagree that the ultimate only solution is probably a structured bankruptcy since neither the bond holders nor the unions seem willing to make concessions. The unions simply can’t believe that the administration they helped buy and pay for would sell them out !!
This whole bailout,forced resignation of corporate officers,punitive taxation of legal contracts,taxing “the rich” to pay for improved lives for illegal aliens, etc are to me the latest steps toward not only socialism but out-and-out anarchy ala Mussolini and Hitler. I am gravely worried not about our prosperity but about our system of government and freedom when I see stimulus packages to fund ACORN and similar groups and Obama’s proposals for an Americore(sp)group to act as a “civilian police force” !!! Of course there will also be a move for federal registration of all private arms followed by confiscation like in Britain and Australia and the subjugation will be complete. Once a set of constitutional rights are violated it is easy to violate them all(like the local police confiscating cash from non-violators af any law)
Lockwood,
They didn’t force anything. These guys came hat in hand to the government because they have nowhere else to go. They are asking for a “loan”. The condition was the management had to go. GM could’ve just as easily said no thanks and went on their way. They were not forced to do anything.
The union leadership has stated that they are willing to make concessions if everyone else does and specifically the bondholders. To date, those bondholders have refused because they believe the government will make them whole regardless of what happens.
I wouldn’t call WWII Italy and Germany an anarchy - quite the opposite but that’s not really material to your point.
I share some of your concern here. But I wonder where the right-wing outrage (not speaking specifically of you here) was the last 8 years. Neither party seems to believe in civil liberty any more. I fear it is dead and gone, never to return…
Jeff and Lockwood:
For starters, Ron Gettelfinger should be asked for his resignation as well, he’s just as culpable as Wagoner. To-date, the UAW has not agreed to any major concessions, they’re dragging their feet in the hopes that the “O” administration will overlook this issue. FTR, no person in the Obama administration has said diddly about the UAW making concessions, and they won’t. If they (the White House, et.al.) want a fresh start, get rid of Gettlefinger as well. Shit, (SEIU) Service Empoyees International Union President Andy Stern said now that Wagoner is gone, Bank of America CEO Ken Lewis should be next. Why not the union chiefs?
Gettelfinger handled the negotiations that kept Goverment Motors sacked with costly benefits programs and protected higher-paid, long-term employees from the cutbacks set in place for new workers. That’s not concessions. He’s merely protecting the current worker base, which is where the high cost is associated. Keep on thing in mind here, GM isn’t hiring anyone. Concessions for new workers is smoke and mirrors. GM pension funds are under-funded by about $12.4 billion. Gettlefinger and Wagoner both had a hand it that.
GM is paying current workers a combined total of $73 an hour, factoring in benefits like health care and pension payments, or $584 a day. Honda and Toyota pay about half that. Where’s the concessions? If these people really want to keep their job, it’s time to come to the table with a reasonable offer. If the feds think they can break the AIG employment contracts, what is the difference in breaking a UAW/GM contract? Nothing. Oh, well wait a minute. Most corporate executives are republicans, and most UAW members are democrats. I get it now.
Jeff, the last 8 years are over. Not many people are happy with them, and as a republican I can tell you I wasn’t happy with the last 2-3 years of the Bush administration. But it’s over. Why kick a dead horse? It has nothing to do with the assinine moves that Obama has been making.
1st of all, NONE of these companies (finance, insurance,auto) should have been given a dime by the US government. Period. By letting Uncle Sam in, they queered capitalism as we knew it.
My belief is Der Leader is just putting the last few “squeezes” on GM & Chrysler management and making false noise about any union concessions.
This is far and away his golden opportunity to foist the green car agenda on us and protect the unions. Period.
Mark my words, unions will not make “measurable” sacrifices, the company will go through a “controlled” bankruptcy (not controlled by a bankruptcy judge but by politicians-just brilliant) and the company will emerge owned primarily by the federal government building electric and hybrid pieces of union made shit.
You think the BMV and the post office are frustrating? Wait until you need to get warranty work done on your Obamacar.
This isn’t about economics anymore, it’s about social engineering on a grand scale, and I’m wondering now, is this the “Hope-n-Change” ya’ll had in mind?
Dan,
That just isn’t true. The UAW has already made concessions with Ford and the administration has stated their restructuring targets for the union. Here’s the text from Loan Service Agreement the Treasury put in place with GM:
Some of the other targets were:
How could you not consider that to be asking for concessions from the union? Heck it was an administration requirement for GM in their latest report:
And since that clearly didn’t happen the auto task force wrote this:
As to your main point maybe Gettelfinger should be asked to resign - it’s not like he’s been doing a real bang-up job. But the real point I was making with this post was that FINALLY the Obama administration is making sense and moving in the right direction. The auto task force report is very blunt and I don’t think anyone reading this blog would quibble with their findings.
It’s an honest assessment that essentially says bankruptcy is likely the only solution. I suppose one can quibble about how this bankruptcy transpires but that’s a different argument…
Tim,
Can’t quibble with you there. But that ship has sailed. I just want us to stop the madness as soon as possible. This auto report, if followed (which is a big if), will do just that. Unfortunately the finance sector is still under the control of Geithner who is completely out of control…
Obama made the point that the (hard) workers had made big concessions and were not to blame for the demise of GM (and Chrysler). BS! The UAW has had the automakers in a stranglehold for decades and whatever concessions they made came way too late. GM management and the UAW sank the ship together. It was inevetable but you couldn’t convince them to change until it was already under water.
The public education system and the teachers unions should take note. They’re sailing on the same course.
[...] digging our financial woes deeper is to hammer the bondholders of failing institutions. Here was my previous comment regarding GM and Chrysler: Right now bondholders have been unwilling to take a loss in order to [...]