Submitted by Edward Harrison of the site Credit Writedowns
I like the fact that President Obama has drawn a line in the sand and signaled that no more funds will be given to U.S. automakers without their presenting a viable long-term plan for restructuring. Ultimately, the automakers cannot survive merely as a result of government largesse, but through the discipline of a competitive auto market.
In my view, the American automakers are viable companies which can produce cars that sell well. It is their poor operating cost structure and disastrous balance sheets which make them bankrupt organizations. This should mean they are prefect candidates for restructuring.
Nevertheless, other aspects of Obama’s treatment of the automakers are troubling. The dichotomy between how the big three automakers are being treated and how the big banks are being treated plus the sacking of a CEO at a critical juncture leave a lot of questions.
First, as to what Obama has done.
- The Obama Administration used the threat of withholding bailout funds from General Motors to induce that firm’s CEO Rick Wagoner to resign and its board to seek replacement members.
- GM has received 60 days to come up with a viable restructuring plan or they will face Chapter 11 bankruptcy. Chrysler gets 30 days to forge a deal with Fiat or they too face the same fate. The Obama Administration has indicated that it will help the companies with liquidity during this time, but will not give them any ‘bailout’ funds.
- Any bankruptcy will be heavily ‘directed’ by the Obama Administration to mitigate any fallout in terms of jobs, suppliers, regional economies or the broader American economy.
- Meanwhile, the Administration has indicated that it would guarantee any vehicle warranties offered by either firm on existing and newly purchased vehicles if either firm were to go into bankruptcy.
- The Administration has also made green car production, federal car purchases, an tax breaks for buyers a large part of helping increase demand for domestic vehicles. Very smart. The green emphasis is something the Germans have also done.
In short, the Administration is credibly threatening to withhold support for GM and Chrysler unless those organizations can create a restructuring plan that Obama’s people consider viable, the penalty for failure being bankruptcy.
This approach has several benefits. Here are a few:
- Taxpayers will not need to commit more money without the certainty that this money will be used effectively.
- The carrot and stick approach forces the unions, management and bondholders to the table because their best alternative to a negotiated agreement (BATNA) is clearly inferior in each case. Bankruptcy would mean significant losses for each constituency. That is the stick side of things. Simultaneously, if they do reach agreement, their concessions will be met with additional capital from the government. This is the carrot.
- Even if the parties cannot agree, the Administration can make sure that bankruptcy will not mean Armageddon for workers and local communities by taking a direct role in the proceedings. Moreover, by withholding funds until bankruptcy, the government will be senior to all other creditors including bondholders.
All in all, this seems like a difficult choice, but the right one.
But, is this not what should be happening with the big banks? Why the differential treatment here? Here’s my take. I see two reasons.
First, the Obama Administration suffers from cognitive regulatory capture. Former denizens of Wall Street are so ensconced in the Administration that they cannot but see events from a ‘Wall Street perspective.’ In effect, they operate like a horse with blinders. Their view takes as axiomatic the importance and needed continued existence of the big banks that they dismiss alternative workout solutions out of hand.
Second, the Obama Administration is well aware of rising populist sentiment. They understand that bailing out the big three automakers would weaken them politically as this would be seen as another outrageous subsidy to big business. However, Obama errs politically because the juxtaposition between his treatment of the big three and his treatment of the banks is obvious to everyone. the big three are seen as representing ordinary blue collar Americans. While the big banks are seen as Gordon Gekko-like rapers and pillagers of the robber baron class. This alone increases populist outrage at the administration. Effectively, Obama’s unwillingness to deal with the banks in the same fashion earlier has put him in a lose-lose situation.
Then there is the dismissal of the GM CEO and re-composition of its board of directors. While the need for someone to take ‘responsibility’ for failure has been obvious, the timing is questionable. GM is about to go through the most crucial phase of its existence. To subject the organization to the type of turmoil that a change in leadership entails at such a juncture is a catastrophic misstep.
Finally, the uncertainty surrounding the Big Three has led to a major selloff globally. In my view, this eliminates all of the positive momentum we saw earlier this month and after the Geithner bank plan was announced. Tactically, this announcement, then, has been another major misstep.
My conclusion, therefore, is that the Obama Administration has developed a fairly good plan here. It looks to force necessary concessions from all interested parties without bankruptcy. It is also still viable in bankruptcy. However, tactically, I see the plan as having misfired for the reasons enumerated above. And, this is unfortunate because this auto plan may end up weakening the Administration rather than pushing it forward.
40 comments
Comments are closed.
with all do respect:
Your article is clearly the work of someone who has had little experience in the real world.
“Hi, I’m here to interview for the job – you know, the one where I end up being CEO of major auto manufacturers, maybe some other major industries,… oh and maybe at some point all of the biggest banks in the world.”
“I see. And do you HAVE any executive experience?”
“Um… I was a community organizer once.”
“I meant executive experience – managing lots of people….”
“Well, I ran a big presidential campaign.”
“Did you actually RUN it?”
“No. This guy named Axelrod did. But I got up in front of crowds and read the speeches he wrote for me.”
“I see…. Any other professional experience.”
“Let’s see…. I gave some lectures at a law school as an assistant.”
Oh, dear…..
They seem to be more comfortable with the idea that they understand the car business. Thus they can afford to get rid of the Boss of a car company, but not a Wall Street Banking chief.
Highly unlikely. The end product may be easy to understand, but there is nothing simple about the modern manufacturing process.
Modern Manufacturing may not be simple but it certainly needs demand which is not returning to anything near prior levels. Demand also means the ability to pay something most economist seem to forget.
Thanks for your take Mr. Harrison you have captured Team Obama’s political plight, hopefully their tactics will improve.
Obama didn ‘t start the bank bailouts, nor GM, nor AIG for that matter. This is the first one he can put his stamp on, and the CEO is out, the company is being forced into bankruptcy, and will be restructured, hopefully without falling apart in the interim. Seems like there is a plan, and while so many seem eager to cr*p all over the socialization of business, it’s light years ahead of the ad hoc waste of Bush’s last year.
I am no big supporter of Obama, and certainly not of a Democrat controlled Congress, but this is about as good a move as he could make. If the government can force the UAW to make serious concessions, unions all across the country will have to deal with the consequences of their greedy contracts. Perhaps that is wishful thinking, but the U.S. needs to clean out all the junk and keep some productive assets in the country to remain a viable economy. Maybe it just ends up being a giveaway to the unions after all, but they took a hard line. Those that can give back to TARP funds will probably look to go even more quickly now.
I would add Ken Lewis should start packing up his office as well.
If nothing else, I think this does prove that Obama’s economic team can actually know what they’re doing when push comes to shove.
It gives me a tiny glimmer of hope for the banking situation, because it raises the odds, however small those are, that someone in the administration will throw up their hands, yell “Fuck it!”, and show the banks the same discipline that the automakers are being shown.
Thinking suicidal thoughts due to not getting a bailout or a gold-plated government pension? No worries – the Department of the Treasury is here to help you!
A Guide to Getting Through Tough Economic Times
Contains this beautiful nugget. God what a laugh.
The Department of the Treasury serves the American people and strengthens national security by managing the U.S. Government’s finances effectively, promoting economic growth and stability, and ensuring the safety, soundness, and security of the U.S. and international financial systems.
“It gives me a tiny glimmer of hope for the banking situation, because it raises the odds, however small those are, that someone in the administration will throw up their hands, yell “Fuck it!”, and show the banks the same discipline that the automakers are being shown.”
They’re not going to.
They’re screwing over the automakers because they primarily employ middle-class people that don’t give a lot of campaign donations. They’re not screwing the banks because they’re rich and they give lots of campaign donations.
Hey,
Is anyone home here, I need help with a Q, which may or may not be off-topic here.
Q: What corporate reports have been really good lately; did I miss something? I guess the word “encouraging” has pushed stocks up in a small unstable bubble, but what was that good news?
FYI: “The March rally was fed by economic and corporate reports that were starting to look more encouraging. Now, investors are taking money out of the market ahead of economic numbers this week and first-quarter earnings in the weeks ahead, fearing that disappointing data, including the government’s March employment report on Friday, will set the market back.”
Have to disagree with the assumption that labor has to give up anything in a restructuring. We are not talking about mid range investment banker whose annual bonus amount to 20 salaries of a auto worker. All the workers have is a decent low middle class income and social benefits.
Demanding any concession from workers amount to robbery.
“Have to disagree with the assumption that labor has to give up anything in a restructuring. We are not talking about mid range investment banker whose annual bonus amount to 20 salaries of a auto worker. All the workers have is a decent low middle class income and social benefits.
Demanding any concession from workers amount to robbery.”
“UAW concessions” was one of the six things the Obama administration said in his address that GM and Chrysler had to improve before the timeframe.
Here’s a Detroit Free Press article saying it.
http://www.freep.com/article/20090330/BUSINESS01/90330063
“The Obama administration has given the two automakers until April 30 to meet six key requirements in order for Chrysler to receive $6 billion more in government loans.
“Among the requirements, Chrysler must convince holders of its secured debt to forgive “the vast majority” of $8.9 billion owed them. Investors holding unsecured debt and equity, which includes Cerberus Capital Management and Daimler AG, must accept that their original investments are gone.
Chrysler and Fiat also must negotiate new concessions from the UAW, particularly on the trust fund created to pay health insurance benefits for UAW retirees.“
I know this is off topic, but WTF are these PIGS doing back in the trough?
‘Outrageous Threats’
Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes
“What disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters,” said Levitt, now a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.
FASB spokesman Neal McGarity said the proposal allowing significant judgment was “in the works prior to the Washington hearing and was merely accelerated for the first quarter, instead of the second quarter.” The plan on impaired investments “was an attempt to address an important financial reporting issue that has emerged from the financial crisis,” he said.
Mary Schapiro, sworn in as SEC chairman in January, testified to Congress on March 11 that the agency recommends “more judgment in the application, so that assets are not being written down to fire-sale prices.”
OINKING PIGS
Also see: Pile of non-OINKING PIGS, marked-to-market
Anon at 10:08
Very good points. But recall that Dingel really really annoyed a lot of Democrats by holding up their green agenda:
http://www.cleveland.com/nation/index.ssf/2008/11/californias_waxman_topples_mic.html
And the Unions tend to run foul of the Democrats desire to cater to the growing Hispanic vote. If the Unions would drop some of their protectionist rhetoric (which mostly protects non-union workers in the South) they would be likely to get far more of what would actually be useful to them in their recruiting efforts.
In any case, the net effect is that Michigan loses.
You know, we’re going to need that green agenda for the good of the planet and the future of mankind. So I’m not really opposed to the Democrats pushing for it.
“Very good points. But recall that Dingel really really annoyed a lot of Democrats by holding up their green agenda.”
With good reason, it’s idiotic. California’s so f*cking green that they’re going to ban cars painted black starting next year and that their electricity generation plants to provide everyone, you know, power, in Mexico because the NIMBYs used the green excuse to ensure it never got built. I don’t see how anyone can look at the enviro-nuts and think these people are positive for American prosperity. I read what they think and what they stand for and the only conclusion I can draw is: “these are rich limousine liberals that don’t like the fact there’s a middle-class that has jobs and so they want to chase every potential job these people can get outside of their area.”
There are so many things they have completely wrong. Like for example, do you know that the California-specific emissions actually decrease their cars’ fuel mileage? Since they have a tighter emissions level, the engine can’t combust as much fuel which means less emissions are created, but this means less fuel gets converted into energy to propel the car forward, which means we have to ship more fuel here from the Middle East, which then means that huge barge ship shipping all the fuel is putting lots more hydrocarbons and NOx into the air, all because of Californian rules designed to improve air quality they’re actually hurting air quality.
I’ve just tried to reason with these people, and I’ve come to the conclusion they don’t understand how anything works and just enjoy the sound of their voice. Like Al Gore. “Emissions are bad.” Yet you’re flying around the country in your private aircraft. Why didn’t the Democrats in Congress harp on him for that like they did the carmakers?
The author is mostly right on target. The refusal to fund GM and Chrysler is just, but to call it bad tactics politically entirely misses the point. Given the evidence, how can one assume that the Obama Administration enjoys the freedom to engage in “bad tactics”? Owned as they are by the financial interests as to economic policy and by AIPAC when it comes to the Middle East, is it fair to expect an unencumbered response. Why of course the banking interests are dealt with with kid gloves and Obama sits mute while Gaza and its little children are blasted to kingdom come. How else would paramecia like this be apt to deal with gift horses and extortionists? Would you expect courage or moral behavior from someone who’s so consistently proved himself incapable of them? Obama is an eel. Eels don’t qualify as moral agents.
whatever Obama and his cabal of crooks are doing, I’m fairly certain it is not for the public good. It looks to me that he has plans to sell off pieces to the mafia, and give the crap to the American taxpayers. Why else would he demand that Wagoner leave? Maybe he wouldn’t go along with “da plan”.
There is no Ford, Chrysler, GM in the USA. The executives that run these businesses (into the ground) care only about enriching themselves, paying off those in power and utilizing public assets for the global poker game.
These guys are crooks just like the ones running this country (into the ground). What kind of deal gets done between crooks?
“There is no Ford, Chrysler, GM in the USA. The executives that run these businesses (into the ground) care only about enriching themselves, paying off those in power and utilizing public assets for the global poker game.”
Then get out your gun and start shooting executives Mr. Anarchist.
Obama chose his bed partners and now he is goinmg to have to live with it. If this GM & Chysler fiasco blows up in his face the unions will crucify. Man of Change, Man of the People, My ASS!
He is no different then "BUSH" kissing ass to Wall Street! Who runs Washington? Jamie Dimon, Bill Gross and a few other Wall Street Oligarchs!
It just makes me sick, but at least Obama is now showing his true colors!
Regulatory capture is one key reason. Another is the complexity of the situation in finance. Very few people – indeed, very few Congressmen – feel up to the challenge of understanding how the financial system came apart. When the insiders come and say “it must be done this way”, they do it.
Everyone thinks he understands the car business, and everyone can has heard the story of the greedy, lazy union that wouldn’t work. Far easier to work up some backbone on safe, slow-moving ground.
More here:
http://tauntermedia.com/2009/03/30/rare-optimism/
And here I thought it was the financial services division of GM that led to its downfall.
Put a banker in charge of GM to tap the bailout monies. Making car can just be a second thought.
My conclusion, therefore, is that the Obama Administration has developed a fairly good plan here.
Yes, and the same should be done for/to … Blacks, who voted for him in overwhelming numbers. No more welfare, affirmative action, etc, until the ‘black community’ develops a “good plan” to do something about things like disproportionate criminality and incarceration, academic underachievement, out of wedlock births, welfare use, etc — you get the idea. Verifying the statistical validity of the above claims (“disproportionate”) is left as a reader exercise.
Actually, I don’t see so much a “plan” here as an ultimatum — coming up with a “plan” is what GM is supposed to do. All of which is perhaps not without justification. Like you I also wonder about the timing, if perhaps for different reasons — i.e. not because it has quashed the “positive momentum” in stock prices, but because it does not seem entirely reasonable to demand this in the middle of what could turn out to be the worst industry downturn ever.
…a restructuring plan that Obama’s people consider viable…
And I’m not so sure you want this lot deciding what’s “viable” and what’s not — e.g. “green car production”, whatever that is.
I suspect that what will follow shortly is something like:
Obama: This is how it has to be.
Gross: No.
Obama: Say what?
Gross: No.
Obama: Well then, I guess we will just have to come up with something else.
Gross: Yes.
GM/Chrysler is not my game but is would it not be reasonable to assume that it now is all about the size of the cuts that bondholdeers would have to take.
My guess is that we are watching a chicken race, Obama, vs. the bondholders. The former raised the stakes slightly by firing Wagoner. But that was probably an easy decision. Obama also controls the cash and can move the goal posts by setting deadlines.
Can anyone think another scenario that would help Michigan? – Anonymous – 10:08
Michigan could join Canada. We would love access to all that water.
Yeah, let’s bust the UAW, the institution that is probably most responsible for creating the post WWII middle class.
Yeah, that’s the ticket…
Hello, I am here to interview for the bank CEO position.
Yes… it says here your previous job was in the public sector. I find that distasteful, but to your credit, it says you were fired.
Yes. I was fired for lying to the public and stealing.
Excellent! Would you care to expound on that?
I don’t have to tell you anything.
When can you start?
This approach is kind of nonsensical:
– GM and Chrysler are crappy businesses, which were operationally in the red even during the bubble boom times.
– From the view of Michigan, they’re too big to fail. From everybody else’s point of view, they are already dead since how many months/years?
– GM in chapter 11 will be a mess. But still be able to produce the 4wheeled junk they’re making right now.
Now, let’s look at the banks.
– Citi or BaC do not have operating losses. They are just sitting on a pile of junk, which probably (most likely) isn’t worth as much as it would have to be according to regulation.
– FDIC-receivership should be a given but is just a theoretical solution. Because the process of receivership is geared to way smaller institutions.
Just listen to the 2nd part of this radio feature (This American Life – http://bit.ly/noCiti).
The FDIC comes in with massive man power, overnight, without telling anybody, with maybe a weekend to do the restructuring. Because otherwise, the outcome would be a pretty messy bank run.
Now try this on BoACiti:
– If you can come up with a quick solution on how to scale up this process 6.000 fold, with way more complexitiy in the involved products, structures and dealings, without leaking or just even hinting into the direction that receivership is round the corner, you should call Geithner ASAP.
– if you prefer a run on BoACiti, please provide a contingency plan, which doesn’t work like “whoever comes latest, please turn off the lights”
I’d like to see the IMF have criteria placed on it for new funding.
It should not cause a distressed country more distress.
It should not require any conditions that lead to higher unemployment.
It should not forbid a country from pegging their currency to gold.
It should not promote speculative attacks on a nation’s currency.
It should not require any public health programs to go private.
The IMF heaps money on dictators because dictators don’t care what they do. When the dictator is overthrown, and fair elections are held, the IMF is right there asking for crippling repayment of the dictator’s loans.
I was pleasantly surprised by the hardline taken on GM/Chrysler by team Obama save the ‘green car’ demand. I suspect reality got in the way of expediancy here though as the amount of money required to keep GM/Chrysler in their present configuration was just not available.
One might remember that the world’s
most profitable car company is not Honda, Toyota or Hyundai rather it is Porsche and Porsche does not do ‘green’. Let the car companies decide which cars ( and trucks) they are to build and simply require them to use ‘best available’ pollution and mileage technology on whatever it is they decide to produce. It is simply impractical to expect a 4X4 pickup truck that can tow a boat or backhoe to get 25+mph.By the same token if Chrysler or GM want to make a high performance luxury auto let them.
The notion that Congress or the president know what type of car will sell in the US is laughable. If they want to run a car company let them resign their offices and try it.
eh – youhave so serious anger issues that should be professionally treated.
Out of all the analogies you could have made about conditional assistance, you chose a racial one.
That’s your big problem? Do you think blacks are the cause of all the problems this country faces?
Like I said; professional help should be sought out, and I’m serious.
Anybody who read through the auto proposals would know that they were unsound. The recovery rate for vehicle sales was just not realistic with car loans never really returning to the levels they once were as predicted. Obama’s team is beginning to realise the bailout money will soon reach its limit and their will be no coming back to the trough again and again like AIG, Fannie and Freddie. FED and Treasury firepower is starting to look very constrained now.
anon at 10.08
this is not the first bailout- have your forgotten Toxic assets,Citibank ownership , the guarantee for Bof A, the ring fence around Citibank which admittedly didn’t happen on his watch but one that his treasury secretary was intimately involved. I understand the need for some Obama supporters to believe that all their efforts were not in vain and that they weren’t conned but lets not make up facts.
isn’t the reason that we have a market is that different participants can make their own judgments. So what if prices are written down to fire sale prices. Investors are free to accept or disregard that evaluation at least they know on what basis the evaluation was made. Somehow the alternative providing a number that investors have no way of knowing how it was arrived is better?
A big part of automotive company restructuring should be a broadening of their focus: cars (greener cars) and rail. In particular, passenger rail, high-speed rail.
Most commuter rail and passenger rail equipment has to be purchased overseas. No one makes that stuff here. Change that and use the expertise of the automotive companies to change that.
The obvious follow-on to this, of course, is to fire the CEOs of BoA, Citi, JPMorgan, and Wells Fargo. They are all corrupt, criminal, blind, incompetent f*ctards.
Michigan could join Canada. We would love access to all that water.
You know, last night I was fantasizing that scenario. I thought that a nice response to Obama screwing workers while coddling bankers and Wall Street would be for Michigan to hold talks with the Canadian PM about his feelings concerning Michigan seceding from the US and joining up with Canada. Better healthcare system, better government system (parliaments are superior to our nonsense…much more responsive to people, much more democratic with multiple parties possible).
Michigan should voice the thought.
I can read this brand of neoliberal drivel in any mass media source. What a disappointing post!
Edward Harrison’s proposal that we accept the premise that the Obama Administration has blinders on when it comes to financial sector restructuring, regulation, and enforcement is ludicrous. The policy players in this Administration are anything but ignorant. They know exactly what they are doing. What they are doing is actively allowing the looting of public resources by insatiably greedy private raiders.
In contrast to this Administration’s intentionally velvet-gloved handling of the FIRE sector, its approach to the flagging US auto industry seems suspiciously conspiratorial. Attempts to disembowel the UAW will further crush labor, the vestigial notions of civic obligations in the US and, therefore, democracy.
I don’t see how the administration could have kept Wagoner on. He was adamantly opposed to bankruptcy and would have continued dragging his feet while burning through billions more taxpayer dollars.
I suspect Obama is kneecapping the auto companies on purpose. They do need financial restructuring. They do NOT need Obama telling them, with his vast understanding of technology, what cars to build.
Obama declares the Chevy Volt is “not viable”.
Obama declares that CO2 is a no-compromise issue, thereby preventing us from getting better fuel economy with modern diesels.
So what are we to drive, hybrids? That’s just an interim technology until the battery problems are solved and plug-in cars are available (that is the Volt.)
Obama is making sure not to leave a viable long range technical solution for the car companies.
Same with his emphasis on only “shovel-ready” projects for fiscal stimulus. He is ensuring that we cannot re-engineer the country.
He’s kneecapping us.
“Would you expect courage or moral behavior from someone who’s so consistently proved himself incapable of them? Obama is an eel. Eels don’t qualify as moral agents.”
No, and I agree that Obama is an eel that tries to get away with whatever it can get away with.
However, at least some part of the Obama political team is much more in touch with political realities in the liberal-moderate-independent broad swath of the population that voted Obama in, and this political team does seem to have been able to clobber it over the head and get it swim in a generally appropriate political direction, *in order to save its own skin.*
This has always been a “just in a nick of time” operation, after an astounding amount of popular protest.
Let’s hope that when the eel next decides to save its skin, the Obama political team has a rescue plan for it that actually does the economy and financial system some good.
This should be some trick, given how liberals tend to be given to purely symbolic gesticulation–which will likely not be adequate this time out–and, yes, the eel did desperately need Michigan.
It’s not like there’s no political will to restructure our arrogant and bloated financial sector, with its new found welfare dependencies. Now, that’s a 50-state strategy if ever there was one.
So, we don’t need to turn eels into moral agents. It would be nice, however, if it would wise up and decide to save its skin a little quicker this time.