Submitted by Edward Harrison of the site Credit Writedowns.
I was on the BBC yesterday talking autos and my commentary was almost entirely political. So, as we await the likely General Motors bankruptcy, I think it bears discussing how political this process has been and will continue to be.
General Motors is a monster company employing a quarter million people worldwide. It sells $150 billion in cars – or at least it used to. It is not just a producer of vehicles. It is also a supplier. It has been through several joint ventures and has owned a number of foreign manufacturers, Isuzu and Opel being but two. In short, the company is a very big player, financially, economically and politically. Yet, somehow you get the impression that many in the financial media think we could just turn the lights out and go home. Witness the video below of CNBC anchors Mark Haines, Erin Burnett and Phil Lebeau and a trio of auto analysts trying to impress upon Haines how important GM is.
The GM bankruptcy is a very big deal and will have wide-ranging implications. Let me review a few of the issues here starting with the politics.
2010 elections
In the U.S., we have just witnessed an historic election that some are comparing to the election of Ronald Reagan in 1980 and Franklin Roosevelt in 1932. Indeed, there has been a sea change in the political climate here in Washington since January, with the Democrats and their agenda taking precedence over the Republicans. But, none of that is going to last if we don’t see a recovery that lasts through the mid-term elections in 2010. And that is already very much on the minds of politicians in Washington. Here is the calculus.
In 2008, the Democrats benefitted greatly from Barack Obama’s election as President, taking large majorities in both houses of Congress. Their mandate was to work with the President to fix America’s economic problem. So, Obama’s and Congressional Democrats’ first priority is to end the recession as quickly as possible. I guarantee you there would be hell to pay if this is not done well before November 2010 when the next general election is held.
From Obama’s perspective, it is crucial that he fix the banks and fix the auto industry as these were the two economic issues front and centre in the election which he said he could tackle. With the banking industry stabilised, the Obama legacy rides crucially on how the Auto Bailout proceeds. Under no circumstances is the Obama Administration going to allow General Motors to do to the economy in 2009 what Lehman Brothers did to it in 2008. They are going to fix GM no matter what it takes. And if this includes heavy-handed tactics, so be it.
So, be very clear that the GM and Chrysler issue is an existential question for this administration. Handle it well and you get the Roosevelt treatment and ensure a good outcome for your party in 2010. Screw things up and the depression bears down on America and you’re out of office in due course. The key policy decision is how to ensure a favourable outcome. And when I say favourable, I mean one that ensures as many jobs as possible while minimizing any wider economic fallout. Other issues like treating bondholders well, not committing taxpayer monies to the effort, or keeping government out of the auto industry are going to be much less important.
German General Election
And if Obama is concerned about his political fortunes because of an election next year, you can bet that Germany’s Chancellor Angela Merkel is concerned given her election is later this year. In Germany, cars have a mythical status. The Autobahn was begun in the Depression as a way to jumpstart the German economy. The first such road was completed in 1931 between Bonn and Cologne, a road I drove I have driven at least 2 or 300 times (it is a great road for fast driving, by the way, and was opened by Germany’s first Chancellor Adenauer when he was Mayor of Cologne. I believe the Bonn Porsche dealership is literally a few hundred meters from the entrance). Shortly thereafter, also during the Depression, the Germans began the car company Volkswagen (literally “the people’s car”) as yet another car-oriented way to jumpstart the economy.
Today there are hundreds of thousands of jobs in Germany tied to the auto sector, which has huge importance in the Rhineland, Germany’s industrial heartland and part of the most populous German state North Rhine-Westphalia, as well as in Lower Saxony, Bavaria, and Baden-Württemberg. In short, destroying auto jobs is a sure-fire way to lose an election. The ruling coalition is keenly aware of this and that is why they too will be very involved in the GM bankruptcy as it affects Germany through GM subsidiary Opel.
Below is the video of me discussing this yesterday on the BBC (I know I should put these videos up more often, so I promise to get a hold of the footage or audio whenever I do a media appearance).
And I haven’t even mentioned the politics in Sweden, the U.K., Austria, Canada or Italy where this expected bankruptcy is equally important.
As for the finance side of things I only want to highlight a single issue, credit default swaps. Back on April 30th, I wrote an article called “CDS contracts and the implosion of several Eastern European economies.” In it, I argued that the ‘insurance’ of credit default swaps changed creditor behaviour in a way that made bankruptcy more likely. I also warned that credit default swaps were going to be an issue in the Chrysler and GM bankruptcies (for a German-language take on the same, see Blicklog’s “Warum Gläubiger von GM ein Interesse an der Insolvenz haben“).
Think about this for a second: what if CDS contracts were exchange-traded? Then, we would know exactly who held what CDS exposure. So the motives of creditors would be made much more transparent and I believe this would help to prevent bankruptcies. The likes of Whitney Tilson, managing partner of the hedge fund T2 Partners, have been making similar noises of late. If any financial reforms do indeed result from this financial crisis, my hope is that this be one of them.
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Edward Harrison: Under no circumstances is the Obama Administration going to allow General Motors to do to the economy in 2009 what Lehman Brothers did to it in 2008. They are going to fix GM no matter what it takes. And if this includes heavy-handed tactics, so be it.
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Rattner, Rahm, and Obama better retain criminal defense counsel before they take heavy handed actions against creditors. For example, pretty much, it is a criminal act for staff of Obama or Biden to request an IRS audit, punishable by up to 5 years in prison, and pretty much, it is a criminal act to threaten to make such a request. And there are other restrictions on using the SEC and other regulators against GM creditors.
The attack on GM/Chrysler is merely the most immediate and potent implement at hand with which to cudgel, and eventually demolish the UAW, nest paw?
Pretty much all the rest is window-dressing.
The Auto makers earned the wrath of the FIRE community by coming out for Universal Single Payer health coverage. It was their death sentence…
I am sympathetic with the upholding the law rhetoric regarding the bondholder issue, but there just seems to be this unseemly smell about it as well.
I think it is because it oversimplifies the moral and social aspects of our mutual agreement as a society to abide by laws. The law is the principle we bind ourselves to rather than a despot. However, we also construct the law with our innate feelings as a society about what is right and wrong. And we unintentionally create contradictions and make mistakes because we are human. It is also a moral fact, I feel, that not all laws are equal. What do I mean by this. Well, using hyperbole, would we insist on enforcing the letter of the law regarding bondholders if it meant somehow the accidental death of 100,000 people? I think most would think this a justifiable reason to abrogate the contract. It would not be RIGHT to enforce it in that case. Now, what about the impoverishment of 100,000 people, a few suicides, some hungry kids that grow up bitter, a longer depression etc. Maybe not a no brainer, but probably deserves adult discussion.
Now am I suggesting all law is “flexible” at the same level? No, it’s a difficult and gray area about right and wrong and what we mutually agree to as a society.
For example, I for one put the right of habeous corpus at a higher level. I think it is a law worth the sacrifice of lives and prosperity. It just seems more fundamental.
And from a purely personal emotional point of view I am watching a bunch of rich and powerful defend in my view completely despicable positions regarding derivatives and how they should be regulated or not deride workers who are aggressively defending there very livelihood. They actually face poverty and the degradation of unemployment.
I think that unseemly smell is the intellectual cowardice of not addressing the difficult, gray, and yes moral questions regarding how our business law is constructed, what is best for society, and an ongoing economic catastrophe. It is easy to take a black and white position behind enforcing any law, good or bad.
I have similar, but not completely analogous, feelings regarding the efficient market hypothesis (religion) and its use to justify appallingly selfish behavior while deluding oneself it is for the overall good.
In all these cases, for investors, workers and politicians, it is clear that the defending some aspect of law and the defending what THEY feel is right and the defending one’s SELF INTEREST seems to be getting conflated in peoples minds. Also unseemly but unavoidable because we are human.
In short, the purely legal argument is naive. It is just not an easy straightforward question.
Yves,
I agree that the Obama administration will keep GM on life support but as a practical matter, of course, GM is dead. Chevrolet (i.e., Camaro and Corvette) will live on as will Cadillac, but Will Durant’s company is dead and gone.
The Obama administration doesn’t care about this reality because it wants to “save jobs” so it will continue to pump money into GM — government “ownership” of a dead company will, by definition, inevitably entail taxpayer support of it.
The thing is: most Americans don’t want this. Repeated public opinion polls unambiguously show that the people don’t want continued auto bailouts and in general are leary of the government running a company.
Further, the economy continues to hemorrhage jobs to a tune of 500K per month, with no end it sight. By late ’10 national unemployment will be around 12% — in Michigan it already is 12%.
Bottom line: the Obama administration is pursuing a public policy that a majority of the public doesn't support and that won't get the results that the administration is looking for anyway.
This doesn't sound like the Obama administration is going to "handle it well" — I can't imagine 2010 and 2012 going well for Obama & the Dems.
First of all, when the President does something, it’s always legal. Just ask any President from Nixon to Bush. So Obama can choose to take whatever actions he deemed necessary unless for the ones that need approval from Congress. As we can see now, Obama is bypassing Congress and Congress is letting Obama bypass them. So everything is legal.
Next public opinion might show the population not supporting bail outs for bankrupt auto companies; the public still prefer the 1.5 mil employees (who are in one way or another relied upon GM), to keep their jobs rather than lose them. When forced with a choice, the people will choose jobs and therefore will support the bailout.
Obama’s popularity is still above Heaven. The only group of ppl that are unhappy with him are the identified Republicans who shifted either from positive or neutral to negative. In this case, it’s a moot point as they are now the minorities.
Finally Obama is still learning. The voters had decided to choose a novice candidate and therefore have expected Obama to have a bumpy ride for at least the first year. To Obama’s credit, he’s learning fast and that’s a good thing. A leader has to be decisive in order to tackle this economic mess and Obama is a decisive leader. We might not agree with his means as it will reward greed and might cause another huge economic crisis in the future, but for the mean time, the end result could be a positive one.
Woody,
The Auto makers earned the wrath of the FIRE community by coming out for Universal Single Payer health coverage. It was their death sentence…This interests me enormously. Could you provide more information, a link or source. Thank you.
Many angles to the declining auto industry and its political impact but its more immediate problems is selling expensive cars and trucks to an aging population that is suffering large drops in its pension,stock and employment prospects. Washington D.C. is still living in the past trying to create another consumer lending bubble based on confidence and hope which will have a very short shelf life but spinning the idea that change will generate a return to living the lavish life style that all Americans desire will probably keep the Democrats in power longer then we can imagine.
LeeAnne said…
Woody,
The Auto makers earned the wrath of the FIRE community by coming out for Universal Single Payer health coverage. It was their death sentence…This interests me enormously. Could you provide more information, a link or source. Thank you.It was something I heard Chomsky say to Amy Goodman, the last time he was on her show, mebbe 6-8 weeks ago, now? Tempus fidgits, and I do not recall exactly. But it will be in the archives of Democracy Now, I am sure…
Obama could and should have stepped in actively for the Big 3, and ordered all departments, divisions, bureaus, committees etc which used such machines to immediately replace the oldest 20 or 25 % of their fleets with new cars, from the existing stores of vehicles on dealers’ lots.
There woulda been some vicissitudes with such a program, but it could have been done, and it would have saved a LOT of jobs…
Woody:
Replacement of cars is another short term bandaid which would last how long for three companies able to crank how nmany million cars per year?
The correct course of action would have been for Chrysler, GM, and Ford to continue the downsizing with UAW, salaried, and hourly workers being the eliminated as a result of the reduction. Obama pushing them into bankruptcy has made the problem more complex requiring drastic actions.
Furthermore, does anyone believe the UAW was the cause of all of this?
“Furthermore, does anyone believe the UAW was the cause of all of this?”
Why yes, yes they do! I’m wondering if lead pipes are as prevalent here as they were in Rome…
So many people ready to quote chapter and verse King Larry Kudlow’s version of reality.
Meanwhile, back in Michigan, my retired parents lose their dental and vision coverage in just over a month.
But, of course, according to the blowhards on msnbc, “let them return to work, even if unemployment is at 12%…”… even though real unemployment is at 20%.
This doesn’t end well.
GM, Chrysler and ford were selling car loans that came along with a car. This makes them banks. See GMAC, half “owned” by Cerberus and the rest of the ILC’s attached to GM, Chrysler and Ford. They are now bank holding companies if I remember correctly. I also think they all had access to the commercial paper windows that the fed/treasury set up for the banks.
They were making lots more selling loans than cars. Parts and maintenance were probably close to the most honest part of the business. It will survive, and continue to make money.
Car loans are a banker’s wet dream, you can tow a car- you can’t move a house. Community bankers have been complaining about the ILC’s for a while now. The ILC’s took all the high margin low risk work away from the local guys.
My one off the wall thought is that they are going to steal the UAW pension funds to save Penny.
They have a good number in the account, what determines when penny takes over? Penny could cut benefits and keep the cash that is there. That might make them look a lot better on paper.
Labor law is very tedious, but how does the uaw go BK?
On the CDS thing-why would you be able to see who was holding what if they were on an exchange? Look at equities, is that possible with them now? I don’t think so….
GM/Chrysler bonds have been trading at monster discounts for a year. The bond market told you these two were toast in September. Based on the turnover in the capital structure over time I would think that very few ‘original” creditors are now involved. If there are any widows and orphans who bought this crap at par and still own it, well, I feel sorry for them but they represent dumb money.
My point is that the corporate bond market is like the stock market. The price action tells you what will happen next. It is a very healthy part of the system. Investors can always vote with their feet.
Yes, it is a game of vultures. But the vultures play a very important role in shifting the risk from the dumb money to so form of restructuring.
Putting on some screen who owns what CDC positions will defeat this process.
Some of the rules of the market that have worked for the last 50 years or so should be retained. If you are going to be a vulture you have to have the ability to keep your cards very close. You would not play that game unless you could be ‘invisible’.
Ed, I can not believe that you would be an advocate of eliminating shorting in the stock market. Posting CDS positions is not much different.
bk
Bruce, all I am saying is that the CDS market should not be over-the-counter. It should be regulated like other derivatives markets. Doing so would mean that regulators would know who has what position. You and I would not know, but regulators would and that is a good thing.
Ed, Fox Biz has had a Freedom of Information suit against the Fed for 6 months. Fox wants the details of the Feds holdings. (so do I). The Feds counter argument is that disclosing that information would injure its ability to sell what they own. The Fed is using the argument that I try to make.
You play poker? You don’t show your cards in that game either.
There is no such thing as Public Records that do not become public…
I fully support Bloomberg’s suit (I am not familiar with the details of Fox’s). Transparency is key here when it comes to public money. It is also key regarding financial markets. Just because regulators know who holds what, doesn’t mean it becomes public. This is true at the NYSE or the CBOE and so on. Let’s get these OTC derivatives on an exchange.
Bruce,
The faux news is seeking information for the treasury, not the fed.
http://www.foxbusiness.com/story/markets/industries/government/majority-treasury-docs-secured-fbn-foia-suit-blacked/
They asked, the fed and treasury rejected it, and faux sued the TREASURY. I guess they forgot about the fed, there is no indication that they are suing the fed. It still looks political and truthy. If they were serious they would be suing the fed too, as Bloomberg is.
http://thefoiablog.typepad.com/the_foia_blog/2009/03/fox-news-discovers-the-foia.html
good quote from that last link-
“I’m not excusing the government here, but as those of you who follow the FOIA know, this is not a problem that began to occur on January 21, 2009. It has been occuring since the FOIA was enacted and was made worse on January 21, 2001 by an administration that didn’t really care about transparency. On behalf of the rest of the FOIA community, I say to Fox Business Network, “welcome to our world.””