Bailout Bingo

Bailouts remain very unpopular with voters, expecially the conservative Southern voters on the wrong side of the last election. That fact, more than ideology, explains the Republican Senators decision to torpedo the Auto bailout. Of course it helps that many have Japanese auto companies in their States that would benefit from the disappearance of Detroit.

The politics of resentment play a big role too. The wingnutosphere likes to talk about the Union workers making $73/hr - mostly BS of course, but actual wages and benefits are a bit higher in unionized plants, and costs, mostly legacy costs are significantly higher. The non-union workers in the foreign auto plants are well paid as well, mainly because the companies know that their workers would unionize if they fell too far behind Detroit - but watch them fall after Detroit disappears. In any case, Republicans are expoiting the fact that lots of other people are hurting and resent what they (correctly) see as special treatment for some.

Of course the other side is that if the US auto industry does go away, almost everybody will be badly hurt. In any case, there is room for argument about the form any rescue should take. Joseph Stiglitz, probably the most prestigious economist writing, thinks Chapter eleven is the way to go.

The debate about whether or not to bail out the Big Three carmakers has been mischaracterised. It has been described as a package to help the undeserving dinosaurs of Detroit. In fact, a plan to bail out the carmakers would benefit shareholders and bondholders as much as anybody else. These are not the people that need help right now. In fact they contributed to the problem.

Financial markets are supposed to allocate capital and monitor that it is used to good effect. They are supposed to be rewarded when they do that job well, but bear the consequences when they fail. The markets failed. Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.

Well, as one of those stock and bond holders, it's hard for me to be enthusiastic about this theory, but it does make sense. What needs to be protected are workers, suppliers, car owners, and the industrial capacity of the US.

What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.

The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard – the undermining of incentives – will be averted: a strong message will be sent.

Ouch!