Monday, March 30, 2009

Discriminatory Bailouts? $2 Trillion for Wall Street, Tough Love for Detroit

According to the Associated Press, the White House has demanded that Chrysler and General Motors restructure before the companies can receive additional financial assistance from the government. General Motors CEO Rick Wagoner resigned Sunday at the request of the White House, and federal officials are reportedly pressuring Chrysler to accept a partnership agreement with Fiat SpA. Ford, the third United States car manufacturer, has not received federal assistance and is not subject to White House plans.

Here is a clip from the story:
The White House says neither General Motors nor Chrysler submitted acceptable plans to receive more bailout money, setting the stage for a crisis in Detroit that would dramatically reshape the nation's auto industry.

President Barack Obama and his top advisers have determined that neither company is viable and that taxpayers will not spend untold billions more to keep the pair of automakers open forever. In a last-ditch effort, the administration gave each company a brief deadline to try one last time to convince Washington it is worth saving, said senior administration officials who spoke on the condition of anonymity to more bluntly discuss the decision. . . .
Question: Why Does Detroit Receive Tough Love, While Banks Are Waiting for the Next Trillion-Dollar Installment?
The White House approach to domestic automobile manufacturers seems rooted in an understanding that market forces have seriously eroded demand for their products and that management has not adequately responded to this reality. With respect to banks, however, the government has proposed tossing another trillion dollars into the very industry that is largely responsible for the global financial and economic collapse.

Based on the banks' culpability in the economic crisis, the better argument would have the White House make stricter demands on banks than automobile manufacturers. The fact that the banking bailouts dwarf the magnitude of federal assistance for Detroit warrants even greater caution regarding the financial sector.

Experts ranging from Nobel Prize winning economist Paul Krugman to famed Merrill Lynch analyst Richard Bernstein have argued that the government should abandon its heavy subsidization of financial institutions and their investors. They believe that the government should instead offer financial institutions a healthy dose of tough love in the form of either nationalization and restructuring (Krugman) or promotion of greater consolidation within the sector, rather than artificially inflating the price of and purchasing toxic assets (Bernstein). Even former Federal Reserve Chairman Alan Greenspan recently promoted the idea that "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.”

Final Thoughts
The reality that the United Autoworkers union is a leading supporter of President Obama could potentially make the White House approach politically difficult. With that in mind, perhaps this is Obama's way of indirectly pressuring UAW to accept concessions. A tough public stance towards management could likely conceal the government's desire that UAW relent on issues such as compensation and benefits. On the other hand, a public standoff between the White House and labor would be politically damaging.

The cost-cutting and restructuring that the White House has demanded of the automobile manufacturers, however, would likely necessitate sacrifices by labor. Offering tough love to management could send a message to union leaders that they should approach negotiations with greater flexibility. Banks deserve the same type of treatment.

PS: I wrote a related article on this subject after Senator Dodd called for the resignation of automobile industry management earlier this year. Also, it seems others are making similar observations: CEO Change Begs Question About Banks.

Update: Some auto workers believe they are being punished because the public is upset with the banking bailout.


Anonymous said...

I disagree that banks should be given the same tough love when, as most may recall, not every bank even wanted to accept the bailouts for reasons just like this. Bank of America for instance has already made their first TARP payment back to the government. This isn't just free money but rather a loan that is being paid back. Think about it this way, when you get a mortgage from a bank do that check to see what you put in the house? When you buy a car does the bank regulate how many miles you can drive? Then why should the government have a say in how banks like Bank of America utilize their funds and run their business. Unlike the automotive companies listed here, Bank of America has been profitable in every single quarter except 1 since 1981. Auto workers are being punished because of the UAW unwillingness to cut costs, something banks have been doing for years, and the thousands that were laid off that refused to look for new jobs even before the recession.

Darren Lenard Hutchinson said...

Anonymous - thanks for your comment. I appreciate your question which raises various hypothetical lending scenarios. But these are very different from the bailout. If I get a loan under extraordinarily generous terms that represent a huge discount below market value, then I assume the bank would have a good reason for doing so - and as "consideration" for the excellent terms, it would have the right to impose uncommon obligations upon me.

Even with "regular" loans, conditions are placed upon the borrowers. Banks, for example, require homeowners to verify insurance in order to protect their interest.

I have generally taken a far more "understanding" approach on the issue of banks than my liberal colleagues. For example, I believed that blaming BoA for the Republic Windows situation was outrageous (just search the site for "Republic Windows").

Also, you are reading into my post some appeal to heavy regulation of banks. I definitely cited to Krugman and others who have called for restructuring or consolidation. But my point was that most the "better argument" would be to do more with respect to banks than to the auto industry.

Finally, I noticed that you did not respond to my argument about the banks' culpability in the financial problems around the world. The reckless lending during the housing bubble has caused more injury to the banks and financial markets than the auto industry has ever caused.

Darren Lenard Hutchinson said...

PS: Anonymous -- the PURCHASE of TOXIC assets by the government certainly looks like a "handout." If the market values the assets as worthless, and the government buys them for some greater value around one trillion dollars, then this is fundamentally different from a loan.

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