Politics

The bailout is going down in flames. There is not enough Republican support in the Senate to get the legislation through. This is the story so far: Auto Bailout Bill Appears Stalled in the Senate

The Republicans have dug their heels in over this one and will not budge. Since the House voted yesterday and passed a bill, the fact that the Senate seems incapable of agreeing will effectively kill any efforts to get a bailout passed before Congress re-convenes in January.

The White House is also punting this hot potato into the Obama Administration’s inbox.

So that’s it. Pending some last minute fix there will be no bailout this month.

The plan is taking shape. This is the latest from the Wall Street Journal: In Bailout, Car Makers Could Cede Stakes to U.S.

The key things here are:

The White House seems to be pushing back on the viability of the companies receiving the aid. Clearly the administration doesn’t want to pour money down the drain. Giving a ton of cash to GM if it doesn’t prevent bankruptcy is a waste. This I agree with.

The Democrats have included some provisions [the details are still being worked out] that give the government an equity stake in any company receiving cash. This is also good. But I would go dollar for dollar, rather than the 20% the Democrats have suggested.

The key here should be to eliminate the existing shareholders first. They are the ones who took the original risk and should sacrifice their positions before the government puts in money. This is especially true of Chrysler whose owner is Cerebus, a private equity firm. Once the shareholders have been wiped out the next group to surrender something would be the workforce through the re-writing of benefit and wage contracts.

Substantially this is what would happen in bankruptcy. So it appears that the government will end up as the provider of restructuring funds, akin to a debtor in possession in a normal bankruptcy.

The whole process is beginning to look like a thinly disguised bankruptcy process with the government rather than the courts overseeing the pain. If so, good. Perhaps then something will be salvaged from the mess.

It looks likely that a deal is close on getting some bailout money to the ‘Big Three’ American auto makers. Here’s the update from the New York Times: White House Says Deal on Auto Bailout Appears to Be Close

I am still opposed to a bailout. The deal on the table today is only slightly more palatable. It is effectively a bridge loan, along with some controls for the government to enforce modernization.

We should be careful in limiting our expectations. Even with this money GM and Chrysler in particular will have to undergo painful restructuring. There are going to be job losses, wage and benefit cuts, factory closings and product eliminations regardless of the amount of money the bailout includes.

The issues that the ‘Big Three’ are facing are structural. They are not temporary. This is not a case of helping well run companies manage their way through a nasty downturn in the market. It is an effort to breath life into what are, in effect, bankrupt companies.

GM and Chrysler are companies that time has left behind. Their approach to the business is outdated. Their vision is out of step with the modern car market. Their products are unwanted. They took far too long to invest in fuel efficient and cheap cars. Indeed it looks unlikely that they took fuel and energy costs seriously at all until very recently. Their Japanese, Korean, and European competitors all have invested much more heavily in fuel efficiency. The American auto makers seem to have lived in a bubble of denial. Now they are paying the costs.

More than this their industrial model has been exposed as a failure. The notion of being able to pay high wages and benefits in the face of strong and low cost foreign competition was a disaster. GM, in particular, has totally failed to cut its costs in line with its shrinking market share.

So I repeat: my opinion is that even with taxpayer help GM and Chrysler will not survive much longer as they are. They need to re-organize themselves. Ford has done a better job of changing itself and may last.

Hopefully the loans now being talked about come with strong government oversight and direction. That way we can at least hope to see some of the money repaid.

This AP story carried in today’s Huffington Post is important because it highlights the problems we have had with ideological leadeership:Bush Administration Weakened Lending Rules Before Crash

The important issue here is not just the hard right ideological content of the Bush Administration’s policy decisions. It is also that we should all be leery of any policy derived from pure ideology. Our emphasis should be on the practical rather than the purity of the politics.

One of the reasons it is such a welcome change to have a president who thinks about issues is that we can abolish ideology as the be all and end of all of policy making. Instead we can implement pragmatic and competent solutions that solve actual, rather than perceived, problems. And we can avoid a failure to act when the problem seems to have a more risky but ideologically correct solution.

Bush’s evident failure in the mortgage debacle [as described by AP in their article] is exactly the kind of policy failure we get when ideology rather than pragmatism rules the decision making process. These kinds of errors are far more likely when the president is also as disinterested and disengaged as Bush apparently was.

Obama is to be applauded for his purposeful pursuit of competence. Even if that pursuit comes at the cost of watering down the progressive agenda being pressed by the more left wing Democrats.

This is why I am annoyed at the criticism being leveled at some of personnel choices. There is a premium right now on competence. The damage Bush has done is enormous. It will take years to undo. A sudden lurch to the left will not help. Instead a steady and persistent emphasis on sound governance will allow the left to capture the high ground. If Obama can persuade the country that the Democrats are the party to trust on security, economics, health, etc. simply by being sensible rather than ideological he will allow the center-left to dominate politics for a generation. Progressive solutions will then not simply be trusted they will be preferred. As a liberal that’s what I believe will happen when the average voter can compare the social experimentation of the Reagan/Bush era with what I hope will be the Obama era.

The evidence to date is impressive: Obama seems to be determined to launch a generational shift. That’s good news for the country, even if it annoys some of his more ardent supporters.

I am providing you all a link to this New York Times article:U.S. Approves Plan to Help Citigroup Cope With Losses – NYTimes.com for two reasons.

First: it has an excellent embedded graphic showing the long list of bailout money that has so far been spent. Second: it has a terrific photograph of George Bush doing his best to look as if he’s relevant to the current situation. Relevant, that is, in a positive helpful way rather than as one of the people who caused the mess in the first place.

There is no doubt that bailing out Citibank is an essential policy move. The failure of Citi would produce an unimaginably large cascade of panic and secondary failures throughout our financial system. It has to survive. But I think this deal is heavily biased towards Citibank: the taxpayers are not being rewarded for stepping up.

The deal itself looks fairly onerous from Citi’s point of view, but on closer inspection they get away fairly lightly. They have given up a large chunk of preferred stock, and have issued warrants for a potential wad of common stock as well. In return they are getting a capital infusion and a guarantee for a vast swathe of their bad assets. The deal does not, obviously, prevent Citi having to write down assets. It will have to post big losses on its rotten assets for a few quarters. The goal is to calm the market and signal that the bank will weather this particular storm. Its current shareholders will suffer in the near term as their dividend is cut, which was part of the deal, but in the medium term their investment will be saved, at least in part. That sticks in my craw. This is my point: the deal lacks teeth to punish the laxity of the current management, Board, and shareholders. In a way it typifies the Paulson era of bailout. Saving the bank is a necessity, but that doesn’t mean saving the current set-up is also a necessity. At a minimum the taxpayers should be getting a better return on their immediate investment and the current management team should be shaken up. The Board too is culpable for not having exercised due diligence over the past few years as the problems piled up. So I think the deal lacks teeth.

Whether the deal is sufficient to stop speculators targeting other weak banks we have to wait and see. I would be surprised if there aren’t more of this kind of deal in the next few months as other banks suffer the same attack by short selling speculators that Citi weathered last week.

Going forward: I hope that the stupidity of the deregulation enacted during the Reagan era is unwound and that the banking industry returns to sanity. Part of Citi’s problem has been the extent of its non-balance sheet assets. It has approximately $2 trillion on its balance sheet, but almost $1.3 trillion of non-balance sheet assets. This massive amount hangs as a vague and under-reported millstone around the bank’s neck. Advocates of better and more stringently applied bank reporting have a perfect case to bash the bank regulators with. Investors need to know more clearly what they are investing in. Until banks are transparent about what they own they will suffer the consequences of market nervousness.

Finally: the current management of Citi is clearly inept. They have dithered in the face of a mounting crisis and have moved at a glacial pace. They should be replaced.

Addendum: Some of you have asked why bail out Citi and not GM. The answer is that the industrial sector, as typified by GM, is secondary in the overall economy. The financial sector is the grease that allows the wheels to turn smoothly. Without credit there is no business. So getting the credit markets settled down takes priority over everything else. Only when the financial sector is safe can we turn our attention to the industrial sector. Having said that I expect that Congress will eventually help the auto industry, but only after there has been sufficient evidence that the car companies are serious about changing their evidently bad business models. As I have said before: I don’t agree with helping GM because I think it is beyond help. I still feel that even with government money GM is a hopeless case: it just has no ability, apparently, to update itself. Obama has asked them to produce a plan against which the government can lend help. Let’s see what the car companies do in response. there must be some crazy overtime in Detroit right now. About time too.