Stiglitz has written an op-ed for the Financial Times opining that what Detroit needs is a Chapter 11 bankruptcy. His reasoning is that without getting rid of legacy costs like pension and forcing bond holders to take a haircut, the Big 2 1/2 will be burdened with costs which their competitors do not bear. A loan does not remove these costs, it merely postpones the day of reckoning.
He’s right, and he’s wrong. It is true that the auto companies need a restructuring, but it is not true that that restructuring needs to be done in bankruptcy. 80% of consumers won’t buy a car from a bankrupt company, and bankruptcy is not something which occurs fast. Right now, by the time a bankruptcy ends, there may be no market left for American cars and any auto companies remaining are likely to be shells of their former selves.
What needs to happen is to bring all the major players to the board and force a restructuring on them, with everyone losing something. The deal last night was scuppered because, in effect, Republicans only wanted union workers to take the bath, and not anyone else.
Congress can do this without forcing the companies into formal bankruptcy. It will take some creative lawmaking, but it was already implicit in the language asking the auto Czar to arrange for long term restructuring, and if he or she needed more power to force that restructuring, to come back to Congress to get the power.
The problem with doing all of this now was and is simply that Republicans are still in charge, and as they proved last night, their first, second and last intention in any restructuring is only to break the union and to reduce wages, not for everyone including bondholders and dealers, to make sacrifices.
So, while Stiglitz is half right in the long run, in the short run what is needed is what we’ve been calling for: a bridge loan to get the automakers to the next Congress and the next President. At that point, a new bill can be put out which allows a restructuring without formal bankruptcy and which forces everyone to take their fair shares of the losses, not just workers.
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Apply Stiglitz’s solution to Stiglitz and the banking and auto execs first.
But,but……Corker just said they didn’t WANT to break the unions……who’s lying here?????
The Repukes really screwed this deal all the up the river.
this seems like a departure from stiglitz’ article in vanity fair a few days ago. http://www.vanityfair.com/maga…..litz200901
that article deals with the banks, derivatives and the like, but he seems to understand what went wrong so well that to read he now wants to hurt the unions, (even if along with everyone else,) is surprising and unfortunate. they did not cause this problem. they did not give sweetheart deals to the foreign auto makers in other states. those auto workers should be striving for what the big 3 employees have.
Back when President Bush was trying to get his pick for the Supreme Court confirmed didn’t the Democrats consider a filibuster? Wasn’t the threat of a filibuster considered beyond the bounds of decency? At the time wasn’t it known as the nuclear option?
Thank God we have somehow pulled back from the brink and have been spared that awful specter.
Thanks Ian.
digg
Sorry to see Stiglitz make such a huge marketing mistake wrt the impact a Chapter 11 filing would have on selling vehicles.
Great post, as per usual, Ian.
For what it is worth McShame voted against the bridge loan.
Well that is disappointing. Who does Stiglitz think should or will take on those pension costs? Who will provide the financing for a Chapter 11 re-organization?
And although we are all focusing on the auto bailout, none of these plans will work if the underlying problems of financial markets and now the economy are left unaddressed.
Having been in the business of finance and investment banking, I know for a fact, that bankruptcy is all about busting the unions. These people who are advocating bankruptcy protection proceedings are definitely trying to break labor unions. They are also trying to restructure the debt or bonds of the Company, which will be wiped out or severly reduced in any bankruptcy restructuring. You may want to ask yourselves, who benefits from this? Who owns the Credit Default Swaps on the auto manufacutures? They stand to make a lat of money if the auto manufacturers go down in flames…..
OT Breaking news Rahm Emmanuel is Obama team member who had contact w/ Blago
In the Senate if the Republican minority stop legislation it is known as a “procedural” vote.
When the Democrats were in the minority only a full blown filibuster could prevent passage of bills. Of course they never (with one exception) used the filibuster, because that would have appeared to be an attempt to bring the government to a standstill.
I must be missing something here. Is there a difference between the 60 votes needed for the the “procedural” thing and whatever was going on when the Republican majority appeared to be able to pass any bill that the President was willing to sign?
The Stiglitz plan reminds me of Biden and how he made a big deal of saying we needed to send more troops to Iraq, conveniently overlooking the fact that there were no more troops, they didn’t exist.
last sentence should read, “They stand to make a lot of money if the automanufacturers go down in flames..”
Republicans, Democrats, and CEO’s are all so stupid it is difficult for me to weigh in.
But I shall try, even though I am a bear of very little brain.
Everyone understands that the legacy and pension costs are dragging down the big three. But nobody seems to grasp the fact (probably deliberately because it’s inconvenient) that the reason japan doesn’t pay those same costs is because they have universal health care which is paid for via taxes, not burdened by the automakers.
So, if you want to make a difference, give Americans universal health care. it takes the pressure off of businesses, which pass premium increases along to employees or absorb them themselves, dragging down the company.
I realize I’m simplifying a little bit here, but goodness gracious, why is this such a bitter pill for our leadership to swallow?
now to call corker and ask him why busting a union is better than a healthy economy. And to ask him why he’s more interested in representing the interests of foreign automakers than american workers. and to blame him for the market crash.
where did you hear that?
No, in fact, you aren’t missign anything at all. It’s the Democrats who are and it is called a backbone.
MSNBC
Please see my answer to you at 61 from the “Last 100 days…” below, I apologize…
That would be the “reverse 100 days”….
Not surprised by that at all. Although that doesn’t mean that anything untoward took place.
However Rham ‘is’ a dirty little fellow…a ‘fixer’. I was horrified when Obama picked him as his gatekeeper.
I suspect the 80% of consumers won’t buy a car from a bankrupt company statistic might be a tad exaggerated. If the Big Three had a product line that met consumers’ other purchasing criteria, more than 20% would take the chance… assuming of course that the requisite credit is available.
thanks!
DUGG and commented there.
scout
“Stiglitz says”?!? Here’s what I say, “So what”. I’m tired of people, including politicians, putting so much weight on what one person thinks.
It really isn’t about people buying their product, it is really about busting the unions!
It is also about those folks who own the credit default swaps on bankrupt auto manufacturers debt…
follow the money….
Anybody have a count of the number of times Republicans have filibustered since the Dems took over?
This thorny problem is being made worse by knee-jerk, ideological responses–on both sides:
1. The Right is ideologically locked in against unions, and against anything reminiscent of nationalization.
2. The netroots, generally speaking, views anyone who comes out against the bailout as a union buster.
It appears to me that Ian was on the right track with his earlier post that discussed nationalization, and while this won’t happen under Bush, there is at least some remote chance it could happen under Obama.
Regardless, the ideological straight-jackets being worn on both sides of this issue need to come off.
No problem. I forgot reinstituting the uptick rule to limit shorting, banning naked shorts, treating CDSs as insurance, and limiting how CDOs can be repackaged and making clearer who owns the underlying asset. I also like the idea that mortgage writers have to take out a warrant on those mortgages so they don’t write stupid or irresponsible ones.
On Letterman last nite, McCain pontificated on the auto bridge loan. He was against it b/c of the legacy costs of $2000 per car. McCain said that something had to be done, but strict accountablity must be enforced. Letterman was a bit clueless as McCain misprepresented the issue.
McCain also whored for the Nuke Industry. Its green energy in his book. “Nuclear Power, wind, solar, and we’ve got to stop buying oil from people who hate us”.
IOW, we’ve got to keep burning fossil fuels. We just have to drill our own or steal it from people who hate us.
Critics say Detroit needs to restructure, including “manufacturing cars that sell.” The only car ads I see on the tube show pickup trucks and SUVs tearing up streams and plowing through mud holes and carrying Joe SixPack and his buddies; and, of course, sexy, high-speed sports cars screeching sideways to a stop. I don’t see many ads for economy. So, I wonder, is Detroit creating this “demand” or is it merely responding to the demands of a nation of morons?
Yet what is “funny” about it is that those who bust the unions, and therefore make more money, i.e. management of those same companies make money on what is in inverse proportion to thost who lose money.
Where does Stiglitz expect to get the “Debtor in Possession” financing to run a company in Chapter 11? The Banks? LAMO.
Yes, there has to be a desire for people to fail in naked CDS. Possibly even malice.
We need 8,000 Nuke power plants wordlwide to get off fossil fuels. 4,000 of those in the US.
Talk to us about waste.
Even Harry Reid doesn’t know.
http://briefingroom.thehill.co…..ter-tally/
Back in April he said there had been either 72 or 65.
Exactly.
vitter just on fox stating specifically and emphatically that it broke down for one reason only—because the unions would not give concessions. no mention of the concessions already given.
corker was on, they left him to put vitter on.
(can someone explain to me how corker became so powerful in such a short period of time? even just after he was elected, he was on tgas wsmeal.)
bush speaking at college station texas winter commencement. wow.
What do you think of the people who own the CDS’s on failing auto manufacture’s debt?
FYI According to a post by EW last week the top selling vehicle was the Ford F150, second was the Chevy Silverado of the top 16 that she listed 4 were pickups and the only Chrysler on the list was the Dodge Ram.
Nonetheless, I agree with you. I have seen a lot of ads for the “new” Hummer wtf.
ummmmmmm, must have been talking with my mouth full–meant to say
(can someone explain to me how corker became so powerful in such a short period of time? even just after he was elected,
he was on tgas wsmealhe was on all of the talking heads shows.)Answer is B.
Bushco encouraged Consumers to buy the biggest SUV’s. There was the farm equipment tax loophole. The war and Hummer appeal. Shopping to cure 9ll. Cheney said that Americans are entitled to a non-negotiable way of life.
When a consumer can’t afford the biggest SUV, he buys the mid-sized SUV – which is still a gas hog. Now the hybrid SUV appeals to the same mentality.
All great for the oil business. Gasoline prices can be adjusted at will. They made a Killing before. Now they’ll only make a killing.
Yesterday, on one of the news channels, I saw a piece about a potential new form of energy from water with some other common elements like salt. It was not a total pipe dream, no rumor, it was a serious new effort to develop a new source of energy, and it was being taken quite seriously by scientists and business alike. They thought it could become viable within 5 years. Bottom line, who knows what the future brings; why contaminate our atmosphere further with nuclear or “clean coal”?
OT Breaking per MSNBC IL AG to do presser – She is expected to announce action against Blago before state SC to have him declared unfit.
A Credit Default Swap is a bet that someone won’t be able to repay their debt. Whether that someone is a person unable to repay their credit card or a company unable to repay their bond debt. So if you, as an person or an entity don’t believe that Chrysler will repay their bond debt; you buy credit default swaps that say Chrysler won’t be able to repay their (bond) debts; hooray, you make big money on that bet/CDS.
That is if Chrysler is forced into Bankruptcy…
I think some people who are using pickup trucks in their businesses may drive a part of the market where purchases are less optional than, say, urban sportscars. Hence the ads continue for these vehicles in the hopes that some purchases will be made. That’s how I interpreted the current advertising.
Corker’s lying mouth is all over cable news this morning. It is very clear that the plan is to break the UAW. The pubs are so lost in their zealotry that they don’t about the result of further depressing wages, and increasing unemployment.
I have no problem with nullifying naked swaps. If there is an underlying asset, I think the risk should be amortized over the length of the CDS. I think most CDSs should be re-opened and recalculated. I also think that any holder of a automaker CDS should be banned from shorting any auto stock.
Techdirt had an interesting idea regarding bailouts of companies that are too entwined to our economic health to fail. Temporarily ignore the emotions tied into the auto industry situation and think about his comments in the context of the bailouts of the banks:
If we grant the premise that some of these companies are too big to fail, and they absolutely need gov’t bailouts to make them work, then why not set the terms of the bailout as being that they need to use the money to become small enough to fail? That is, they can get the money, one time only, and then need to look at breaking themselves up into separate pieces (even competitive pieces) that, by themselves, are no longer too big to fail.
The end result is that you aren’t left with the same terrible situation, while also creating a new generation of “spinoffs” that can innovate and compete against both older firms in the space, and new upstarts that can more readily enter the market, rather than face a few giants. That way we’re enabling more competition and innovation, leading to economic growth, while dismantling the structure of “too big to fail.”
It’s not quite that simple, of course. But, on the whole, it makes absolutely no sense to be “bailing out” companies that are too big to fail while leaving them as too big to fail.
A very good post Ian. I was just wondering how much in City, State and Federal taxes have been paid to our government through the 100 years GM has been a company? I would happen to guess it is in the billions. And now they are asking for a loan. How many tax dollars has the government collected from the foreign auto companies? Could some one crunch those numbers?
I have a stupid question: why won’t the failure of all the suppliers if GM goes out of business hurt the foreign manufacturing plants here in the US like they will hurt the remaining American auto companies? I only ask this because I never hear any mention that those plants will suffer, too. Well, make it two stupid questions: if parts suppliers go under won’t that affect repair shops as well? Or is that different?
They don’t use the same parts. American vs foreign.
It is so typical of Orwellington DC that they throw unaccountable money to WS and yet have to ‘think about’ saving our largest manufacturing segment and hundreds of thousands of jobs.
However the crisis is ripe with the opportunity to change the current fundementals of the capital and labor…but congress has always proved they aren’t up to that job. Half of them are blinded by capital and the other half are blinded by labor.
Unfortunately unions are necessary but in this case the ‘legacy cost’ the union pushed GM into are not bearable by any company in today’s competitive market. That’s just a fact.
We have a few protected classes of employees; union members, and federal and state employees. Consumers pay for the protected legacy benefits of the union members and all taxpayers pay for the legacy retirement and health benefits of state and federal employees.
If you are not in one of those groups you are rolling the dice these days on any present or future benefits from the private employment sector.
Even the proteced classes may be rolling the dice when unemployed and straped consumers and taxpayers can no longer support their positions.
As long as we have our current influence lobbying system we will always have
an unbalanced tug of war between labor and capital and someone always loses, and in some cases both lose.
I remember being stranded at National airport when Eastern A/L went down. Lenrenzo gave the finger to the union demands,shut Eastern down and walked away. A friend who was an Eastern pilot refused to take part in the walkout and kept working but after the crash he was black balled by unionized A/L’s becuase other piolts who had taken part in the walk out refused to fly with him. He spent his last 15 years flying overseas for Singapore A/L.
We need to create a more equitable and fair responsibility sharing between every single workers and every single employer in this country.
We need new ideas and attitudes if we are going to keep the US machine humming.
Auto workers used to make good wages and paid plenty in to programs like Social Security and Medicare. Now we hear they may both be going broke and we won’t get any and now they want to take our retirement away from us too? What a f’ked up system.
Here’s my e-mail to CNN’s question should we bail out the auto industry.
Of course Detroit’s Big 3 auto workers should be helped out. Are you kidding me? They have paid so much is taxes over the past decades that has helped our country including cities, counties, states governments and especially the Federal gov through those taxes. They have probably paid billions in taxes to the US gov. so why shouldn’t they get a loan when they need it? Do you know many of those auto workers and retirees are veterans. They are black and white and other races. Why would the republican party want to hurt them? Is it racial?
I know many are angry with the management from these past decades because they have taken millions out of the company in wages, stock options and bonuses rather than put that money into the company. And the management seems to be partners with the oil companies which resulted in them waiting so long to produce energy efficient vehicles but that doesn’t mean we should punish the American auto workers or retirees and others that would be effected because of bad management. We do need to have a manufacturing industry in the north as well as the foreign industry in the south.
Carol
http://www.wxyz.com/news/local…..HW6ew.cspx
Is this “Units” people?
“Units” are vehicles. We may get to “units” as a euphemism for people before too long though.
About taxes?
Does anyone have a rough idea, or even a way to find out, how much in the way of federal, state and local taxes went to entice foreign manufacturers to set up plants in “their” area? Would or would that not be considered a subsidy for foreign auto manufacturers?
To me, it sees GM is asking for a one-time subsidy whereas foreign manufacturers have been sucking at the tax teat for quite a while, pardon the expression.
Ian, you say 80% of consumers won’t buy a car from a bankrupt company. But that’s not saying they won’t buy cars from a company in bankruptcy. Technically ch. 11 is all about restructuring, not liquidation (ch. 7) which is what a “bankrupt company” would be. I think people know the difference because we’ve seen a lot of airlines in ch. 11 bankruptcy and people don;t stop flying on airlines in ch. 11. I think your gloom and doom prognosticating is a bit over the top. Who really knows how bad off these three auto manufacturer really are and how much has been scare talk to arm twist a favorable bail out?
Gettlefinger said GM would have to liquidate, not go bankrupt.
Sounds like warm piss to me.
Is anyone actually looking at the actual records of GM, or are bailout decisions being made from only the testimony given at the White House? The Quarterly GM balance sheet does not appear to show a crisis.
http://finance.yahoo.com/q/bs?s=GM
Question: I just heard Congressman Miller (yes, Pelosi’s pal) on the Ed Schultz show talking about the auto industry and the Senate Republicans.
He was talking about “bankruptcy” and how the “bonds” are selling. Cerberus Capital and the BushCo pals (doesn’t Poppy Bush also have the Carlyle Group involved here) like former Treasury secretary John Snow and Dan Quayle will, according to Miller, benefit from the bankruptcy. This article seems to be saying the exact opposite! I am totally confused now.
Can anyone explain this story and determine if it’s true? http://sify.com/finance/fullstory.php?id=14815112
By Robert Farago
November 6, 2008
The obvious person to bring everyone to the table is Barack Obama. The auto industry crisis is a perfect example of why we so desperately need someone with Barack Obama’s concensus skills and why John McCain would have been such an utter disaster (even worse than Bush).
Those of us who are sometimes discouraged by Obama’s, well, odd choices for Cabinet & other top jobs, should just chill & think back six weeks when we still had a prospective President whose stated role model was Joe the Plumber (or Sam the Scab or whatever that guy’s name is), and who didn’t have and would never get the first clue about how to negotiate an economic compromise.
The Constant Weader at http://www.RealityChex.com