The horizon is not so far as we can see, but as far as we can imagine

The Velvet Glove Comes Off For Carmakers As Obama Threatens Them With Bankruptcy

big-3Well, well, well.  I see Obama has pulled out another card from the Bush playbook.  Not only has he forced GM’s CEO to resign, he’s threatening to send them into bankruptcy if they don’t get enough concessions from workers and bondholders (Tom Bratwaithe, FT, not online as of this writing):

Officials said on Sunday night that Chrysler would be given 30 days and GM 60 days to reach agreement with debtholders and unions, with new tougher targets for cost cutting, or they would lose their last chance for a government bailout, almost certainly sending them into bankruptcy.

Wow.  Tough talk, maybe even tough action.  I’m impressed.  Impressed by his willingness to talk this way and act this way towards non-financial companies that is.  Somehow when it comes to banks and brokers Obama’s practically begging them to keep the money they’ve been given, and assuring everyone that they won’t be forced into bankruptcy or nationalized.  Somehow his words of outrage at bonuses don’t include forcing companies like AIG, Bank of America and Citigroup to renegotiate thier compensation contracts by saying “do it or you go down”.

Nope, it’s not people making high 6 figures, or 7 figure salaries and bonsues who are forced to take a haircut. It’s not bondholders of financial corporations like Freddie and Fannie who are forced to share in the pain.  It’s only workers and bondholders of industrial companies.  Imagine that.

There are a ton of cynical things I could say about this, but I’m going to point out something more fundamental: long run the US needs its industrial sector healthy and strong more than it needs an overpriced, overpaid financial sector.  One major long term problem the US has is its trade deficit.  Financial companies don’t noticeably help that, what they do instead is package up paper assets for sales to foreigners, but those assets are almost all debts.  Everytime the US sells a collateralized debt ogligation, it’s selling its future to foreigners.  Every time it sells a car, it’s getting money now for a real item now.

Smart restructuring of the economy would mean figuring out how to create a car industry and an industrial sector that stays in the US and doesn’t move all its production and R&D overseas, rather than trying to restart the paper for money financial economy, an economy which caused this financial meltdown and which has been partially responsible for stagnant wages for Americans for 30 years now.

I will also note that a real bankruptcy for the Big 3, would cause in excess of two million job losses and worsen the US’s trade deficit.

Tough love isn’t necessarily a bad idea, but I hope Obama is playing chicken and isn’t entirely serious.  Because if the Big 3 go under, well, this economic downturn will get a lot, lot worse.  And perhaps, just perhaps, he might somehow find whatever it takes to apply some of this tough love to the financial companies who caused this crisis, rather than the car companies who are largely collateral damage?

Because I find it very hard, as a matter of basic fairness, and a matter of basic policy, to stomach seeing workers earning 5 figures being forced to take wage cuts while bankers are still making huge 6 and 7 figure salaries.


What to Watch For In Obama’s Financial Sector Reforms


Next Time, Listen


  1. Great Blog post. I am going to bookmark and read more often. I love the Blog template

  2. Pectopah

    Ian, have you considered the following?

    If I understand naked CDS properly, the holder actual wants the underlying asset to fail. The analogy being that if I take our fire insurance out on my home, I still do not wish for the house to burn down, but if my neighbors take out fire insurance on my house, then it can only be with the hope that it actually burns down. So they have incentive to behave like fire bugs around my house. Thus, if a bank or hedge fund purchases a naked CDS then they wish the underlying CDO to fail (or to Limbaugh). And if they are in a position to cause that failure how would they act? Morally, or in self-interest? Just because a bubble is clearly about to burst, does not mean mangers are going to be patient. They are likely sticking pins into it. So it is with this background that I wonder if last year’s Oil price run-up was not an intentional act by certain hedge funds to tip the economy with the expressed hope to cause a massive default of CDOs. Many analysts believed the fundamentals did not explain the high price of oil, but that speculation was the root cause. But was it speculation or manipulation? Or am I just being too cynical?

    In another vain, if CDOs were so secure, then why were people taking out insurance policies on them? Someone was being taken for a fool. If I were selling those policies, then I would ask if the fool was me.

  3. Ian Welsh

    Yes, absolutely, you shouldn’t allow people to buy insurance on someone or something failing unless they have a financial interest equal or greater in that person not failing. More on such issues in this post:

  4. grs

    Please take the Ford logo out of the picture with this piece. Ford is not in the same boat as GM and Chrysler and they have not taken any government loans. They asked for a line of credit but have not taken any loans. I believe that because of their actions to date, they will fall under the rule of the ridiculous “car czar”. I think Ford had the common sense to see what was about to happen and more importantly, had enough cash to wait it out so far and at least until the end of 2009. Don’t get me wrong, Ford is in trouble, just not as much as GM or Chrysler.

    Other than that, you’re spot on my friend.

Powered by WordPress & Theme by Anders Norén