GM bailout makes most of bad situation

[CaP'N GRuNGe]

About the only article i've seen that tries to paint the governments intervention in GM in a more positive light.

[CaP'N GRuNGe]

(the author - i think)

[H8tank]

“We are acting as reluctant shareholders, because that is the only way to help G.M. succeed,” Mr. Obama said . . ..

 

A private company can only succeed if the government steps in? If that is true, then why does GM need to be the one that is saved? What about these other companies that filed for bankruptcy last year?

 

* Circuit City

 

* Sharper Image

 

* Linens 'n Things

 

* Bennigan's

 

* Frontier Airlines

 

* Mrs. Field's Cookies

 

* Bally's Total Fitness

 

* Lehman Brothers, the 4th largest U.S. Investment Bank

 

* IndyMac, the 7th largest mortgage originator in the United States

 

All of these companies had employees with families and made products many of us have bought, used, or loved (at least in the case of Mrs. Field's). And yet they were not taken over by the government or given any sort of bailout. They either reorganized under existing bankruptcy laws or went paws-up altogether. That's the American way. Why? Because the American government doesn't take over private companies.

 

But in Barack Obama's America, the government does take over private companies.

[CaP'N GRuNGe]

None of those small companies had the economic impact of failure on the economy as a whole as the auto industry.

 

I'm not at all comfortable with the Feds stepping in to save private companies either, but I can at least see the reason why some may think it necessary to do so given the "too big too fail" argument.

 

Frankly, we shouldn't have companies too big too fail and we wouldn't be in this mess.

[Azazello1313]

at this point it's not a bailout, it's a controlled takeover.

[WaterMan]

Frankly, we shouldn't have companies too big too fail and we wouldn't be in this mess.

 

But the companies that are too big own your politicians.

[Azazello1313]

None of those small companies had the economic impact of failure on the economy as a whole as the auto industry.

 

I'm not at all comfortable with the Feds stepping in to save private companies either, but I can at least see the reason why some may think it necessary to do so given the "too big too fail" argument.

 

Frankly, we shouldn't have companies too big too fail and we wouldn't be in this mess.

 

first of all, the US auto industry would not have disappeared. the assets of the failed companies would have been sold...purchsed, presumably, by someone who wanted to make cars in the US.

 

the "too big to fail" argument never holds much water, IMO. sometimes the argument that a particular industry cannot fail without a lynchpin effect taking down the rest of the economy holds some merit. the finance industry last year, for example. or the airline industry after 9/11. or the steel industry during the korean war. but if GM and chrysler completely went away, people would still own and still be able to buy cars. which means they are not in any way in the "too vital to fail at this point in time" category.

 

how many millions of people have lost their jobs since this recession began? so why are a couple hundred thousand at GM and chrysler so important to warrant $85 billion in direct government intervention? isn't that like $300,000 in taxpayer money per job saved? I think the answer is, those jobs are so important, 1) because they have some political capital with the current president, and 2) because the administration senses an opportunity to remake an industry in their own image.

[Azazello1313]

I thought this article stated it brilliantly:

 

As General Motors finally filed for bankruptcy on Monday, some critics of the move have already made the case that Congress, not a White House task force, should have planned the bankruptcy. They are right about one thing: a White House task force should not have planned the bankruptcy. But they are 180 degrees wrong about what the government should have done. The bankruptcy needed much less “public policy” input, not more. If GM were going through a “normal” bankruptcy, here is what would have happened:

 

When it saw it was running out of cash last November, GM would have been forced to put together a plan that immediately stopped its financial haemorrhaging by selectively suspending its obligations and asked for protection from its creditors by filing under Chapter 11 of the bankruptcy code. To keep going through the process without liquidating, it would have had to get a debtor-in-possession loan (a high-priority loan secured by all the company’s assets). As a condition of providing the DIP loan, the government, like a private lender, might have insisted upfront on installing a management committed to a successful bankruptcy. Once in bankruptcy, GM management would have been required to propose a reorganisation plan with a reasonable chance of success. GM would have been able to determine which contracts to reject, giving it the chance to restructure its dealer networks, supply and long-term debt, secured and unsecured. Crucially, using Section 1113 of the bankruptcy code, it would have been able to reform its labour contracts to the extent necessary to achieve a successful reorganisation. If its proposals are rejected by the union without good cause, the court can impose it.

 

During bankruptcy, GM would have been able to sell off divisions, facilities and brands. Finally, if a plan of reorganisation that was likely to get a better outcome than liquidation was proposed, the court would approve it and a “new” GM would emerge.

 

What would have been the impediments to doing this? Management would not face the inevitable, so GM had (perhaps deliberately) placed itself in a position where it needed money to keep going long enough to file for bankruptcy. No private credit might have been available for a DIP loan under the conditions prevailing then and now. If the filing was done without prior negotiation with unions and creditors, the proceeding might have been so messy and protracted that it could have substantially reduced the possibility of a successful reorganisation. The plan might not succeed. Notice that I have not mentioned that the filing and the actions taken to protect GM from its creditors would cause great pain to workers, suppliers, dealers and cities. That is because that pain will occur anyway.

 

What would have been the role for government in this scenario? Providing bridge financing and a DIP loan, and setting a much shorter deadline for filing than was ultimately adopted. The deadline would have forced all parties to negotiate as much “prepackaging” as possible, because the unions and unsecured creditors would not have wanted to take their chances on a filing, and the secured creditors could not have been assured of a rapid liquidation in such an important bankruptcy. The loan could have been secured by GM’s assets and a claim on its revenues, and not involved the government in owning and managing the company. The billions of dollars the government would have saved by starting this process last winter could have been used to alleviate collateral damage through aid to state governments, unemployment insurance, etc. Both of those activities would have met genuine needs, commercial and social, without the government being forced to own and manage GM.

 

Instead, the Obama administration overtly played favourites to get the United Auto Workers protection it would not have received under Section 1113, probably elevating costs in a way that will damage prospects for a successful reorganisation. It made and imposed business judgments on GM about what cars to make and what plants to close (and perhaps about suppliers and distribution) that no one in the government or on the task force had the experience to make and for which no one would be financially accountable. Worst of all, despite Sunday’s desperate attempt to distance itself from GM’s future decisions, it left its fingerprints all over the new plan. Inevitably the White House will take political and hence financial responsibility for its success, relieving pressure on management and labour to succeed. Ultimately it elected to adopt an industrial policy toward the industry that failed utterly in the UK, and has worked out badly and expensively in France and Italy.

 

Finally, in the process, it disturbed the security of expectation that has made lenders willing to provide capital as secured credit, thus handicapping all US industry and undermining what has been, for all its flaws, one of the best financial reorganisation processes in the world, now emulated elsewhere.

 

The administration took a tragic situation and turned it into an expensive mess to pay a political debt. It wasted billions of dollars over many months delaying GM’s filing and then implicitly put itself on the hook for many billions more. The financial, political and social echoes of that decision will be with us for a long time. In short, they blew it.

[bpwallace49]

isn't that like $300,000 in taxpayer money per job saved?

 

That is overly simplistic and doesnt account for all the "ripple effect" companies that directly supply carmakers with everything from nuts and bolts to raw steel.

 

But the point is valid.

[keggerz]

first of all, the US auto industry would not have disappeared. the assets of the failed companies would have been sold...purchsed, presumably, by someone who wanted to make cars in the US.

 

the "too big to fail" argument never holds much water, IMO. sometimes the argument that a particular industry cannot fail without a lynchpin effect taking down the rest of the economy holds some merit. the finance industry last year, for example. or the airline industry after 9/11. or the steel industry during the korean war. but if GM and chrysler completely went away, people would still own and still be able to buy cars. which means they are not in any way in the "too vital to fail at this point in time" category.

 

how many millions of people have lost their jobs since this recession began? so why are a couple hundred thousand at GM and chrysler so important to warrant $85 billion in direct government intervention? isn't that like $300,000 in taxpayer money per job saved? I think the answer is, those jobs are so important, 1) because they have some political capital with the current president, and 2) because the administration senses an opportunity to remake an industry in their own image.

1. I don't think that companies should be bailed out....NONE of them but that is a personal belief but I also understand why it is being done...I just dont agree with it...

2. See below

 

That is overly simplistic and doesnt account for all the "ripple effect" companies that directly supply carmakers with everything from nuts and bolts to raw steel.

 

But the point is valid.

This was the additional point I was going to make.

Edited June 2, 2009 by keggerz

[Perchoutofwater]

GM and Chrysler were bailed out to save unions jobs and union pensions all at the tax payers expense. Had they been allowed to fail, someone would have bought their assets, the bond holders wouldn't have been screwed, and the workers would have been hired back at with more reasonable wages and benefits. This is nothing more than political pay back for all the loyal support the UAW has shown the DNC.

[CaP'N GRuNGe]

GM and Chrysler were bailed out to save unions jobs and union pensions all at the tax payers expense. Had they been allowed to fail, someone would have bought their assets, the bond holders wouldn't have been screwed, and the workers would have been hired back at with more reasonable wages and benefits. This is nothing more than political pay back for all the loyal support the UAW has shown the DNC.

 

Everyone keeps saying this, but where are these mythical buyers that wouldn't have thrown more than pennies on the dollar to purchase the auto companies and basically screw the bondholders anyways? I didn't see them lining up at the door to make the big purchase before the government intervened.

Edited June 2, 2009 by CaP'N GRuNGe

[Azazello1313]

That is overly simplistic and doesnt account for all the "ripple effect" companies that directly supply carmakers with everything from nuts and bolts to raw steel.

 

But the point is valid.

 

well it's also overly-simplistic in the sense that I simply eliminated every person employed by GM plus a hundred thousand or so. in reality, many of those jobs would be reinstated by whoever bought the assets.

 

but the point is, however you slice it, this is a tiny percentage of the overall number of jobs being shed in the current economy. a tiny percentage receiving a vastly disproportionate share of government money and attention. which simply goes to show that the motivation is much more than simply keeping people working.

[Perchoutofwater]

Everyone keeps saying this, but where are these mythical buyers that wouldn't have thrown more than pennies on the dollar to purchase the auto companies and basically screw the bondholders anyways? I didn't see them lining up at the door to make the big purchase before the government intervened.

 

Every thing I've read has indicated that auctioning off the assets would have resulting in the bond holders getting 80 cents on the dollar instead of the 20 cents on the dollar they got.

[Azazello1313]

Everyone keeps saying this, but where are these mythical buyers that wouldn't have thrown more than pennies on the dollar to purchase the auto companies and basically screw the bondholders anyways? I didn't see them lining up at the door to make the big purchase before the government intervened.

 

could ask you the same question. BO is saying the government can start selling its stake next year and be fully repaid in 5. who's buying? and to put that in perspective...

 

Obama claims the government could begin to sell its stock in the company in as soon a year and be fully repaid within five.

 

According to an analysis by The Wall Street Journal, even if taxpayer support of GM remains capped at $50 billion, which is a long shot, the company would need to grow to a market capitalization of $80 billion for taxpayers to break even on the loan. For reference, GM's recent market cap peak came during the go-go days of 2000, when the auto giant was at $56 billion.

[wirehairman]

I wish that Ford made the Chevy Silverado.

[Ursa Majoris]

GM and Chrysler were bailed out to save unions jobs and union pensions all at the tax payers expense. Had they been allowed to fail, someone would have bought their assets, the bond holders wouldn't have been screwed, and the workers would have been hired back at with more reasonable wages and benefits. This is nothing more than political pay back for all the loyal support the UAW has shown the DNC.

This'll be the same union workers who are losing 20,000 jobs and the health benefits they worked for?

[dmarc117]

GM is now a federal jobs program.

[Perchoutofwater]

This'll be the same union workers who are losing 20,000 jobs and the health benefits they worked for?

 

The same union workers who had a lesser legal claim than the bond holders. What makes their work any more important than the guy that invested his money for retirement and got screwed when the bonds his retirement account held were made worth 25% of what they should have been by BO?

[CaP'N GRuNGe]

The same union workers who had a lesser legal claim than the bond holders. What makes their work any more important than the guy that invested his money for retirement and got screwed when the bonds his retirement account held were made worth 25% of what they should have been by BO?

 

Or the government could have stayed out of it and left them with nothing.

[H8tank]

Or the government could have stayed out of it and left them with nothing.

 

 

You don't understand how a Bankruptcy works do you? And you do realize there are laws on the books on how to handle one?

 

Yet none of that matters, in your eyes hussein can do no wrong.

[Perchoutofwater]

Or the government could have stayed out of it and left them with nothing.

 

Had they stayed out of it, the assets would have been sold of and all monies received from the sell of those assets would have gone to the bond holders until they were paid off in full. A conservative estimate of auction value of the assets suggests that the bondholders would have received 80 cents on the dollar had the government stayed out of it. Since the administration got involved and decided to reward it's campaign contributors and ignore contract law, the bond holders got 20 cents on the dollar instead of 80 cents on the dollar.

 

Like H8 said, you might want to read a little regarding bankruptcy.

[WaterMan]

Had they stayed out of it, the assets would have been sold of and all monies received from the sell of those assets would have gone to the bond holders until they were paid off in full. A conservative estimate of auction value of the assets suggests that the bondholders would have received 80 cents on the dollar had the government stayed out of it. Since the administration got involved and decided to reward it's campaign contributors and ignore contract law, the bond holders got 20 cents on the dollar instead of 80 cents on the dollar.

 

Like H8 said, you might want to read a little regarding bankruptcy.

 

It bothers me when the rich aren't raking in like they used to. Nevermind the loss of jobs for average America.

[dmarc117]

It bothers me when the rich aren't raking in like they used to. Nevermind the loss of jobs for average America.

 

 

so because you hate rich people, its ok to circumvent laws?

 

and alot of these bondholders arent 'rich'. just normal people with an investment they thought was somewhat protect by our laws.

[WaterMan]

so because you hate rich people, its ok to circumvent laws?

 

and alot of these bondholders arent 'rich'. just normal people with an investment they thought was somewhat protect by our laws.

 

So you would like to be the one to tell the 20,000 jobless people that they can't be helped because it would be breaking the law?

 

In fact, we should impeach Obama right now. How dare he try and save jobs during a recession.