http://news.yahoo.com/s/bloomberg/20081113/pl_bloomberg/apwpjfpf6mgu_1
``This is a flip-flop, but on the other hand, when they first proposed the thing, they didn't really know what they were doing,'' said Bill Fleckenstein, president of Fleckenstein Capital Inc. in Seattle and author of the book ``Greenspan's Bubbles.'' [Treasury Secretary Henry] Paulson has pushed some ``cockamamie schemes,'' he said. ``So one has to ask, does he have any clue?'' -Bloomberg.com
In September, Bush and Paulson sold the rescue package to Congress and the public as such: taking the toxic mortgage-backed securities off Wall Street's books would help restore recently lost confidence and unclog the financial sector. Uncle Sam would hold onto these investments until the economy rebounds and they turn profitable, maybe even making a pretty penny for the taxpayers. After initial resistance, Congress signed on, and up to $700B was available for Paulson to buy up whatever he felt would help the economy.
Yet two months later, how many securities has the government purchased? Yep, a big fat zero. This is partly because of the credit crisis taking priority and stocks tanking. Lending dried up, the economy was grinding to a halt, and banks requested cash infusions and lowered interest rates to try to right the ship. Like in Europe and Asia, our government also wanted to buy up shares of troubled companies to stanch the bleeding. So what about the bundled mortgages? Washington hasn't moved on those toxic securities because even the experts have no friggin' clue what those assets are worth (if anything), and who really owns them. It's too darn difficult to research and ascertain the value of those securities to decide what to buy. So instead, they just take the easy approach: pump more money in the credit markets, keep interest rates low (will the Fed rate even fall to 0%?), and hope for the best.
Paulson generally received praise for his swift, decisive handling of the financial crisis this fall (but decisiveness is only commendable when you're making good decisions). Now he said that he won't apologize for changing his approach as the facts change. That is fair, and much better than clinging to an outdated, flawed strategy. But maybe he could have handled his PR a little more delicately. The Wall Street bailout was already very controversial in Congress and more so on struggling Main Street. Some Americans still feel very outraged, and anti-fat-cat backlash is the strongest its been in decades. The taxpayers have given unprecedented authority and a gargantuan loan to Bush/Paulson to fix the economy. If the custodians of our cash appear wavering, maybe people will start to feel jerked around. It also sends mixed signals and uncertainty to the markets, which responded as expected (Dow and Nikkei lost 4-5% on Wednesday). So they don't have to pick one plan and stick with it no matter what, but at least speak plainly with us (something Paulson is not known for). Is this bailout about restructuring mortgages, increasing lending, buying up stakes in troubled companies that are "too big to fail", or taking toxic paper off private sector books? I am sure we need to do all those things, so let's have a cohesive, comprehensive plan of attack already. It's been two months, and more people's lives are being shattered each day longer that Washington flounders.
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http://www.economist.com/opinion/displaystory.cfm?story_id=12601932
"Bailing out Detroit would be a bad use of public money." -The Economist
Also, what do you guys think about Obama/Pelosi pushing for an auto industry bailout? As J and I noted in September, the Big 3 already got $25B in "loans" from a rushed spending bill in Congress, to help them modernize and get more efficient (things they promised to do years ago, but kept making SUVs instead). Now Obama is calling for another $50B in a move that would resemble Chrysler's rescue in 1979. But America and Detroit were very different back then. Auto was and still is huge, but to give you a sense of scale, UPS has more employees than the Big 3 combined. Manufacturing was a much larger sector of our economy back then, Wall Street was relatively healthier, and Chrysler had the very effective and innovative Lee Iacocca at the helm (he axed many bad car concepts, rolled out the first American minivan, and laid the groundwork for the Jeep Cherokee). I don't think the current bozo CEOs would measure up. US auto sales are way down across the board (even for Toyota), and the Big 3 are hemorrhaging money to keep their expensive operations going while their lots are chock full of unsold vehicles. They have announced new rounds of layoffs, factory closures, and reduced hours/production. But this is nothing new - Detroit has been contracting for a decade or longer ("Roger and Me"). Maybe they would have failed earlier if not for all the lobbying in Washington for huge tax breaks and other government assistance.
The rescue might sound outrageously huge, but to be fair, the entire proposed auto bailout is just 42% of what one company already got from Paulson ($120B to AIG). Though AIG had its tentacles in most of the big players in global finance, so its failure would make Detroit's vast problems look like a piece of cake. Rescuing auto will add to the bad precedent of the Wall Street bailout: companies can screw up as much as they like, and Uncle Sam will clean up the mess (as long as they demonstrate that they are "vital to the economy"). But the Big 3 are not, at least not as much as banks/credit. For years, Detroit kept saying they are this close to finishing their restructuring for modern competitiveness, and just need one last push to get over the hump. Maybe this bailout is that last push, or maybe they are willing to say anything for a handout. Sure in a perfect world we would want to help Detroit. But lending and resources are very tight now. Imagine all the good that $50B could do for expanding green industries and critical infrastructure projects (things Obama promised during the campaign), which also creates jobs and commerce. Instead of a bailout, the Big 3 can file for Chapter 11 as the airlines successfully did after 9/11. If it wasn't for the spike in jet fuel, many of our airlines might be healthy and profitable now. Auto can continue to pay their workers and maintain some operations during the bankruptcy negotiations, and it won't cost taxpayers nearly as much. Then in a few years after this recession has abated, they can emerge as leaner, stronger companies ready to compete it the new hot markets (developing nations, not saturated Western countries).
Though of course the auto industry has sentimental and symbolic value to America, and its labor unions have much political influence. But does that mean we have to use our dime to keep those screw-ups on life support? In a market economy, companies are free to fail. Yes it's true that the ripple effects will be huge (losing the Big 3 would also kill thousands of dealerships, parts suppliers, mechanics, etc.). But they are not the only show in town; foreign auto makers also have dozens of huge plants in the US and employ almost as many Americans as the Big 3. We don't have to build or buy American cars if we can't do it well. Or will auto become another taxpayer-subsidized unprofitable industry like agriculture? Already our domestic electronics and textile sectors are all but gone due to globalization - why not let auto go if the costs of supporting them are too great? It will be painful, but auto is not the only industry in deep trouble. The gambling entertainment industry (which employs more Americans than the Big 3, and generates billions in tax revenues) is also on the rocks due to restricted leisure spending in this economic downturn (I guess it's not recession-proof after all). The major casino corporations have seen their stocks drop over 50% in the last 12 months. The airlines are desperate too: Delta-Northwest merged out of survival, and even though oil dropped from $140 to $55/barrel this year, the industry will still report billions in losses. The big carriers' stocks all lost over 20% yesterday on news that Americans would be predictably curbing their travel habits next year. Who deserves a bailout and who doesn't? Who is more vital to our economy?
And what about the housing sector? Isn't that the root of many of our problems? Millions of households are still at risk of foreclosure in the next year. What about their rescue? The mortgage and housing sectors employ many more people and are a much larger chunk of our GDP than auto.
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http://marketplace.publicradio.org/
Some interesting interviews on these issues:
First, though, Henry Paulson. We've told you over the past couple of weeks that there isn't any buying up of troubled assets going on. Today, Hank Paulson made it official.
Our Washington bureau chief John Dimsdale starts us off.
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Dimsdale: Secretary Paulson was unapologetic about the change in plans. He said the purchase of bad assets would have been too slow to help banks, while the new strategy of injecting government capital will shore up banks and attract private investments.
Tape of Henry Paulson: As the situation worsened, the facts change. The thing I'm grateful for is we were prescient enough, Congress was, that we got a wide array of authorities and tools under this legislation. And I will never apologize for changing an approach or strategy when the facts change.
Paulson said he might use some of what's left in the bailout to encourage broader lending to consumers, now that credit card, student and car loans are drying up. The Department is reportedly thinking of requiring that lenders match future government payments with money they raise on their own. And John Dearie at the Financial Services Forum says forcing lenders to come up with their own capital eases the perception that the government is choosing winners and losers with its money.
John Dearie: The extent to which you can minimize government involvement by trying to leverage the government's involvement by bringing in or encouraging private capital, I think that's wise on Secretary Paulson's part.
Paulson is also under pressure to use bailout money to help homeowners facing foreclosure. He praised Fannie and Freddie's plans to set voluntary standards for banks to ease mortgage terms, but stopped short of endorsing an FDIC-backed plan to buy distressed mortgages. He said that crosses the line into a government spending program.
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RYSSDAL: I wanted to pick up on a couple of themes that John Dimsdale just laid out for us. First of all, why? Why didn't the original plan to buy up those toxic assets work?
PETROU: Well, they've never tried it. But, in part, it didn't work because it was always going to be hard. And not anticipating how hard it was going to be, Treasury was sideswiped when it figured that out and then had to quickly construct Plan B.
RYSSDAL: Was it the thing that we heard about as that plan was being floated -- that you couldn't figure out how to price these assets? You didn't know what they were worth?
PETROU: Bingo. The assets are complicated. They're hard to price. They're held by thousands of investors around the world. This isn't e-Bay here. This is tricky.
RYSSDAL: All right. Well, then, why is bank recapitalization better?
PETROU: In the long run I'm not sure it is. It's just easier. I think in time in poses significant issues, most notably the question of combining troubled banks into huge, bigger troubled banks. Or handing problems that ought better to be resolved by the FDIC over to big banks that then get weaker. But it was easier. It was quicker to corral those nine big banks, put them in a room and force the capital on them than it turned out to be to run the asset disposition and purchase process.
RYSSDAL: Here we are, two months into this bailout program and still the secretary of the Treasury said this morning that he is worried about systemic failure in the economy. Did that catch your ear at all?
PETROU: Anytime he says that, it sure does. It's pretty scary out there still.
RYSSDAL: Why?
PETROU: I think it is because we've taken the financial markets from a liquidity problem, which was where we were starting in August of 2007, and a very delayed recognition by the federal regulators and Treasury about how serious that was. Then we moved into a rapid collapse of the housing market, particularly prices and the residential market freezing up. Now we're looking at a recessionary scenario -- one thing building on the next, with a sharp drop-off in retail sales and the unemployment issues. So, that's a lot of scary reality built on top of the liquidity and market-confidence issues. And that's the problem Treasury Secretary Paulson was referencing this morning.
RYSSDAL: Let me ask you sort of a strategic question. It seems now the government's attacking this problem two ways: One, sort of top-down with the Treasury and the bailout money, and also, especially, yesterday with some mortgage relief. How did that come to pass and is one better than the other?
PETROU: I think we need all of them. We need more mortgage relief. And the plan announced yesterday with Fannie Mae and Freddie Mac is a piece of the problem. As you all know, the FDIC is looking at another program that would involve guarantees. We're going to need still more in the mortgage sector. But we've got problems throughout the financial sector -- autos coming immediately to mind, commercial mortages. There are different tracks for each one of these asset sectors.
RYSSDAL: Where do the tracks all lead, then, Karen?
PETROU: Ah, to you and me and the rest of us as taxpayers! I hate to say it but that's where, right now, all the tracks are coming into each one of our houses.
RYSSDAL: Karen Shaw Petrou is a managing partner at Federal Financial Analytics in Washington. Karen, thanks a lot.
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Yeah, the problem with bailing out the Big 3 is tough. I'm sure the US Gov't will demand their requisite pound of flesh for bailing them out (equity, limitation on executive pay, etc). The problem this time comes from the high possibility that you create zombie firms; sure, this time they only ask for $25 billion, but what about when they keep losing money and have to come asking again? Are we going to say no then?
On the other side, there is the fact that if just GM went out of business, 100,000 people lose their jobs, with a multiplier effect of maybe up to 500,000 people losing their jobs (supplier companies, etc.). If all 3 went out of business, we'd be talking about well over 1 million people. In the middle of perhaps one of the worst recessions in the last 50 years. It's a pretty steep price for creative destruction; it would no doubt further sink the economy and prolong the recession.
So ideally you'd want a company to come in and buy up GM or Ford's productive assets (like the bank bailouts); lay some percentage of the people off, but basically keep the plants and whatnot running as going concerns. But who wants to buy these turds of a company now?
It's a really tough nut to crack. I guess I'd probably come down on the side of bailout, but hardly enthusiastic about it. I'd probably bail them out but only under the agreement that they work on parting themselves out as quickly as possible...
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Well, I agree that we shouldn't "punish" the Big 3 and ancillary employees for their industry's mismanagement. But let's not be alarmist - it's not like 100% of those jobs will be lost and they'll all go on welfare. And where do you draw the line then? How do you justify saving some and not others? We have seen how the markets responded to the ambiguity of saving Bear but not Lehman. We can't possibly save them all, unless we want our future economy to be semi-private. How many other troubled industries will come crying to Washington for rescue? Just today Citi announced over 50,000 layoffs - that is half of GM. Sure that company is still solvent, and probably the move is meant to downsize from their bloated status during the financial bubble. But why should Washington care more about auto workers than those workers, or the 1.2M+ Americans (according to CNN) who have lost their jobs in the last 12 months for a variety of reasons?
Plus, we're not talking about the Big 3 disappearing. Maybe Chrysler is beyond salvation, and will be carved up and sold on the open market no matter what. But the other two will be around, just maybe in diminished form or merged, even during Chapter 11. Unlike Chrysler's rescue in 1979, the Big 3's current problems have less to do with finances. They just have a screwed-up business model and produce the wrong products for the 21st Century. Ford and GM are successful in overseas developing markets (often because they enjoy near exclusive trade rights), but other makers are catching up. They have had almost a decade to reconfigure their facilities and change their production to match demand. But they haven't yet. I know it's a pain in the ass to negotiate with the UAW, shareholders, and change is like molasses for some companies. But what is it... like Japan needs 2 years to get a car from blackboard to showroom, yet Detroit needs 8? Will another $25B in loans be able to fix that? Their problems extend far beyond executive pay.
Whatever we do, it's going to be painful no doubt, and some lives will be ruined. But it boils down to choice. Will those billions be best spent by our government on an auto bailout, or maybe other public works and economic stimulation programs that could deliver more widespread impact? Let's be honest; Michigan, Ohio, and much of the Midwest rust belt are dying economies, even if the auto industry was more robust. And auto bailout just postpones the inevitable. And even if the Big 3 have to lay off 100,000's, I really doubt that the Obama administration would just cut them loose. Already there are plans for job retraining and other assistance programs, right? And a lot of those supply chain logistics jobs can translate into many other industries. We bailed out the banks because we didn't have a choice. I don't think that is the case with the Big 3. But as you say, there is quite a strong argument to still do it. Maybe the pros outweigh the cons. We just won't be happy about it.
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