(Auto)Making a Decision
Posted on: April 6, 2009 - Email Article - Printable Version
President Obama, at the urging of his auto task force, announced Monday his decision to reje
ct the restructuring plans from General Motors [GM: 0.75, 0.00 (0.00%)] and Chrysler that would require additional government funding. This announcement was coupled with Obama’s request for CEO Robert Wagoner to resign. Barring tough concessions from the UAW, debtholders and unions, both companies will likely end up in bankruptcy. Plans for bankruptcy proceeding include the creation of a “good” company/”bad” company structure. “Good” GM, including Chevrolet and Cadillac, would remain an independent company. “Good” Chrysler would be sold to Fiat SpA. Potential sticking points in the bankruptcy proceedings include the fate of the 140,000 member UAW and healthcare plans for the hundreds of thousands of retirees.
The End of an Era
Taking a step back, GM’s situation raises an interesting question. Clearly too big to fail is too big; inhibiting capitalistic processes as the gov’t is forced to step in. Yet restricting these companies’ growth is difficult to rationalize in a capitalistic system.
My heart goes out to the residents of Detroit who have and will continue to lose their jobs. Realistically, however, paying someone in Detroit $65 an hour plus benefits (for a largely unskilled job) when someone in Asia will do it for $45 (and far less benefits) is simply not sustainable. The problem right now lies in the plethora of past mistakes. The government is paying for poor regulatory decisions (removal of Glass-Steagall, etc.) and companies are paying for poor capital budgeting/financing decisions. Poorly managed companies are easily fixed; file Chapter 11, restructure or liquidate. 
Regulatory missteps, however, do not have an easy fix; companies become ‘too big to fail.’ Regulatory failures has allowed a $45 trillion (notional value) CDS market to go completely unregulated (because it was deemed a “swap” contract) and allowed an auto industry to continue to overpay a unionized employee base for an inferior product.
Obama’s removal of Wagoner is a far cry from the capitalistic society most of us imagine we would live in. Being realistic about the situation, the government has pretty much been running GM for the past several months. However, what a scary precedent for the government to come in to a completely private enterprise and force employee resignations. The government owned GM debt and preferred shares; they in no way had any voting rights. On the positive side, at least there is now the possibility of failure (bankruptcy and restructuring). This in stark contrast to AIG [AIG: 35.58, -0.08 (-0.22%)], which was essentially handed a signed government blank check.
American (Taxpayers’) International Group
However, saving AIG was never about AIG. Nearly every company in the financial services industry held CDS on other institutions through AIG. A failure of AIG would render these contracts useless and do unspeakable things to the banks’ balance sheets. News released Monday pulled back another layer in the seemingly alternate universe of AIG. Assuming these allegations are valid, this is where the government’s role is unquestioned. The way that you prevent fraud is by making an example of offenders. Fraud was a major part 
of our current problem and violators should be thrown in jail. Geithner has announced plans for a ’superregulator’. While I don’t see why the current system can’t stop problems like AIG (at all levels), I am all for whatever bureaucratic squabbling that is necessary to prevent these future blowups.
The question has been raised several times over the past week of bear-market vs. sustainable rally. From a very holistic perspective, the problem was a buildup of excess debt in the system. The way to purge the system of this debt is through natural capitalistic failures. Propping up companies (and entire industries) simply pushes back the payment of debt. This is not a cure, it is a band-aid.
-Adam Brown
Disclosure: None
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The Following Stocks Were Mentioned In This Article: AIG, GM
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