Posts tagged ‘bailouts’

Bureaucracy and Incentives

Loved this passage from Glen Reynolds on the VA:

There's a naive tendency to believe that whatever a government agency's mission is supposed to be, is really the mission that its people pursue. That's seldom the case for long.

Science fiction writer Jerry Pournelle, observing such things, has formulated what he calls the Iron Law of Bureaucracy: In every organization there are two kinds of people: those committed to the mission of the organization, and those committed to the organization itself. While the mission-committed people pursue the mission, the organization-committed people take over the organization. Then the mission-committed people tend to become discouraged and leave.

As a result, the strongest priority of most bureaucracies is the welfare of the bureaucracy and the bureaucrats it employs, not whatever the bureaucracy is actually supposed to be doing. That's worth remembering, whenever someone says they've found something else that we should "choose to do together."

This is not unique to government, but a rule for all organizations.  However, in a private-sector, organizations that devolve in this way get slaughtered (except of course for crony favors and bailouts, but that is another topic).  Accountability never ever comes to government organizations.

Update:  One other observation -- in criticizing Obamacare in advance of its implementation, I never mentioned computer systems problems.  And I always assumed that if you threw enough money and mandates at the problem, the number of uninsured (not to be confused with the number of people with access to quality care) would be reduced.  So all the current triumphalism around Obamacare are about issues that were in fact never raised in advance as criticisms.

One issue that was raised time and again was the information and incentives issues that make it almost impossible to government health care to deliver quality care at a reasonable price.  And the heart of the VA disaster is all an incentives issue.  And it will not get solved.  In part because the incentives issues are endemic to monopoly government services (see: public high schools).  But the government is not even trying to solve the incentives issue.

Our Political Opponents Believe Whatever We Say They Believe

I can think of two groups with whom I have some sympathy -- the Tea Party and climate skeptics -- who share one problem in common:  the media does not come to them to ask them what their positions are.  The media instead goes to their opposition to ask what their positions are.  In other words, the media asks global warming strong believers what the skeptic position is, without ever even talking to skeptics.  It should be no surprise then that these groups get painted with straw men positions that frequently bear no resemblance to their actual beliefs.

Paul Krugman provides an excellent example.  He writes:  (shame on the blog author for not linking Krugman's article, here is the link)

Or we’re told that conservatives, the Tea Party in particular, oppose handouts because they believe in personal responsibility, in a society in which people must bear the consequences of their actions. Yet it’s hard to find angry Tea Party denunciations of huge Wall Street bailouts, of huge bonuses paid to executives who were saved from disaster by government backing and guarantees.

This is really outrageous.  I am not a Tea Partier because they hold a number of positions (e.g. on immigration and gay marriage) opposite of mine.  But to say they somehow have ignored cronyism and bailouts is just absurd.  TARP was one of the instigations, if not the key instigation, for the Tea Party.  As I have written any number of times, the Tea Party and Occupy Wall Street actually shared a number of common complaints about bank bailouts and cronyism.

David Harsanyi has more here.

By the way, it is Hilarious to see Krugman trying to claim the moral high ground on Cronyism, as he has been such a vociferous proponent of the Fed balance sheet expansion, which will likely go down in history as one of the greatest crony giveaways to the rich in history.

Obama Didn't Need to Order IRS Crackdown on the Tea Party

There won't be any direct order found telling the IRS to go hassle Conservative groups.  That's not the way it works.  Obama's style is to "other" groups he does not like, to impugn their motives, and to cast them as pariahs beyond the bounds of civil society.  Such and such group, he will say, opposes me not because they have reasonable differences of opinion but because they have nefarious motives.  Once a group is labelled and accepted (at least by your political followers) as such, you don't have to order people to harass them. They just do it, because they see it as the right thing to do to harass evil people.  When Joe Nocera writes this in support of Obama in no less a platform as the NY Times, orders are superfluous

You know what they say: Never negotiate with terrorists. It only encourages them.

These last few months, much of the country has watched in horror as the Tea Party Republicans have waged jihad on the American people. Their intransigent demands for deep spending cuts, coupled with their almost gleeful willingness to destroy one of America’s most invaluable assets, its full faith and credit, were incredibly irresponsible. But they didn’t care. Their goal, they believed, was worth blowing up the country for, if that’s what it took...

He concludes by saying

For now, the Tea Party Republicans can put aside their suicide vests. But rest assured: They’ll have them on again soon enough. After all, they’ve gotten so much encouragement.

There are probably some deeply confused people in the IRS right now -- after all they were denying tax exempt status to terrorists, to enemies of America.  They should be treated like heroes, and now they are getting all this criticism.  So unfair.

Postscript:  And they are racists.  Racist terrorists.

But Obama, in his most candid moments, acknowledged that race was still a problem. In May 2010, he told guests at a private White House dinner that race was probably a key component in the rising opposition to his presidency from conservatives, especially right-wing activists in the anti-incumbent "Tea Party" movement that was then surging across the country.

This is totally the Obama way of fighting a political battle.  He is saying, "forget their stated reasons for opposing me, such as opposition to the health care law, to Wall Street bailouts, and to rising government debt.  They really oppose me because they are racists and I am black."  Obama's opposition are absolutely never, ever people of good will who simply disagree.

PS#2:  It's pretty hilarious the NY Times published Nocera's "Tea Partiers are Terrorists" editorial just 6 months after they editorialized against incivility in the context of the Giffords shooting, which by the way had as much to do with civility in public discourse as the Benghazi attacks had to do with a YouTube video.  In fact, it sure seems like this administration has a history of falsely blaming tragedies on their political opposition's speech.

We've Gotta Keep Bailing Out Banks Because...

...uh, just because

Iceland vs Greece

via Zero Hedge

 Update:  Whenever I argue with people about this, I find out that we share different assumptions.  Those who seem to support the bailouts assume that given some breathing space, the reckoning in Europe can be avoided.  I assumed the reckoning is unavoidable, and will come either soon or at best in the next cyclical downturn.  And it will be far worse in, say, 2015 than it would have been in 2010.  Every time we delay the reckoning, we make it far worse.

And then there are politicians.  I don't think they honestly know or care if the reckoning is unavoidable. They only care if it does not happen this minute.  For politicians, the discount rate on pain is infinite.  Future pain is thus always better than current pain.

A Partial Retraction on AIG

The story the other day that AIG was considering suing the taxpayers because the taxpayers did not give them a nice enough bailout was so vomit-inducing that I did not even look much further into it.

A couple of readers whom I trust both wrote me to say that the issues here are a bit more complex than I made them out to be.  The Wall Street Journal sounds a similar note today:

Every taxpayer and shareholder should be rooting for this case to go to trial. It addresses an important Constitutional question: When does the federal government have the authority to take over a private business? The question looms larger since the 2010 passage of the Dodd-Frank law, which gave the feds new powers to seize companies they believe pose risks to the financial system.

That vague concept of "systemic risk" was the justification for the AIG intervention in September 2008. In the midst of the financial crisis, the federal government seized the faltering insurance giant and poured taxpayer money into it. The government then used AIG as a vehicle to bail out other financial institutions.

But the government never received the approval of AIG's owners. The government first delayed a shareholder vote, then held one and lost it in 2009, and then ignored the results and allowed itself to vote as if the common shareholders had approved the deal.

In 2011 Mr. Greenberg's Starr International, a major AIG shareholder, filed a class-action suit in the U.S. Court of Federal Claims in Washington alleging a violation of its Constitutional rights. Specifically, Starr cites the Fifth Amendment, which holds that private property shall not "be taken for public use, without just compensation." The original rescue loans from the government required AIG to pay a 14.5% interest rate and were fully secured by AIG assets. So when the government also demanded control of 79.9% of AIG's equity, where was the compensation?

Greenberg is apparently arguing that he would have preferred chapter 11 and that the company and its original shareholders likely would have gotten a better deal.  Perhaps.   So I will tone down my outrage against Greenberg, I suppose.  But nothing about this makes me any happier about bailouts and corporate cronyism that are endemic in this administration.

Words That Have Been Stripped of Any Meaning: "Spending Cuts" and "Austerity"

I have already written that the supposed European austerity (e.g. in the UK) is no such thing, and "austerity" in these cases is being used to describe what is merely a slowing in spending growth.

Apparently the same Newspeak is being applied to spending cuts in the US.  How else  can one match this data:

With these words from President Obama (my emphasis added)

"If we're going to raise revenues that are sufficient to balance with the very tough cuts that we've already made and the further reforms in entitlements that I’m prepared to make, then we’re going to have to see the rates on the top two percent go up"

Seriously?  The only small reductions in the budget were because some supposedly one-time expenses (like TARP bailouts, war costs, and stimulus spending) were not repeated.  Allowing one-time costs to be, uh, one-time does not constitute "tough cuts."

Tough cuts are when we knock government spending back down to 19-20 percent of GDP.  Clinton level spending in exchange for Clinton tax rates.   That's my proposed deal.

Why We May Be Bailing Out Chrysler Again

I work in a small, four-story suburban office building.  I have seen our fire drills and can look out at our parking lot, and I would be surprised if there are 200 people in the building.    A few months ago some division of Chrysler moved in and took a bunch of the space.   A lot still remains empty (which is why I am here -- cheap!)

The Chrysler folks put a sign downstairs a few days ago saying that they would be hosting a luncheon for the building.  Great, I thought, a free hot dog and some fruit salad.  Imagine my shock when I saw this when I arrived today:

Chrysler sent three full semi-trailers, one of cars and two of convention-type booths and displays, plus a whole crew of people to set this up, all for a lunch in our building with less than 200 people.  I thought maybe that we were just getting a preview of a larger public event, but I am looking out my window now and they are tearing down again.  Crazy.

One thing that even many libertarians get wrong:  Wasting money is not unique to government entities.  Private and public entities can become senescent, and grow bureaucracies that lose focus on what they are supposed to be doing.  The difference between the private and the pubic sphere, though, is that for private companies, markets eventually enforce discipline (either forcing change or killing off the bloated entity).   There is no similar mechanism for state agencies short of perhaps absolute bankruptcy, and Greece is proving even that is not enough to force change.

Of course, when the government gives large private entities with political pull special protections and bailouts, then no such accountability is enforced.  The same people are operating the company with the same false assumptions and unlearned lessons.

Creative Destruction

I thought this was an interesting example of creative destruction.  Five years ago, Time and Newsweek were running cover stories about the "Blackberry" culture and how ubiquitous the device was in modern business.  Now, people are making fun of it for being outdated tech.  If only we could get the average voter to truly appreciate creative destruction.  We might have fewer bailouts and more economic growth.

By the way, Canada says it won't bail out Blackberry, which is good, but is interesting given that it did bail out the Canadian automotive sector just a few years ago.  In terms of total market value I would guess the Canadian automotive sector is way smaller than Blackberry at its peak.  Only a cynic would suggest the difference is that the auto sector is unionized and therefore politically organized to generate campaign donations and grass roots get-out-the-vote efforts, while RIM is not.  That would imply that bailouts were due to political pull rather than sound and consistent economic reasoning, which I am sure can't possibly be true.

PS- there are still good and valid reasons for enterprises, like the Administration and government agencies, to use the Blackberry over smartphones.  Just because they are out of favor with 16-year-old girls does not mean they don't have utility. Oddly, though, given this particular niche and comparative advantage, RIM seems to be obsoleting its installed base of enterprise servers.   I am not an expert, but I think a lot of enterprises would stick with Blackberry for quite a while just out of inertia and lack of desire to change.  But now that Blackberry is forcing them to rethink their whole enterprise platform anyway, it seems to allow other competitors solutions into play.  Or am I missing something?

Update:  Apparently RIM is saying the previous paragraph is incorrect, that the new servers will support all the old devices ... except for email, calendar, and contacts.  Unfortunately, this seems to encompass the entire Blackberry functionality.  I have had one or two of the devices, and you are a nut if you are trying to surf the web on one as your main usage.

Things You Didn't Know About the European Debt Crisis

Apparently the most important issue is not the unsustainability of deficit spending, lack of fiscal responsibility, or the tough problems of balancing expensive bailouts with expensive defaults.  It is making sure the timing of a Greek default does not negatively affect Obama's re-election.  From the Independent (UK) entitled, "Obama asks eurozone to keep Greece in until after election day"

American officials are understood to be worried that if they decide Greece has not done enough to meet its deficit targets and withhold the money, it would automatically trigger Greece's exit from the eurozone weeks before the Presidential election on 6 November.

They are urging eurozone Governments to hold off from taking any drastic action before then – fearing that the resulting market destabilisation could damage President Obama's re-election prospects. European leaders are thought to be sympathetic to the lobbying fearing that, under pressure from his party lin Congress, Mitt Romney would be a more isolationist president than Mr Obama.

 

Too Big To Fail

Just in case you believed all the BS around the passage of Dodd-Frank that in the future there would be no such thing as too big to fail, just look at yesterday's JP Morgan hearings in Congress.  

U.S. lawmakers on Wednesday interrogated J.P. Morgan Chase Chief Executive James Dimon in a much-anticipated and sometimes-heated exchange after the bank registered more than $2 billion in derivatives losses

No one grills Exxon-Mobil executives when the company loses a couple of billion to a nationalization somewhere or grills Sears executives as the blunder their way towards bankruptcy.  These are private business losses.  The only reason to grill JP Morgan is if Congress still considers the American taxpayer to be ultimately on the hook for trading losses (above and beyond deposit insurance requirements, which the Bear Sterns and AIG bailouts certainly were).

Lesson We Keep Missing in the Financial Crisis: Bite the Bullet Now

Investors have a saying - your first loss is your best loss.  In other words, if you think an investment sucks, swallow your pride, take your lumps, and get out entirely now.

This is NOT how we have dealt with the financial crisis.  Through a series of bailouts, we have tried to keep failing financial institutions and countries on life support.   We have dragged out the reckoning on mortgages, so we still have not had a real clearing in the real estate market.  Worse, we have postponed, even entirely interrupted, financial accountability for those who made bad investments or took on too much debt.

Here is an interesting counter-example - Iceland, which basically went entirely bankrupt along with pretty much all their banks, is on the road to recovery.

Crony Capitalism? Blame the Progressives

That is the purposely inflammatory title of my article this week at Forbes.com, finding the roots of crony capitalism not in capitalism itself, but in progressive legislation.  An excerpt:

The core of capitalism has nothing to do with, and is in fact inherently corrupted by, the exercise of state power.  At its heart, capitalism is one simple proposition -- free exchange between individuals based on mutual self-interest.  There is no room in this definition for subsidies or special government preferences or bailouts.  The meat and potatoes activities of crony capitalism are corruptions rather than features of free markets.  Where state power to intervene in economic activity does not exist, neither does cronyism.

Believe it or not, the Occupy movement reminds me of nothing so much as 1832.  Flash back to that year, and you will find Federal officials with almost no power to help or hinder commerce... with one exception: the Second Bank of the United States, a powerful quasi-public institution that used its monopoly on government deposits as a source of funds for private lending.  The bank was accused of using its immense reserves of government cash to influence elections, enrich the favored, and lend based on political rather than economic formulae (any of this sound familiar?).  Andrew Jackson and his supporters, the raucous occupiers of their day, came into office campaigning against the fraud and cronyism at the Bank.

Jackson, much like the current OWS folks, was a strange blend of sometimes frontier anarchist and sometimes tyrannical authoritarian.  But in the case of the Second Bank, the OWS movement could well learn from Jackson.  He didn't propose new and greater powers for government officials to help check abuses of the existing powers -- he proposed to kill the Bank entirely.  Eliminate the source of power, and men can no longer tap it for their own enrichment.

Unfortunately, the progressive Left which makes up most of the OWS movement has taken exactly the opposite approach over the last century or so, expanding government powers and economic institutions (such that today the scope of the second bank seems quaintly limited) and thus the opportunity for cronyism.   In fact, most of the interventions that make crony capitalism possible are facilitated and enabled by the very progressive legislation that the progressive Left and the OWS protesters tend to favor.  Consider some examples...

Crony Capitalism

Perhaps I do not give Sarah Palin enough credit, because this is a really good passage, from one of her recent speeches (emphasis added by Mickey Kaus)

We sent a new class of leaders to D.C., but immediately the permanent political class tried to co-opt them – because the reality is we are governed by a permanent political class, until we change that. They talk endlessly about cutting government spending, and yet they keep spending more. They talk about massive unsustainable debt, and yet they keep incurring more. They spend, they print, they borrow, they spend more, and then they stick us with the bill. Then they pat their own backs, and they claim that they faced and “solved” the debt crisis that they got us in, but when we were humiliated in front of the world with our country’s first credit downgrade, they promptly went on vacation.

No, they don’t feel the same urgency that we do. But why should they? For them business is good; business is very good.  Seven of the ten wealthiest counties are suburbs of Washington, D.C. Polls there actually – and usually I say polls, eh, they’re for strippers and cross country skiers – but polls in those parts show that some people there believe that the economy has actually improved. See, there may not be a recession in Georgetown, but there is in the rest of America.

Yeah, the permanent political class – they’re doing just fine. Ever notice how so many of them arrive in Washington, D.C. of modest means and then miraculously throughout the years they end up becoming very, very wealthy? Well, it’s because they derive power and their wealth from their access to our money – to taxpayer dollars.  They use it to bail out their friends on Wall Street and their corporate cronies, and to reward campaign contributors, and to buy votes via earmarks. There is so much waste. And there is a name for this: It’s called corporate crony capitalism. This is not the capitalism of free men and free markets, of innovation and hard work and ethics, of sacrifice and of risk. No, this is the capitalism of connections and government bailouts and handouts, of waste and influence peddling and corporate welfare. This is the crony capitalism that destroyed Europe’s economies. It’s the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys. It’s a slap in the face to our small business owners – the true entrepreneurs, the job creators accounting for 70% of the jobs in America, it’s you who own these small businesses, you’re the economic engine, but you don’t grease the wheels of government power.

So, do you want to know why the permanent political class doesn’t really want to cut any spending? Do you want to know why nothing ever really gets done? It’s because there’s nothing in it for them. They’ve got a lot of mouths to feed – a lot of corporate lobbyists and a lot of special interests that are counting on them to keep the good times and the money rolling along.

I Do Not Think That Word Means What You Think It Means

I am sympathetic to the OWS hatred for bailouts and crony capitalism, but struggle to understand how they intend to fix the consequences of the exercise of government power in the private world with yet more exercise of government power in the private world.

Apropos of very little, I found this bit from Matt Taibi funny (emphasis added)

1. Break up the monopolies. The so-called "Too Big to Fail" financial companies – now sometimes called by the more accurate term "Systemically Dangerous Institutions" – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled

I am pretty sure that, by definition, a single industry cannot have 20 monopolies.

Though I share the same concern, my solution is to just let them fail.  Right now, the cost of capital for these large companies is lower than the cost of capital for smaller companies because, even though many of them have far worse balance sheets than smaller banks, investors feel they have too big to fail protection.  Let a few fail and have the cost of capital shoot up for larger companies and you can be pretty damn sure they market itself will break up these companies.

In some ways it reminds me of the market premium given in the 1960's to multi-industry conglomerates like ITT.  When the capital markets made their cost of capital low, everyone tried to copy their conglomerate strategies.  When these strategies started failing and companies like RJ Reynolds found their diversification into shipping and shower curtains was a business disaster, capital dried up for these Frankenstein monsters and most of them were broken up.  All without a hint of government intervention, either to save them or kill them.

Its telling that no one on the Left or with OWS who gives this advice for financial institutions takes their own advice with, say, auto companies.  GM should have failed and likely been broken up as well.

James Taggart is Alive and Well

In my Forbes column this week, I publish an essay I wrote for an Americans for Prosperity event commemorating Milton Friedman's birthday.  A brief excerpt:

Having once been successful through excellence, leading businesses typically get lazy and senescent, and become vulnerable to more innovative, lower-cost or more nimble new competitors.  Sears lost its electronics sales to Circuit City, which in turn succumbed to Best Buy, which is now struggling to compete with Wal-Mart, who is being challenged by Amazon.com.

Unfortunately, businesses that were once successful can feel a sense of entitlement, believing that this new competition is somehow unfair, or that consumers are somehow misguided in taking their business elsewhere.  When they have money or political connections, these businesses may run to Congress and beg for special protections against competition, or even new subsidies, mandates, stimulus projects, and bailouts.

Where is the threat to capitalism and individual liberty coming from today?  Is it from some aggrieved proletariat, or is the threat from bailed out Wall Street firms, and AIG, and GM, and Chrysler, and ethanol manufacturers, and electric car makers, and windmill builders?

 

Coyote's Pre-Response to Obama's Budget Speech

No, Mr. Obama, the fecklessness of politicians does not obligate me to send more of my money to the government.

Three times in my life I have lent money to people in serious financial straits.  In every case, they came back to me for more.  "X more dollars and I will be home free and can pay you back."  In a few cases I came up with a second infusion and in one case I (embarrassingly) actually gave money a third time.   In no case was I ever paid back.    I haven't heard this phrase in years, but when I was young stock investors had a saying -- "your first loss is your best loss."  This was just another way of saying don't throw good money after bad.

Obama and Bush (I haven't forgotten your culpability in all this George) sold the country, or at least Congress, on emergency spending for wars and bailouts and stimulus.  This was supposedly one-time spending only for the duration of the emergency.  But now Democrats and Obama are treating the peak of this emergency spending as the new baseline, from which cuts are impossible.

This lack of desire to cut spending and a resetting of norms as to "what is normal" is not just a government problem, it is endemic to every organization.  Private organizations face this problem all the time.  The difference is that when times go bad, private organizations do not have fiat taxation power, so that when they are underwater, they must cut bloated budgets or die.  Either way, the problem goes away.  Private companies differ from government not in that they don't have problems with beauracracy and risk aversion and deadwood and bloat and bad incentives - because they do.  The difference is that private companies cannot get away with allowing this stuff to linger forever, and governments can.

Government will never, ever, ever, ever cut spending unless all hope of new taxes is removed, and even then they will likely try to cut spending on the most, rather than the least, popular programs to build public support for more taxes.

In the early 90's, after the fall of the Soviet Union, we talked about a peace dividend from reductions in military spending.  I want a sanity dividend.

Postscript: We like to think that financial problems are due to bad luck, but they usually are due to poor management.  The guy I lost the most money with was producing a really interesting boat concept, basically as fun and lithe and fast as a jetski but enclosed so boaters who were less daring would not actually be in contact with the water.  I wanted a bunch for rental service at our marinas.  But he kept asking for money, saying that he had bad luck with this supplier or that supplier.  Eventually, I found out he was in this incredibly expensive commercial lease, and was burning all the money I lent him on useless rent payments.  Stupid.

After I graduated from college, I cashed in about $7000 in savings bonds I had accumulated.  I was going to make a fortune in the market.  After three years I had lost almost all of it -- right in the heart of one of the greatest bull markets in history!  A few years later, I was in a situation where I could have really used this money.  This was not bad luck or circumstances, I did stupid things.  I recognized something that many dentists and doctors never learn - it was possible to be a smart guy who sucked at investing.  I was one of them.  My investing has been in index funds ever since.

Auto Bailouts and the Rule of Law

Todd Zwicki has a great article on the auto bailouts.  Here is a brief excerpt of a long and very comprehensive article.

Of the two proceedings, Chrysler's was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the "absolute priority" rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company's secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a "deficiency claim" — the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the wronged creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.

To make matters worse, both bankruptcies were orchestrated as so-called "section 363" sales. This meant that essentially all the assets of "old Chrysler" were sold to "new Chrysler" (and "old GM" to "new GM"), and were pushed through in a rush. These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a "sub rosa plan." The reason is that the re-organization process offers all creditors the right to vote on the proposed plan as well as a chance to offer competing re-organization plans, while an asset sale can be carried out without such a vote.

In the cases of GM and Chrysler, however, the government essentially pushed through a re-organization disguised as a sale, and so denied the creditors their rights. As the University of Pennsylvania's David Skeel observed last year, "selling" an entire company of GM or Chrysler's size and complexity in this manner was unprecedented. Even on a smaller scale, it would have been highly irregular: While rush bankruptcy sales of much smaller companies were once common, the bankruptcy laws were overhauled in 1978 precisely to eliminate this practice.

At first, the fact that the companies' creditors (and especially Chrysler's creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler's secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders' acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.

Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly.

Mixed Feelings Today

I always have mixed feelings about party changes in Washington, because I have little faith the Coke party will taste much different than the Pepsi party.  But I am happy about divided government, so I will take that as a positive.

Unfortunately, while many of the Republican sweeps around the US were based on opposition to deficit spending, bailouts, taxes, and Obamacare (all issues I can readily agree with), victories in AZ came mainly in a wave of xenophobic anti-Mexican hysteria, with our governor (now re-elected) campaigning on crazy fantasy sh*t like Mexicans beheading people and leaving their bodies in the desert.  The Governor "reiterated her assertion that the majority of illegal immigrants are coming to the United States for reasons other than work, saying most are committing crimes and being used as drug mules by the cartels."

Wow! Nancy Pelosi Cuts Auto Development Cycle From 6 Years to 6 Months

It used to be that it took something like 5-6 years to develop a new vehicle from scratch.  Apparently, though, GM has accelerated this to 6 months, as Nancy Pelosi is taking personal credit for the recently released GM vehicles.

House Speaker Nancy Pelosi and top Obama administration officials defended last year's federal bailout of automakers on Monday, pointing to new vehicles at the Detroit auto show as a sign of the industry's rebirth. ...

"We've seen ideas turned into policy turned into product," Pelosi said.

Pelosi and company fawned over cars like the Volt, expected to be a money-loser from the get-go, while ignoring the trucks and larger family cars where GM actually makes money.  Bob Lutz steps up to take on the Orren Boyle mantle:

GM vice chairman Bob Lutz said Sunday that Washington's interest in the auto industry was welcome after being ignored by U.S. lawmakers for decades while other nation's backed their carmakers.

He said he had always thought the U.S. "was the only car-producing nation in the world where the administration and the politicians ... didn't know about American car companies, didn't care about American car companies - none of the politicians drove American cars."

"It's like we were the stepchild of the American industry and the American economy," Lutz said.

This is hilarious - few other industries have been the subject of more government bailouts and protection and subsidies than the auto companies.  Remember all those DOE and DOT grants?  Remember Chrysler bailout #1?  Remember the tariffs and import quotas?  But wait, it gets even more barf-inducing:

"Unfortunately it took the financial failure of the American automobile industry to make the whole country aware of the importance of the American automobile industry," Lutz said at a Society of Automotive

Analysts event.

See, its all of our fault they went bankrupt, not their crappy management, crappy designs, and crappy labor agreements.  All our fault.  I feel so terrible.

Moral Hazard Continued at GMAC

From the AZ Republic:

GMAC, the former lending arm of General Motors Co., is in talks with the Treasury Department for a third injection of taxpayer aid, a further sign of the U.S. government's entrenchment in the U.S. auto industry.

The Treasury Department mandated earlier this year that GMAC Financial Services raise an additional $11.5 billion in capital after undergoing a "stress test" along with 18 other banks. While other banks deemed undercapitalized have been able to raise funds from private investors, GMAC has been forced to go back to the government.

Maybe the reason no one but Obama will give GMAC any money is that they know that every time GMAC gets any money, it simply starts shoveling it at every car buyer who walks within shouting distance of a dealership and can fog a mirror.

Immediately after GMAC became eligible for TARP money, GM reduced to zero the interest rate"¦ on certain models. ...

GMAC has begun making loans to borrowers with credit scores as low as 621, a significant relaxation of the 700 minimum score the company adopted just three months ago as it struggled to survive. America's median credit score is 723"¦

GMAC is a giant ponzi scheme to subsidize car sales.  Ponzi schemes last only so long as there is a sucker to keep putting in money.  No private funds are that dumb, but fortunately for GMAC there is the Obama administration.

The Corporate State: A Love Story

Via John Stoessel:

Moore declares capitalism evil, but he's never clear about what "capitalism" means. Considering how much time he spends documenting the cozy relationship between business and government, I thought he might mean "state capitalism."

But then he uses the term "free market" as a synonym for what he doesn't like.

What does the free market have to do with businesses manipulating government and strong-arming Congress for bailouts? Moore properly condemns both.

A libertarian student at GWU pushes Michael Moore on this issue, captured on video.

In the movie, Moore apparently:

visits the National Archives to see if the Constitution establishes capitalism as the country's economic system. Seeing the words "people," "union," and "welfare" in the document, he says, "Sounds like that other ism."

The reason is because free-market capitalism is not a system.  It is the un-system.  It is the lack of a system.  It is the chaotic, anarchic, bottom-up actions of 300 million people acting to direct their lives as they see fit and improve their own financial well-being.  The fact that it works without top-down coordination, that the right number of pencils get manufactured each year without a pencil czar, is a testament to the power of a few simple tools, particularly price, in signaling to individuals where they might best employ their own time and capital.

The Inevitable Result of Government Bailout of Newspapers

A great morality play is running in southern California that gives a pretty clear view into where government funding of newspapers will lead.  Unfortunately, the article I have (via Glen Reynolds) is not written very clearly.  Here are the key facts:

  1. New ownership buys San Diego Union-Tribune, apparently the city's largest newspaper
  2. The new ownership group is funded in part by investments from public pension funds
  3. Public officials argue that since the paper is owned in part with some of their money, the newspaper should no longer be allowed to criticize public officials

Here is their demand:

As [police union] League President Paul M. Weber views it, that makes the League part owner in the flagging Tribune and League officials are none to happy with the paper's consistent position that San Diego lawmakers should cut back on salaries and benefits for public employees in order to help close gaping budget deficits.

"Since the very public employees they continually criticize are now their owners, we strongly believe that those who currently run the editorial pages should be replaced," Weber wrote in a March 26 letter to Platinum CEO Tom Gores.

Seems pretty plain to me.  And I see no reason why government officials, who always long to avoid criticism, wouldn't use investments of public funds to exercise the same leverage.  By the way, I loved this line:

"It's just these people on the opinion side. There is not even an attempt to be even-handed. They're one step away from saying, "˜these public employees are parasites,' " Weber said.

OK, if they won't say it, I will: "Those public employees are parasites."

Who Do You Know Who's Been Saying This About Chrysler?

Good for Megan McArdle:

when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?  Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.

No, leave that aside for the nonce, and let's pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions.  What do you think this is going to do to the supply of credit for industries with powerful unions?  My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit.  Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit.  Though it may well be the last time they get it, on anything other than usurious terms.

I am not sure I agree with the last part.  While banks seem to have an unbelievably long memory when it comes to you or I trying to get a loan after we forgot to return those Columbia House records 15 years ago and couldn't pay our bills, major banks have goldfish memories when it comes to major losses.  Whether it be lending to Latin American companies or to industries like airlines that go bankrupt with clockwork regularity, banks seem perfectly capable of repeating the same mistakes over and over again.

This is in part due to something I was trying to tell folks waaaaay back in October with the threatened liquidity crisis -- banks have to lend.  There is simply no good business model for a bank that involves sitting on hoards of cash under the mattress.  And when you have tens of billions of dollars to lend, you can't just do it in $100 increments -- you have to lend big slabs to large institutions.  And given that lots of other banks are trying to lend to the same guys, someone is going to issue that $300 million line of credit to Chrysler a couple of years hence.

I Don't Think It Will Work This Way

From the Economist via TJIC:

the United Automobile Workers "¦ can own half of Chrysler's stock and a third of General Motors' stock if everything goes through"¦

anti-labour activists might also feel a bit of cheer. As Conor Clarke points out, today's events can only have one of two consequences:

It will change the incentives of the unions"”such that they realize their demands were bad for the company"”or it will run the company (further) into the ground and leave the union to pick up the pieces.

Worker ownership rarely works the way it's expected, so it's entirely possible that the UAW has sped up its own demise by cutting this deal.

I don't have any hope that it will work out this way.  The only incentive alignment that will exist is that union ownership of GM will align Congressional incentives to issue GM a near infinite stream of subsidies, bailouts, tax breaks, import restrictions, consumer incentives, etc.

We are switching ownership of GM from a politically fragmented and unorganized group (ie current GM shareholders) to a single organization that already has political clout and massive political lobbying infrastructure  (UAW).  Just look at the large corporate states of France and Germany.  Union involvement in corporate management doesn't change union practices, it changes government practices.

Update from Q&O:

There's some interesting stuff out there to read about the Chrysler bankruptcy, like people asking "why wasn't this done in the beginning"?

Simple answer - in the beginning there was no way to secure the UAW a majority stake in the company. Now, as Felix Salmon points out, that's been accomplished

Changing Their Story

I am not shocked that Obama is full of sh*t --  all politicians are.  But I am constantly surprised at just how awful the press has become.

Here was the Arizona Republic towing the government line, attempting to stampede the country into subsidizing the auto companies because bankruptcy would be a disaster:

Advocates for the nation's automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Industry supporters are offering such grim predictions as Congress weighs whether to bail out the nation's largest automakers, which are struggling to survive the steepest economic slide in decades.

Even if just GM collapsed, the failure could bring down the other two companies - and even the U.S. operations of foreign automakers - as parts suppliers run out of money and shut down....

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

There was absolutely no background on the chapter 11 process, or any mention by this reporter or in any subsequent AZ Republic article that bankrupcy meant anything but liquidation and disaster. Not even a hint that many large companies, including the largest company based in Phoenix -- US Airways -- have operated seamlessly through chapter 11.

It was left to bloggers like myself to remind folks that the businesses and assets don't just go *poof* in a bankruptcy, and in fact it is generally in creditors' interests to have the company continue to operate.

So, now that Chrysler is heading for bankruptcy, Obama's incentives are now to make chapter 11 look friendly instead of menacing.  And the AZ Republic is finally, after 6 months of coverage, explaining what this really means:

Bankruptcy doesn't mean the nation's No. 3 automaker will shut down. A Chapter 11 bankruptcy filing would allow a judge to decide how much the company's creditors would get while the company continues to operate. The goal is for the whole process to happen quickly, Obama said, perhaps within a couple months.

I thought this was priceless:

[Obama] said a group of investment firms and hedge funds were holding out for the prospect of an unjustified taxpayer bailout.

"I don't stand with them," Obama said at the White House event.

I actually don't think this is true -- as secured creditors, they are FIRST in line in a bankruptcy.  Obama has effectively told them to voluntarily move to the back of the line, and they reasonably said "no way."  Obama is miffed that they have not taken his royal direction, but I think they are correct they will get more out of a process run by bankruptcy law rather than one run by political pull.

But, even if hedge funds had this expectation of a taxpayer bailout, who in the hell do you think has given them reason to have this expectation?  Can anyone say "moral hazard?"