NYT editorial: Bailing Away

[DeepModem Mom]

Bailing Away
Published: November 29, 2008

The federal government is going for broke in an attempt to avert the type of calamitous financial collapse that led to the Great Depression. No one would fault the objective, but throwing money at the problem is becoming an end in itself.

Last week alone, while everyone was still arguing whether a $25 billion loan to the Big Three carmakers would be money down a sinkhole, the government committed more than $1 trillion to prop up Citigroup and to try to spur lending to consumers and home buyers. Moves to stabilize the system this year have put Americans in harm’s way from possible losses on nearly $8 trillion pledged in loans, guarantees and investments to financial firms. And the crisis is far from over.

This page has consistently held that the government must intervene in markets when failure to do so would cause even greater economic harm. The impending collapse of Citi or an unrelenting credit freeze demand intervention. But good crisis management also requires that the calamity of the moment not be allowed to overwhelm good governing. Unfortunately, that is not the case now.

Even, as the rescue tab rises, taxpayers are not being adequately informed or protected. There is as yet no effort to deal effectively with the underlying causes of the problem, especially mass mortgage defaults that feed bank losses. And officials seem to think urgency to act absolves them from considering the longer-term implications of the actions they take.

In the Citi bailout, as in the bailout of American International Group and other financial interventions, the government has taken shares in the rescued firm in exchange for its investment. That is sensible, as far as it goes. But the upside for taxpayers has been overstated, because the risk in many of the investments may well outweigh the potential return. These gambles are the reason the government should attach more strings to its help, including a say in how the money is used and in major investments and management decisions. But the Treasury and the Federal Reserve have balked at taking greater charge, leaving taxpayers more exposed to losses than they probably realize....

***

By selecting Paul Volcker, the former Fed chairman, to head a team to oversee the financial crisis, President-elect Barack Obama seems committed to a different way, one that combines the ability to respond quickly with the resolve to act wisely.

http://www.nytimes.com/2008/11/30/opinion/30sun1.html?hp

[DJ13]

1. Theres something seriously f*cked up about $1T to Citi with no strings

But pushing automakers to provide detailed plans just to borrow $25b.

[Demeter]

2. I Found an Article on What Chrysler Went Through Last Time

http://www.mlive.com/business/index.ssf/2008/11/automakers_should_expect_strin.html

Automakers should expect strings attached to any bailout
by Rick Haglund | Detroit Bureau
Wednesday November 12, 2008, 11:25 AM

Automakers and their workers likely will be forced to accept some onerous terms to get federal rescue money, former Michigan Gov. James Blanchard says.

Blanchard should know. As a member of Congress at the time, he was a key player in winning a $1.2 billion federal loan guarantee for the nearly bankrupt Chrysler Corp. in 1980.

Now a Washington lawyer, Blanchard told me by telephone he expects the federal government will impose conditions on the Detroit Three similar to those required of Chrysler nearly 30 years ago.


That's if the automakers can convince Washington the domestic auto industry is worth saving this time--to the tune of $50 billion.

"There was a huge requirement of sacrifice involved with Chrysler," said Blanchard, who is not part of the current bailout talks.

The United Auto Workers union, under the leadership of the late Doug Fraser, took $463 million in wage cuts. Chrysler's banks reluctantly agreed to renegotiate $2 billion in automaker debt.

Chrysler also had to win approval from a federal loan guarantee board for its five-year business plan and provide a reasonable assurance it could pay back its federally backed loans...One of the reasons Congress agreed to bail out Chrysler was the automaker hired the legendary Lee Iacocca to turn the company around before applying for federal aid.

"You had a brand new leader who was well known but couldn't be blamed for what had happened," Blanchard said.

It didn't hurt that Iacocca, known as the "father of the Mustang" during his days as Ford's president, was an American hero.

Nevertheless, Blanchard said, there was even more opposition to rescuing Chrysler than there is now to aiding the auto industry.

Congress initially was overwhelming against the bailout, and Democratic President Jimmy Carter was "extremely reluctant" to approve it, Blanchard said. Even some of Chrysler's own bankers opposed the deal.

But eventually Washington was convinced it was worth the $1.2 billion in loan guarantees to save hundreds of thousands of jobs and prevent the government from having to assume billions of dollars in Chrysler pension obligations.

Taxpayers got their money back andearned a $311 million profit on the deal.

The stakes are much larger today. Three million U.S. jobs and much of the nation's manufacturing sector are at risk if Detroit's automakers fail, according to the Center for Automotive Research in Ann Arbor.

"We're going to have to do this," Blanchard said about the need to rescue the automakers. "This is no time for ideology."

[DeepModem Mom]

3. Thanks for that link, and additional info, Demeter! nt

[Demeter]

4. I Was Truly Shocked to Find It In My Local Rag

which I call the "Shoppers' Gazette" because all it has is advertising!