Citi and GM

[Joanne98]

posted by Adam Levitin

If I were a line-worker at GM, I’d be pretty pissed right now. My boss flew into DC on a private plane and came away with bupkes. Citi, on the other hand, just got a fourth big bailout. (Bailout 1: Bear Stearns; Bailout 2: AIG; Bailout 3: TARP preferred share investment; Bailout 4: the Citi-specific bailout. The first two bailouts propped up Citi and other financial institutions by protecting their counterparties.)

What’s most troubling about the GM non-bailout and the Citi bailout is the disparity in the moral hazard angle. It seems to me that from a moral hazard perspective (and I recognize that is not the end all and be all here), we have our bailouts exactly backwards.

http://www.creditslips.org/creditslips/2008/11/citi-and-gm.html#more

[daninthemoon]

1. I feel for the autoworkers, but their anger/dissappointment should be directed

at those bosses, who drove the companies into the ground, and then had the audacity to fly in private jets to ask for a bailout to keep dong the same things. There is no good immediate solution for Detroit. Best plan: Obama builds the infrastructure to support alternative energy vehicles while Detroit retools and produces trhe alternative fuel vehicles.

[peace13]

2. And yet the bankers show up with no plans and a hand out?

How do you reconcile that one?

[daninthemoon]

3. I don't at all. I was against the banking bailout. It was a blank check

for a criminal administration. I don't think bush actually expected to get that money. I imagine the boys sitting around, and someone said " well I guess we got all we could." Then some wiseass said" I bet if we just up and ask for 100, no 500, no fuckit, 700 billion dollars, they'll just hand us a damn blank check. amid general laughter and agreement, some one stopped: " you know, they just might..." and now, weeks later, much of the dire emergency money still is unallocated. I think the world needs a Jubilee year. All debts forgiven and we all get a do-over.

[HamdenRice]

4. Here's why they are different

And I should say up front, I'm entirely in favor of some kind of bailout for the automakers.

But I can see the rationale for preventing the banks from going completely bankrupt while allowing the automakers to go through a prepackaged bankruptcy (not that I think that's wise, but I can see the logic of it).

Most people don't know what corporate bankruptcy reorganization actually is. It's pretty simple, but first, you have to understand "capital structure." There are various kinds of capital put into corporations in different form, kind of like a pyramid in terms of rights. At the bottom is common stock; then preferred stock; then junk bonds; then senior bonds; then secured bank debt; and so on.

At minimum, all bankruptcy means is that two things happen:

(1) The common stockholders' stock is declared worthless, and then everyone "moves over one" -- the preferred become common; the junk becomes preferred; the senior becomes junk; and so on.

A new apex is put on with a new infusion of money. It is given absolute security as the incentive to invest in a bankrupt company.

(2) Management is fired and replaced.

The idea is to keep the company going.

Now here is why a car company is different from a bank.

A car company produces cars. A bank produces paper in the form of securities. Those are fundamentally their products.

The car company can continue to produce cars if it goes through a quick pre packaged bankruptcy. But a bank's very product is destroyed if it goes through bankruptcy.

That said, I think the banks should be nationalized rather than bailed out at this point.

A second big difference is management. The big banks' management, the people who got them into this mess, have been largely fired and wiped out financially already. The auto makers still have the same incredibly obtuse management. It might take bankruptcy to get rid of these guys who have been ruining the auto industry for the past 30 years.

[PassingFair]

5. I see no problem with "profits" being wiped out.

The crisis should be handled by seeing that
INITIAL investments and DEPOSITS are secured.


Given the current crisis, gains should be wiped out.

AND we should loan money to the auto industry.