Economy

A Bad Auto Bailout Is Cheaper Than Any Bank Bailout

Whether or not bailing out the Big Three makes financial sense (which it doesn't), it's still a fraction of the cost of bailing out Wall Street.

Last week, as the clock was ticking on their bleeding books, it looked doubtful that the Senate would vote for the Detroit Three execs’ $34 billion (up from $25 billion two weeks ago) bailout request, or at least not without heavy strings attached. But, after November’s abysmal, 34-year high for monthly job losses' unemployment report on Friday, House Leader, Nancy Pelosi, D-Calif., threw an auto Hail Mary: a $15 billon bridge loan, extracted from a $25 billion fuel-efficient car program, she had previously vowed not to touch.

Not that this will last until March, as she indicated, but that aside, the remaining sticking point appears to be how an oversight committee, or "car czar" would be implemented. Details are being debated, but, given the scant oversight over the bank bailout process, and the fact that taxpayers are already racking up losses on bank stock purchases, breath-holding isn’t recommended.

Whether or not any of this makes financial sense (which it doesn't), it's still a fraction of the bank bailout cost. On the one hand, it does seem ridiculous that the government won't dole out the originally requested $34 billion for the auto industry, or even extract it from the bank bailout money, yet can part with 10 times that in capital injections to buy stock (which has lost money) in financial firms, not to mention the $3 trillion worth of subprime and other mortgage-related assets on the Fed's books in return for cash loans, and the $4 trillion or so of various direct market cash injections and guarantees.

Really, as long as the Fed's been acting as substitute leverage for the finance industry through its rather generous lending policy, you'd think it would be okay taking on a bunch of cars as collateral – actual vehicles would be worth more than structured financial ones, like collateralized debt obligations, and a whole lot easier to evaluate.

Indeed, Senate Banking Committee Chairman Christopher Dodd, D-Conn., thought that the automakers made a better case for federal help than the financial industry did. Of course Wall Street had the Treasury secretary and Federal Reserve chairman batting for them, whereas the automakers were on their own. Doesn't make them better, just less protected.

Still, they did learn something from their financial brethren. In arguing that it's the general economy, not their decisions, that put them on the financial edge, they are taking a page out of the bank-bailout playbook. The general economy worked well as an excuse for AIG, Citigroup, JPM Chase, Bank of America, Goldman Sachs and other banks.

The auto industry is asking for a lifeline, which is less than the cost of bailing out AIG. And no one from AIG had to face the Senate Banking Committee to get its $152 billion rescue package. Unfortunately for the execs, the auto industry's business is far more transparent than Wall Street's. The likelihood that $34 billion won't do squat to turn them around is clearer. With Wall Street, the lack of clarity helped bag the money.

Rather than do anything about the fact that it didn't ask all the right questions about Wall Street's operating practices in determining the TARP (Troubled Assets Relief Program), the committee is transferring that caution to the auto industry.

The numbers the automakers want are big to be sure, but not compared to those of the banking industry. Ford wants $9 billion, as a standby credit line that it promises not to use unless the rest of the auto industry deteriorates. Which it will. Chrysler wants $7 billion by year's end to keep its doors open. GM needs a $4 billion shot in the arm to keep breathing until the end of January, although with its stock in free fall, January might be wishful thinking. The total that GM has requested has already increased by 50 percent, from $12 billion to $18 billion, in two weeks.

Why the increase? Because none of the automakers has enough cash flow. And, unless the economy turns around within the next three months, or Americans spend their last bits of credit on D-3 cars, merely getting government loans and cutting expenses won't be enough to stave off the next request for dough.

So the question that the committee's top ranking Republican, Sen. Richard Shelby of Alabama, asked the execs, "How are you going to pay it back?" was spot-on. So was the one about why only $34 billion was being requested rather than the $75 billion to $125 billion that the automakers said they'd ultimately need to avoid bankruptcy. It's a valid query. The Band-Aid approach has produced spectacularly bad results with the finance industry.

Moody's chief economist, Mark Zandi, who thought $34 billion was just the beginning of future bailout requests told the committee, "A restructuring outside of bankruptcy is preferable to bankruptcy. Bankruptcy would be cataclysmic for the economy."

That's a scary thought. But there's a scarier one: That dreaded, risky, murky, unregulated financial instrument -- credit default swaps. When GM CEO Rick Wagoner said, "There's a significant amount of credit default swaps that would be triggered in a bankruptcy, in addition to credit lines with major institutions," eyebrows raised.

The credit default swap argument did the trick for AIG. Fear of the ripple effect of automakers defaulting on their debt, pulsing through nontransparent chains of international finance may cause a few committee members to lose some sleep, beyond the worry of all those job losses.

Still, the only thing that will fix a cash flow problem -- is cash flow. So, maybe the conversation in Congress should have centered on trying to figure out a way to make money out of existing inventory. True, languishing vehicles are part of the problem, but ignoring them isn’t a solution.  Ignoring home foreclosures rather than restructuring loans made a bad situation much worse.

Subsidizing low-cost consumer-driven purchases with the money would move current inventory and pre-establish a set of buyers to switch into the new lines of more fuel-efficient cars when they come about. This would ensure present and future cash flow. Otherwise, UAW concessions, cutting jobs, not funding off-book health care plans, closing plants and the fire sale of brands just won’t plug the dam of losses. That said, trillions of dollars hasn’t stopped the fallout from Wall Street, either.

Nomi Prins is a senior fellow at the public policy center Demos and author of Other People's Money and Jacked: How "Conservatives" are Picking Your Pocket (Whether You Voted for Them or Not)
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