Mon 30 Mar 2009
Poisoned Bailouts
Posted by Brian Moore under Uncategorized
[4] Comments
I seriously hope that the AIG bonus scandal and the Presidential firing of the GM CEO have convinced the pertinent decision makers at other companies that bailout money won’t be worth the price. Hopefully we can get on with the process of these companies failing and being sold off so we can all forget these embarrassing little events.
The problem is that for most of these companies, the alternative to a bailout was bankruptcy. Under those circumstances, I think you have a fiduciary responsibility to your shareholders to take the money, even if it means your company is going to be permanently politicized in the process.
You’re probably right. But then it seems like we’re destined to repeat this process: big company does poorly, asks for bailout. Bailout money arrives with strings attached and the company fails, either because of government mismanagement, the company was worse than we thought, or irreconcilable changes in the market. I guess even in this context, you have to take the bailout money for the benefit of the shareholders, because that means there will be more cash to pay out to them when the charade is over.
At least with bank style companies I can kinda see how the fact that they owe lots of other people money could be an instance where the government should step in to prevent a cascade, but GM is just doomed. No amount of government help/money is going to save them. They’re still talking about “saving” the company as if in 6/12/36 months GM will suddenly be profitable again, even after the recession. Whatever “help” we’re giving should be in the context of wrapping it up and moving on.
This may be too far into bankrupcty law, but who gets paid and in what order if GM declares bankrupcty? I assume shareholders are pretty far down on the list.
Right, by definition, bankruptcy means that a firm’s liabilities exceed its assets, leaving nothing for shareholders. Creditor priority is defined by statute, with secured creditors (those with collateral) getting paid before unsecured ones. Shareholders are last and almost always get nothing.
So the shareholders and the people representing their interests are always going to want a bailout, because it represents a tiny chance they’ll get something.
To his credit, Obama seems to think that bankruptcy is something on the table, but then there’s this lunacy:
http://www.cnn.com/2009/POLITICS/03/30/obama.autos/index.html
“”We cannot, we must not, and we will not let our auto industry simply vanish.
“This industry is, like no other, an emblem of the American spirit; a once and future symbol of America’s success.”
The president also warned, however, that the automakers cannot depend on federal assistance indefinitely.
“We cannot make the survival of our auto industry dependent on an unending flow of tax dollars. These companies – and this industry – must ultimately stand on their own, not as wards of the state.”"
But what if they need those tax dollars to exist? Which is more important, our nostalgic attachment to auto companies not run by nasty evil Germans/Koreans/Japanese people or your promise to not have them be wards of the state?
This is just crazy. Everyone talked a bunch about how Bush gave the middle finger to the rest of the world during his admin. Now, after 50 years of us lecturing the rest of the world about this stuff, we turn around and say that American car makers are more important than all you dirty foreigners, and we’re going to spend billions helping them compete with you long after it’s obvious they can’t. This is real minor league stuff.
What happens when the international trade organizations decide this is unfair competition? What happens when they let other countries levy retaliatory tariffs against us? What happens when our government realizes it can prop up GM for a lot less by doing the same?