Thursday, November 18, 2010
Barry Ritholtz says it best:
Too Bad Banks Missed Out On the GM Treatment
... a weakened giant, a shadow of its former self, GM was still a substantial employer. That had political ramifications in an election year. Instead of letting them do the Lehman Brothers pavement face plant, the choice was made for a prepackaged bankruptcy.
This was the single best decision of the bailout era.
It seemed to be the only decision that was not made in a panic. It adhered to the rules of capitalism — when your company is insolvent, it goes into reorganization or dissolution. The brutal, Darwinian rules of the market and of bankruptcy applied — not the influence of lobbyists, or special favors from Senators. The Treasury Secretary’s former gig was not running an auto company, he ran a Wall Street bank — so there could be no special favors expected to come from that quarter either.
Instead, Uncle Sam’s involvement was to provide Debtor-in-Possession financing. The bankruptcy plan was obvious: Wipe out shareholders, give bond holders a haircut, fire management, pare the company down to a sustainable size without sentiment.
... what is arguably the most successful bailout of the 2007-2010 era was in fact a non-bailout: It was a bankruptcy reorganization that eliminated the most toxic aspects of a century old rust bucket of a company. The new firm has clean books, is well capitalized, is without crushing debt, has a less onerous labor contract, pension and health care obligations. Its hard not to see how this was anything but a ginormous winner for all involved.
Which brings me to the Banks. ...
The bank bailout plan was ill conceived and poorly executed. Trillions were thrown at them before Uncle Sam had any idea as to how much debt was actually on the books. What were once considered decent holdings were eventually revealed to be highly toxic assets.
Recapitalizing the banks is a huge priority. But after the first round of trillions were given away to the banks, the public was disgusted. The politicians lost their appetite for overt bailouts. But the banks were still under-capitalized, their balance sheets were still laden with junk. A direct transfer of taxpayer monies was out of the question.
An easy backdoor was found: Arbitrage the Fed and Treasury. Zero interest rates and QE allowed giant Wall Street banks to borrow at no cost from the Fed, and then turn around and lend this same zero cost money back to the Treasury at 3% or so. Do this for another 10 years or so, and the banks would be rcapitalized. By then, maybe there might even be a market for all those REOs. Sure, that would mire the nation in a decade long Japanese-like slump. Hey, at least the bonuses would be paid on time.
There's more outrage (it's a long post) at the link.
It's as if the writer couldn't figure out the connection right under his nose.
The GM exercise wasn't about saving the car company. It was about saving the unions, which would have been wiped out in a normal, legal bankruptcy proceeding. Why did those bondholders take a haircut and let the unions ahead of them in line? You can't "give" the bondholders a haircut. Under the law they are first in line to receive the company's remaining assets. The only reason the bondholders agreed to a haircut was that the primary bondholders were the big banks. Why did the big banks agree? Because they were being allowed to receive gobs and gobs of free money because they were allowed to borrow money at 0% from the fed and buy treasuries with it, thus giving them 3% interest on however much money they wanted. Why did the government do that? At the time it was still able to sell bonds overseas anymore. It was done as a quid pro quo to get them to step aside, thus funneling the assets of GM to the unions, who had 2nd dibs on the company's assets.
Would the banks have ever agreed to simply throw away their bonds if they were not controlled by the government and given a sweetheart deal to make up for it?
I think not.
The administration totally picked winners and losers. The winners:
1) Auto Unions. They get another year or two of full wages and benefits before GM goes bankrupt again.
2) GM management. They get to keep their jobs for another year or two before GM goes bankrupt again.
3) Banks. They now have an IV tapped into the treasury, where they get risk-free interest payments. It's permanent corporate welfare.
1) GM's smaller bondholders, who screamed bloody murder when the big bondholders -- the government controlled banks -- "agreed" to have their bonds wiped out. The big banks got taken care of by the administration in spades. It was the minority of smaller bondholders, the Indiana Teachers Union and all of the people who had purchased individual GM bonds as their retirement investments -- who got wiped out and, lacking political connections, were not covertly compensated by the Administration.
2) The public. Now a larger percent of future tax revenue will go towards paying the interest on this rather enormous bailout.
The GM deal was pure corruption and crony capitalism. It flooded the politically blessed parties -- auto unions, GM, the TARP banks with cash stolen from the rest of us -- the small bondholders, the public, the next generation.
Ritholtz can't even put the two halves of the corrupt GM/banking deal together. He doesn't make the connection. Both are two sides of the same coin, and mixaphorically, that coin stinks.
Addition to list of Losers:
and you can bank on that!