“Don’t just stand there. Do something!”
“Don’t just do something. Stand there!”
The first statement above is quintessentially American. We are biased to action. Terrorist attack? Reaction: Go kill people who were tangentially related to the event, making everyone wary of attacking us again others think that we act with unreasonable blind rage.
Major companies on the rocks? Act now to prevent certain disaster! I don’t know — there are administrative remedies in the short-run that can be used to stave off insolvency, without immediately throwing money at the problem — appoint a conservator to get maximum value out of the company for senior bondholders while you wind it down (liquidate).
That’s the way I feel about AIG, GM, Ford, etc., companies that I have had a consistently negative view on well before the crisis began. Why are we rewarding companies that took on way too much debt to finance their operations? To save jobs? Uh, nice thought, maybe, but you could do a cramdown in bankruptcy where everyone gets hit. The senior debtholders would convert their claims to a reduced amount of new equity, and wiping everyone else out.
So when I read about AIG getting new loans from the US government, and reducing the interest rate on all of the debt, I go back to my initial statements regarding the bailouts. When you make policy rapidly, you make mistakes. This has been proven true with AIG. Now, with the automakers, will we compound the mistake?
Let the automakers fail. It is one of the few things that will might bring the unions to their senses. The senior debtholders will bring in new management, and the unions, if they survive, will have to reduce their unreasonable demands that are out of sync with what other auto workers make in a competitive market. Many auto workers would be able to keep their jobs, but at wages more congruent with the value produced.
The Humility of Realism
The above title is a play on a book title from a politician who deserves to be obscure, but has hit it big, much like Jimmy Carter. But as Woody Allen said, half of life is just showing up. By the humility of realism, I am trying to get across the idea that our government should slow down, take a step back, and think hard before acting. Bring in the same old players experts who are disconnected from the “crisis” and let them consider with seriousness the depths of the problem that we are in. We are probably facing a second depression.
From my perspective, depressions end when enough of the debt of the nation is paid off or liquidated, so that the financial system can once again issue moderate amounts of credit to high quality borrowers. But the US Government is presently compounding failure with interest, adding to the total debt of the US by borrowing more, and giving the proceeds to companies that not only are special interests, but have proven that they cannot use it well.
The humility of realism would recognize that the US government cannot borrow its way to prosperity, but must act to conserve, admitting the faults of the past, recognizing that past policy has erred significantly. I am not holding my breath here, waiting for that to happen. I expect that the US government will proceed further down its present path, playing favorites with special interests, and continue to apply irrelevant “cures” in the hope that action will end the crisis.
As for me, I am puzzling over what would preserve value for me, and those that I care for in this environment. That’s not a easy puzzle; in a depression, everything gets whacked. But as I get more clarity, I will write more.
- Auto Makers Force Bailout Issue
- U.S. Throws New Lifeline to AIG, Scrapping Original Rescue Deal
- Time to pull the plug on AIG?
- (And, what will we do about the collapse that is coming in much of commercial real estate? Not a happy scenario for the banks, and ultimately the taxpayers and others who get milked by the US government.)