Bailouts are Unfair to Those Who are not Bailed Out
If you run a large corporation in trouble, there is a drill that you must follow.
- In measured tones, tell the public that liquidity is no issue, and that you are more than capable of meeting all obligations.
- Scream loud behind closed doors to Congress/regulators, saying that you have been a prudent manager, but the economic environment is beyond belief. You need help and you need it now, and the change in administration might be too late for you.
- Explain how many other jobs would be lost if you disappeared. (A canard, because the company won’t disappear. The equity might be canceled, and some factories closed and jobs lost, but most of the jobs and factories will continue with the bondholders as the new owners.)
- In the crisis atmosphere, judgment will be suspended (as it was before the Iraq war and at the debates over the bailout), and legislators will vote for something that won’t work, but must be done out of the appearance that Congress must be doing something to fix matters. Anything to justify their existence…
- Receive the bailout, and thank them for their wise decision on behalf of the American people.
- When the bailout monies fail ask for more. (Think of AIG; you might even get really soft terms.)
- Because Congress has bought into the original premise of bailing you out, they will do it again to protect their investment. Regret has set in, and Congress will easily “double down” to throw good money after bad protect their investment. Remember, Congressmen are facile at speaking to the ignorant populace, but aside from Ron Paul, few have any significant understanding of economics. As my best boss once said, “I wouldn’t trust him to run a hot dog stand.”
As a CEO with a company in trouble, the objective is to get your foot in the bailout door. Once inside, it will be difficult for the government to turn its back on you.
And, that is why Congress should refuse to bail out firms, even those that are too big to fail, unless they are taken through bankruptcy first. Congress invariably throws good money after bad, and we as a nation are the poorer for them doing it. I have no doubt that the automakers will get bailed out, but it is the wrong decision. Better they should go through the bankruptcy process so that they can reconcile their cost structures, than that the US government should subsidize unionized auto workers.
November 30th, 20083:14 am at
Sorry to be such a troll but:
Since when was fairness on the table? Ever since DJ stole the fun size m&m’s from my lunchable in 1st grade, I have had the sneaking suspicion that life, in fact, may not be fair. If it is in fact fair then can we use Goldman’s bonus pool to bail out GM?
Ethics are always arbitrary and can therefore be assumed away, so to speak.
November 30th, 20087:21 am at
As this mess continues I think about what the next shoe to drop is. Obviously credit cards, but what is beyond that? Not terribly insightful but I think we are at a tipping point for pension funds and retirement benefits. In times like these where mtm accounting is broken, I fear that pension funds are going to be the next to stick their hands out for a piece of the great bailout. These fund managers can easily follow a progression like you laid out above. The social impact could be huge as more retirees start reach the age where they draw benefits. If the benefit they expected is suddenly dramatically lower, who is going to pick up the slack? The first place everyone will look to is our government and I think they will listen.
November 30th, 20084:38 pm at
> Better they should go through the bankruptcy process [...] than that the US government should subsidize unionized auto workers.
I can think of $40,000,000 that could very easily be renegotiated right off the top before going anywhere near a union wage, pension or retiree health care program. And that’s only five people.
Those at the top of this pyramid are dangling that huge number at the bottom over the edge to lure in politicians.
Are union members well compensated? Sure. Should Rick Wagoner have a job that would cover 200 people at $70k/year? Should he even have a job, period? Ab-so-f’n-lute-ly no.
December 2nd, 200811:50 am at
Two things
-How come we do not hear anything about who holds the GM and Ford Debt? There has to be a great deal of pension fund, insurance co. exposure here.
-How can you consider bankruptcy for GM/Ford when the credit markets are frozen? I have this scenario whereby our astute politicians do not “bailout Ford or GM” and place them under bankruptcy protection. Their sales plummet and they go into Chapter 7 (remember nothing is being done for the consumer that purchases cars). The parts makers and other suppliers are left holding the bag, so to speak, and they come running for their bailout. Now we are forced to bailout them to save the foreign transplant manufacturers. Talk about calling out the National Guard!