Big Three Endure Public Flogging - Government Finally Gets it Right

Imagine if General Motors (GM) CEO Rick Wagoner called up Mary Peters (Secretary of Transportation, for those unfamiliar with the invisible half of the Bush Cabinet) on a Friday evening and said, “Psssttt. We’re in trouble. We need money. Can you help?” And then, a couple of days later, there was a middle-of-the-night announcement detailing billions in bailout funds for the foundering automaker.

That’s effectively what has happened with Citigroup (C), AIG (AIG), and several other huge companies that managed to arrange rapid-fire rescue packages from the government through a weekend’s worth of negotiations. Except instead of the Transportation Secretary, they’ve been dealing directly with Treasury Secretary Hank Paulson, a fellow banker with a CEO’s push-it-through mentality.

The chief executives of GM, Ford (F), and Chrysler are obviously undergoing a much more arduous public flogging as they plead for help, sitting through hours of televised Congressional hearings where they have to atone for their mistakes and explain why this time, it’s different. It’s fascinating. And uncomfortable. And maybe this is how we should have been doing it all along.

Compare what the Detroit CEOs are going through to the travails of their Wall Street colleagues, and there’s a startling lack of proportionality. For a starter fund of $34 billion, the automakers have each submitted a fairly detailed “viability plan” to Congress, with public versions available to any taxpayer with an Internet connection. GM in particular has laid out its problems in plain English, in a way that’s helpful to anybody trying to decide if the company deserves help, or not.

Members of Congress are asking some pretty good questions, too – like how do we know this will actually solve anything? And since the whole ordeal is unfolding in slow-motion – compared to $300 billion in backing for Citigroup, $150 billion for AIG, and billions more for some banks we don’t even know about yet – taxpayers are calling up Congress and weighing in. Many are skeptical, with a high degree of opposition. Even if there is a bailout in the end, feedback from voters puts members of Congress on notice and gives them better standing to exact tough terms from anybody who gets a federal lifeline.

From now on, let’s give the same treatment to any other CEO who insists there will be Armageddon if his company doesn’t get a bailout – and do it BEFORE handing out the money, not after. It would be nice to see a public, 30-page report from Citigroup CEO Vikram Pandit explaining what would happen to his bank – and the economy – without taxpayer largesse. And how about a concise public explanation from AIG about how what was once the world’s premier insurance firm gagged so badly on credit-default swaps – a kind of insurance! – that it basically needs a bottomless government loan to keep from wiping out half the world’s financial system.

Oh, and when these masters of finance come to Washington, let’s make sure they drive themselves in Everyman fashion, enduring the same traffic and potholes as everybody else. Pandit could drive a modest family sedan whose purchase was made possible by a Citigroup loan. The AIG entourage could come in a bus that it insures, with some leftover space in the back for pile of credit-default swaps. Just so taxpayers can see what they actually look like, since we own a bunch of them now.

Comments

[PeteK:]

To bailout the Financials & insurers is a one time deal. All these
institutions have billions of worth of assets and the gov. has the
upper hand on them. Also, involve alot less workers with no union control.
For GM & the UAW, it's a completely different situation, it involves years
and years of UAW control, senseless contracts and agreements between them, corruption., abuse, GM is not an employer any more, GM is just like
a mummer many ways. The gov should deal with them seperately, GM should file for chapter 11 and consider moving to the southern States.
That way, there will be great hope for success a few years down the road. Michigan is a mess, beyond repair, go south will be the smartest thing to do. Otherwise, history will jsut repeat itself.

2008 Dec 07 09:00 AM

[ddd1612:]

This is a much better balanced article.
This same process should have been conducted on the BAIL OUT to the financial industry. GS, AIG, and other banks, including C were given funds in secrecy ... with no details how those funds were going to be used.
The same thing with C - why wasnt the process made public?
We tend to treat the financial people on WS - and these are the same people that have taken huge risks, walked away with the biggest bonuses and compensation packages and now taken 2.4 trillion dollars with no accountability - all on the word of Hank Paulson and Bernanke.
What a joke!

2008 Dec 07 10:04 AM

[car_guy:]

Mr. Newman's article raises very good points. The Wall Street firms never even had to testify for their gifts. Their money is not even a loan. The $300B for C is to cover the losses on bad debt. That is all taxpayer $ down the drain. Their remaining $50B is in "equity" which I put in quotes since this already exceeds their market cap. I also have not heard Congress demanding that Pandit cut his pay to $1 and sell all of their perks. I did not even hear any uproar when AIG spend $500M of taxpayer money for trip to Europe to "reward" their top executives for their performance this year.

TenQ - the gifts to the financial community are not a 1 time deal. We have been here before with the savings & loan crisis, the huge infusion of capital after the '88 crash, the huge infusions of capital at the begininng of this year, and AIG has already gone back to the well 2 months after their original loan for another $70B and a huge cut in their interest rate. This was after wasting almost 1% of the original amount on the executive vacation. GM/F/C were not interested in government loans until the banks tightened credit so much that ALL US auto sales, foreign & domestic, dropped over 30% the last 2 months to levels that no car company can run at for long. If the financial institutions that caused this mess took some of the $7 TRILLION in government money they received and actually used it to provide consumer credit, the US 3 would not be in Washington.

The UAW, of which I am neither a member nor a fan, finally took their lumps last year and conceded to a contract with lower wage benefit levels for new workers and moving the health care & retirement liabilities off the companies books & into a VEBA. That is why they keep saying they will be at parity with Toyota/Honda/etc in 2010.

2008 Dec 07 01:20 PM

[87gn:]

the gov has the upper hand!!?? the autos are corrupt!!?? aig has pi$$ed in your face with arrogence having half million dollar parties with OUR TAX MONEY being given to them! the credit markets havn't opened up a bit and the pockets being lined, i'm sure is staggering.
gm's not an employer?? they sign my pay check. and no, i'm not a union employee. yes the union has gotten greedy, and need to be reeled in, which if you were educated in whats happening in the auto's would know they are. look at the latest contracts. what the hell is a mummer anyway?
oh yea, the banks are a 1 time deal?? FOR 700 BILLION! when are we gona get that money back? at least the autos are asking for a loan, which will be payed back. you don't have a clue on how bad you just got raped by our gov and the financials, who just skim money off the top of all our investments. and actually produce nothing! i could go on for awhile, but i need to spend some time with my family, teaching them morals, unlike the gov and financials the just boned us


On Dec 07 09:00 AM TenQ wrote:

> To bailout the Financials & insurers is a one time deal. All
> these
> institutions have billions of worth of assets and the gov. has the
>
> upper hand on them. Also, involve alot less workers with no union
> control.
> For GM & the UAW, it's a completely different situation, it involves
> years
> and years of UAW control, senseless contracts and agreements between
> them, corruption., abuse, GM is not an employer any more, GM is just
> like
> a mummer many ways. The gov should deal with them seperately, GM
> should file for chapter 11 and consider moving to the southern States.
>
> That way, there will be great hope for success a few years down the
> road. Michigan is a mess, beyond repair, go south will be the smartest
> thing to do. Otherwise, history will jsut repeat itself.

2008 Dec 07 01:56 PM

[James Wilson:]

I can see what Buffet means now. Each Derivative split into hundreds of small pieces with the total profit broken into even more Derivatives then sold in a package at full value as AAA paper.

The same thing Enron was doing by dividing the risk then packaging the longterm profits as a short term gain.

2008 Dec 07 02:47 PM

[car_guy:]

This brings up another good point. How can the ratings agencies constantly downgrade the US 3 manufacturers driving up their costs & making them uncompetitive (you notice only Toyota is offering 0% financing, with GM's credit rating how could they afford it) while rating derivatives they don't even understand AAA. Isn't a lack of understanding the very definition of risk.

This sounds like market manipulation 101. Put high ratings on the products your customers, the investment banks, want to sell and downgrade everything else. After being so incredibly wrong, why does anybody care what Moodys/S&P/etc rate anything at?


On Dec 07 02:47 PM James Wilson wrote:

> I can see what Buffet means now. Each Derivative split into hundreds
> of small pieces with the total profit broken into even more Derivatives
> then sold in a package at full value as AAA paper.
>
> The same thing Enron was doing by dividing the risk then packaging
> the longterm profits as a short term gain.

2008 Dec 07 03:03 PM

[tiredofyourbs:]

thank you for a decent article. Most of the articles on seeking alpha are stupid, worthless and under-researched.
Financial advisors essentially are gamblers and dont create anything tangible. Its not a science nor it has elegance of nature. People who manipulate these markets are vultures and can speak from both sides. Usually they bring down the economy and play with lives of people.
Noone can stop them because "they" have the money!

2008 Dec 07 05:34 PM

[Steven Hansen:]

a few points:
1) i am against government owning pieces of business. the corrupt members of government use their ownership to extend their corruption into business.
2) having said that the integrity of the dollar hinges on banking. money is constitutionally mandated to be the responsibility of government.
3) if i believe points one and two, i will be conflicted when it comes to bailing out banks. without a sound banking system the dollar fails. i choose to go with bailouts because it is the lesser of the evils.
4) one of the reasons for the bank failures of the great depression has been attributed to the publishing by the government of the help it was giving. i cannot fault the government or the fed to be trying to do things differently than was done in the depression.
5) the failure of the automakers, especially today with the economy in such a weakened condition would set off a cascade of unintended consequences through the economy making the amounts requested to bailout small in comparison. i choose to listen to my wallet - bailout the automakers.
6) i sit bewildered how you know with any certainty the effect of a chrysler bankruptcy on the lower tier suppliers who all the automakers rely. industry has a symbiotic within it. there will be very negative effects to the industry as a whole if Chrysler fails through bankruptcy.

2008 Dec 07 09:25 PM

[LillyM:]

I have no dog in this fight but I cannot understand why Congress has chosen to scapegoat the auto companies yet allowed the corrupt Financial crowd to have carte blanche with our money -- without interrogation and any oversight. At least the car companies can step in should any crisis occur as they did during WWII and supply our needs with expertise. This article was more balanced than most and more reasonable, but first and foremost our govt leaders need to remember that they work for us, not themselves, and the money is to go into our pockets, not theirs! If they were to place the same standards on their activities (and the country's budget) that they are requiring from the automakers, the U.S. would be in AAA shape. ... and how about firing themselves for inefficiency. corruption and stupidity, too?

2008 Dec 08 11:34 AM