Paulson Grasps the Automaker Nettle

Last night, I asked Hank Paulson, in a submitted question for his appearance at the 92nd St Y, why he was dilly-dallying over an automaker bailout and whether or not to ask for the second tranche of TARP funds, after having been so decisive all the way up to the election.

I should ask these questions more often: Today I get the news that Paulson is not only releasing TARP funds for Detroit, but has kindasorta asked for the rest of his TARP money too. Here's the relevant bit of his statement:

It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect's transition team in the near future.

This is less than crystal-clear, but Damian Paletta says that it "signals a shift from recent statements when he suggested he wouldn't ask for the rest of the money". It seems to me that Paulson is saying that the only way he'll formally ask for the second tranche is if he has the support of Barack Obama's transition team.

I am surprised that George W Bush, MBA, said this:

He said that bankruptcy was not a workable alternative. "Chapter 11 is unlikely to work for the American automakers at this time," Mr. Bush said, noting that consumers would be unlikely to purchase cars from a bankrupt manufacturer.

So much for the pre-pack, but this is going to make things very hard on the automakers' managers, who need to impose a swingeing 67% haircut on their bondholders without having the help of a bankruptcy judge to enforce such a thing. I'll be very interested to see how they try to do that; expect a huge fight, and no guarantee of success. Yes, the bondholders are well aware that if they say no, the only other option is liquidation, and zero payout. But that doesn't mean they'll be remotely complaisant.

Comments

[herbert hoover:]

Paulson spent $350 billion in less than 2 month...and they're gonna give him more? Ya gotta love America

2008 Dec 19 12:09 PM

[Jellonailer:]

Yeah right. Americans have proven time and time again that they are willing to risk their lives by flying on a BK airline but they won't buy a car if it's of high quality and priced right from a BK car manufacturer?

2008 Dec 19 12:25 PM

[Poor me:]

Paulson Grasps the Automaker Nettle. Paulson couldn't grasp anything, but the money that keeps getting throw at him. You've heard "when pigs fly", well, their flying now.

2008 Dec 19 12:34 PM

[briacal:]

A big applause for President George W,Bush

2008 Dec 19 12:46 PM

[SEM:]

"Yes, the bondholders are well aware that if they say no, the only other option is liquidation, and zero payout."

Um... I think the other option is to hold out for a federal bailout. With politicians saying that bankruptcy isn't an option, the bondholders know that they can hold out for additional federal funds. I have a hard time seeing a chapter 7 filing from the automakers.

Based on what I've read a chapter 11 with federal DIP financing seems like a reasonable solution. We're already going bailout the underfunded pension via the PBGC- how much should we be doing?

2008 Dec 19 12:53 PM

[Jackson Cash:]

Where's my bailout from the lemon Detroit sold me back in 1998?!

2008 Dec 19 01:37 PM

[who:]

In for a penny, in for a pound, Congress will have no choice but to pony up the rest.

Bush did the right thing for him, don't want to be the president to loose the auto industry for a small sum of 15 billions. Let Obama deal with the mess.

Paulson, not sure what would anyone else would have done anything differently or have an different impact.

Anyway we are in for a long winter!

2008 Dec 19 01:40 PM

[Quickdraw:]

Billions for the financial institutions that practiced questionable lending ...

Billions for the automakers who build products that a significant percentage of the potential market chooses not to buy ...

For the rest of the country, the questions are mounting: What if we don't own a home, or a new car? Tell us again, why we are being asked to prop up the house of cards? Our grandchildren will still be paying for these so-called 'bailouts', which everyone will soon realize bought us nothing. A trillion dollars, to finish right where we started.

If the cards fall, and the people who collectively made the mistakes that led us here are out of the way, and the immediate future for our economy is indeed looking grim. Retailers will sell less. Services will be suspended. A galactic correction occurs in our capitalistic world, but at least we still have that capitalism. After the ashes of the mess that is our current model for doing these businesses cools, then new models will quickly rise that are smarter and more relevant. A year or three of contraction will be followed by a new order ... and most of those responsible for the bad business will be gone. From the bankers who looked the other way when home loan applicants misrepresented their incomes, the business leaders who somehow believe that 2 plus 2 equals 22, to the UAW members who think they are 'entitled' to their jobs at a time when the products they build clearly are not selling; within a short few years our country would be stronger and better after a resurrection of a better business culture. Our country is far different from the USA of the 1930's. We would rebound and emerge better and stronger (just like we did in the 1940's).

Or, should we reward failure and ask present and future generations to pay for it?

Maybe we should give the billions to the banks and the automakers who are NOT struggling. They didn't paint themselves into corners or build boats in their basements. They would become stronger and more dominant, creating jobs and supplying services that the majority of Americans already find more desireable compared to those of the losers who need the bailouts. If we continue to throw good money after the bad, most of us won't be able to afford to go to a bank, nor buy a new car.

2008 Dec 19 01:51 PM

[rismoney:]

Bailouts will never stop and will undermine capitalism until systemic failure occurs. Financial companies too big to fail, Citigroup, Chase, etc. Drug companies Pfizer, Merck will need to continue to make drugs because of systemic population problems if they stop. Airlines, American, United. Defense Contractors, Northrop Grumman,Lockheed cannot fail. Walmart probably can't fail since it employs 2million people. It doesn't end. Exxon can't fail. Right? Am I wrong?

2008 Dec 19 02:01 PM

[prudentinve...:]

Why should the automakers' bondholders be thrown under the bus, when the banks' bondholders (C, BAC, etc) were rescued by the government?

2008 Dec 19 03:36 PM

[Bill M:]

We have bailout fever..

2008 Dec 19 03:48 PM

[Teutonic Kn...:]

Miracles are hard to come by, but sometimes they do happen. Maybe the Big3 could turn it around in a matter of months after decades of ingrained decline.

Come to think about, it, maybe our golden era of making cars - the U.S. of A being coined as the "Kingdom of Automobile" had gone by. My guess is that some of our best brains in exterior design, marketing and advertising had been working for Honda, Toyota for a long while.

Worst case scenario? We continue to chip in another $300B to prop up the Big3 but to no avail. I guess what would happen if the Dem botches this one, voters will show their House and Senate reps the door in November 2010, and Mr. Obama as well as one-term president in November 2012.

Then you would have to give Bush credit to "give unto Caesar the things that belong to Caesar".

2008 Dec 19 11:50 PM