Bankruptcy Lets Capitalism Run Its Course

President Obama, at the urging of his auto task force, announced Monday his decision to reject the restructuring plans from General Motors (GM) and Chrysler that would require additional government funding. This announcement was coupled with Obama’s request for CEO Robert Wagoner to resign. Barring tough concessions from the UAW, debtholders and unions, both companies will likely end up in bankruptcy. Plans for bankruptcy proceedings include the creation of a “good” company/”bad” company structure. “Good” GM, including Chevrolet and Cadillac, would remain an independent company. “Good” Chrysler would be sold to Fiat SpA. Potential sticking points in the bankruptcy proceedings include the fate of the 140,000 member UAW and healthcare plans for the hundreds of thousands of retirees.

The End of an Era

Taking a step back, GM’s situation raises an interesting question. Clearly too big to fail is too big; it inhibits capitalistic processes as the government is forced to step in. Yet restricting these companies’ growth is difficult to rationalize in a capitalistic system.

My heart goes out to the residents of Detroit who have and will continue to lose their jobs. Realistically, however, paying someone in Detroit $65 an hour plus benefits (for a largely unskilled job) when someone in Asia will do it for $45 (and far less benefits) is simply not sustainable. The problem right now lies in the plethora of past mistakes. The government is paying for poor regulatory decisions (repeal of Glass-Steagall, etc.) and companies are paying for poor capital budgeting/financing decisions. Poorly managed companies are easily fixed; file Chapter 11, restructure or liquidate. Regulatory missteps, however, do not have an easy fix; companies become ‘too big to fail.’ Regulatory failures has allowed a $45 trillion (notional value) CDS market to go completely unregulated (because it was deemed a “swap” contract) and allowed an auto industry to continue to overpay a unionized employee base for an inferior product.

Obama’s removal of Wagoner is a far cry from the capitalistic society most of us imagine we would live in. Being realistic about the situation, the government has pretty much been running GM for the past several months. However, what a scary precedent for the government to come in to a completely private enterprise and force employee resignations. The government owned GM debt and preferred shares; they in no way had any voting rights. On the positive side, at least there is now the possibility of failure (bankruptcy and restructuring). This in stark contrast to AIG (AIG), which was essentially handed a signed government blank check.

American (Taxpayers’) International Group

However, saving AIG was never about AIG. Nearly every company in the financial services industry held CDS on other institutions through AIG. A failure of AIG would render these contracts useless and do unspeakable things to the banks’ balance sheets. News released Monday pulled back another layer in the seemingly alternate universe of AIG. Assuming these allegations are valid, this is where the government’s role is unquestioned. The way that you prevent fraud is by making an example of offenders. Fraud was a major part of our current problem and violators should be thrown in jail. Geithner has announced plans for a ’superregulator’. While I don’t see why the current system can’t stop problems like AIG (at all levels), I am all for whatever bureaucratic squabbling that is necessary to prevent these future blowups.

The question has been raised several times over the past week of bear-market vs. sustainable rally. From a very holistic perspective, the problem was a buildup of excess debt in the system. The way to purge the system of this debt is through natural capitalistic failures. Propping up companies (and entire industries) simply pushes back the payment of debt. This is not a cure, it is a band-aid.

-Adam Brown

Disclosure: None

Comments

[jod:]

I read yesterday that the GM bonds are probably mostly covered by cds's and blind cds's. The 28 billion in bonds is estimated to be insured for at least 100 billion. A good portion of these are insured thru AIG and guaranteed by the government. The major bond holders are all pushing for Bankruptcy so they can collect 100 percent of the bond. .Thats capitalism to pay out over a 100 billion and bankrupt a company. All Gm's union workers together make less than 4 Billion a year. If GM goes bankrupt and screws the union out of a billion a year and the Government pays like 50 billion for the CDS's AIG holds how does that make common sense. The whole system seems backwards to me.

Apr 06 06:41 PM

[jod:]

Seems more like organized crime to me.


On Apr 06 06:41 PM jod wrote:

> I read yesterday that the GM bonds are probably mostly covered by
> cds's and blind cds's. The 28 billion in bonds is estimated to be
> insured for at least 100 billion. A good portion of these are insured
> thru AIG and guaranteed by the government. The major bond holders
> are all pushing for Bankruptcy so they can collect 100 percent of
> the bond. .Thats capitalism to pay out over a 100 billion and bankrupt
> a company. All Gm's union workers together make less than 4 Billion
> a year. If GM goes bankrupt and screws the union out of a billion
> a year and the Government pays like 50 billion for the CDS's AIG
> holds how does that make common sense. The whole system seems backwards
> to me.

Apr 06 06:42 PM

[Frank S:]

What part about this dont you understand. The days of Reagan Wreckonomics are dead, the day where conservatives seek not to serve the nations needs but the needs of CEO,s at all costs , are over,and the thinking you exhibit as "journalists" is rapidly approaching extinction.

No we wont be a socialist country, but we will expect honest management of our banks, responsible and YES even a patriotic component from our business community, and a nation that hasn't been brainwashed by an irresponsible press(i.e.seeking alpha), into believing that what is good for America inst what is good for Americans.

Trickle down didnt work because it wasnt designed to work, it was only a means to an end for those who thought they could outsmart and control the world, when they were totally incapable of controlling their own greed and thirst for power.

For their own sake republicans need to as a group grow up, admit their philosophical failures, and actually develop new and realistic policies that will move our country forward. If not, then they will soon reap the reward they deserve as the next third party in American politics.

Apr 06 06:51 PM

[Frank S:]

Well they have a surprise coming. If GM splits in to two companies. the bond holders will have all stake moved to the liquidation side not the new viable GM. Then it would be entirely appropriate for the insurer to deny coverage to them for the debts held in this new to be liquidated old GM.

LOL

Wouldnt that be funny, I hope they cant nailed before this is all over,
thats what they deserve for being a continuing problem when what is called for is a real solution.

LOL

Bondholders get 100% of old GM, the New GM gets a totally clean balance sheet and new beginning without them.

LOL


On Apr 06 06:42 PM jod wrote:

> Seems more like organized crime to me.

Apr 06 06:58 PM

[Bylo-:]

Seems like this author doesn't know his ass from his underwear! I worked for Ford Motor Company for 31 1/2 years and I never got CLOSE to $65 an hour, "plus benefits". Time to ingore this dude.

Apr 06 07:00 PM

[Frank S:]

The reson why they call this SEEKING alpha is because the writers here arent smart enough to become alpha. Amazing how these kinds of lies can be promolgated by people like this, even more amazing is there actually are people who will now believe that crap about $65 an hour.

Amazing how we have let irresponsible and erroneous journalism turn us against each other, when we should be demanding truthful responsible reporting.

Apr 06 07:06 PM

[slowdown:]

Or worse...that someone in asia actually makes $45.00 and hour.


On Apr 06 07:06 PM Frank S wrote:

> The reson why they call this SEEKING alpha is because the writers
> here arent smart enough to become alpha. Amazing how these kinds
> of lies can be promolgated by people like this, even more amazing
> is there actually are people who will now believe that crap about
> $65 an hour.
>
> Amazing how we have let irresponsible and erroneous journalism turn
> us against each other, when we should be demanding truthful responsible
> reporting.

Apr 06 08:34 PM

[Auto Employee:]

Where do they get these authors from $65/hr plus benefits that is completely untrue and yet they get away with writing this crap. Misinforming everyone as ususal, amazing.

Apr 06 09:23 PM

[Auto Employee:]

I get it this is authored by Bullish Bankers, I guess they need to deflect the heat somewhere due to the fact that they are solely reponsible for the mess the economy is in now. They have no morals, no conscience therefore so false reporting is of no consequence to them that is what they are all about.

Apr 06 09:44 PM

[Homer II:]

We just need to hustle GM and CRY over into BK courts for their Chapter 11 reorg and start scraping off all the parasitic UAW bloodsuckers. Then, the companies can emerge nice and clean, ready to hire a whole new staff of WORKERS, but not slackers and other viagra-gulping, meth-gobbling criminal filth known as the UAW.

Apr 07 02:44 AM

[Deweyp:]

This is probably the most pathetic attempt to sound intelligent on any particular issue I have ever read. #1 Auto workers do not make $65 per hour, even with benefits. #2 Asian workers make less than $25 per hour including benefits, with the exception of Japan. #3 US autos are not inferior as you suggest. They are in fact recognized as exceptional (J.D Powers on Buick's rating as #1). #4 How can pushing back repayment of debt be worse than wiping out the debt altogether as you suggest?
If you are going to attempt monday morning quarterbacking at least find out the score .

Apr 07 09:20 AM

[nukldrager:]

Media is dominated by liberal ideology. Demand away, but we should all enjoy these conversations while they are still available.


On Apr 06 07:06 PM Frank S wrote:

> The reson why they call this SEEKING alpha is because the writers
> here arent smart enough to become alpha. Amazing how these kinds
> of lies can be promolgated by people like this, even more amazing
> is there actually are people who will now believe that crap about
> $65 an hour.
>
> Amazing how we have let irresponsible and erroneous journalism turn
> us against each other, when we should be demanding truthful responsible
> reporting.

Apr 07 09:20 AM

[fireball:]

i will call it the free market as the definition of capitalism is probably debatable. i would prefer that the banksters and insurers also reap the deserved results along with the uaw and gm. as it stands the taxpayers (middle class) are stuck with the bill and none of the rewards.
by free market i do not mean the unfettered run amok monopolistic robber barrons. if govt. would apply constiutional restraints and simply perform their legal function then we would actually have a much freer competitive market. to big to fail seems to break constitutional restraints against cartels, monopolies, and trusts by the label.

bylo--what would you say the wage with benefits and retirement was? i drove a little ford ranger for 18 years. when i sold it, it was still like a little sewing machine. i now have a chevy s-10 which so far has been very good.

Apr 07 10:47 AM

[Stepbear7:]

FOLLOW THE NATION’S CREED
The U.S. Constitution- ALL OF IT


Get back to this country's founding creed and do what it states in the U. S. Constitution.
Get Central Bankers out of the counterfeiting business with the Treasury Department and start following and doing what the U.S. Constitution and Article 1 Section 8 Clause 5 instructs should be done.
Use the Gold Standard and get rid of Federal Reserve Notes and start having the U.S Government Treasury print United States Notes backed by gold reserves only producing allotments as needed to balance goods and services. Activate EO11110.

Abolish the Federal Reserve Act of 1913,Fractional Reserve Banking, the IRS, Ben Bernanke and the entire Federal Reserve System.

Use portions of the $787 Billion dollars on paying off the mortgages of defaulted loans of American homeowners so they can be bailed out just as the large banks and large corporations.
There are about 40 million people or more over age 50 in the work force;
> pay them $1 million each in severance….with three stipulations:
> 1) They must leave their jobs. Forty million job openings - Unemployment fixed.
> 2) They must buy NEW American cars. Forty million cars ordered - Auto Industry fixed.
> 3) They must either buy a house or pay off their mortgage - Housing Crisis fixed.
>
> Now that's a lot less money than two,three,or four TRILLION dollars!!!!!!!!
It's not all the American homeowner's and common laborer’s fault because the BIG DOGS at the top of the food chain got greedy like the good folks at Enron and all the Bernard Madoffs out there who have no remorse for ripping people off.
Let the huge banks liquidate into bankruptcy and start from scratch.
Prosecute the frauders and incarcerate them.
They (frauders) should not be exempt from having justice served them because they hold power center positions.
The Tom Daschles of the world have to follow the laws of the land just as
regular and common men and women of this great nation we live in called United States of America.
Oh well anyway...... Keep praying for America and budget your soon to be extinct Federal Reserve Notes.
Stepbear7
Garland, Tx

Apr 07 11:09 AM

[Gedankonomist:]

I think that what he means is that the labor cost to the company is $65 per hour, where only a fraction goes to the employee. Even if you made $65, you really would not be making that kind of money because half or more would be going to the government anyway.

tinyurl.com/dzg6jy

"One of the most frequently blamed culprits in this debacle is the United Auto Workers, which for decades has been demanding all sorts of benefits and salary requirements that made the Big Three much less competitive than their foreign or non-union counterparts. The average total cost of a unionized employee is over $70 an hour, while the total cost for a non-union autoworker is usually less than $50. If Michigan were a "Right to Work" state, where each worker would be able to choose whether or not to join the union, the union would not have had as much clout and the discrepancy would not have been as great. But because the federal labor laws make union membership in a union shop compulsory (except when a state opts out via "Right to Work" legislation), the UAW was in effect able to exercise monopoly control of the workforce to win concessions that have not only damaged the Michigan-based automakers' ability to compete, but have ultimately put the workers' jobs in jeopardy."

Apr 07 05:35 PM

[Kman58:]

In response to Stepbear,

Just had to respond to your suggestion about giving 40 million people over 50 years old each $1million. Please do the math on that. 40 million times 1 million equals 40 Trillion dollars.

I prefer the more time-honored way of earning what ever salary or pay that you can, by bringing value to others.

I think that in regards to GM's future, it is becomming more clear as the months go by, the direction that phase of the company's history has taken. By this, I mean that they do not produce enough revenue to fund all of the commitments they have made, given the expected levels of their market share. This, recognizing that their share of the auto market has been declining rather steadily for several, even many, decades.

On a more hapy note, they have a good shot at being competitive after they have exhausted all of their efforts to delay what is necessary, get on with it and reorganize.


On Apr 07 11:09 AM Stepbear7 wrote:

> FOLLOW THE NATION’S CREED
> The U.S. Constitution- ALL OF IT
>
>
> Get back to this country's founding creed and do what it states in
> the U. S. Constitution.
> Get Central Bankers out of the counterfeiting business with the Treasury
> Department and start following and doing what the U.S. Constitution
> and Article 1 Section 8 Clause 5 instructs should be done.
> Use the Gold Standard and get rid of Federal Reserve Notes and start
> having the U.S Government Treasury print United States Notes backed
> by gold reserves only producing allotments as needed to balance goods
> and services. Activate EO11110.
>
> Abolish the Federal Reserve Act of 1913,Fractional Reserve Banking,
> the IRS, Ben Bernanke and the entire Federal Reserve System.
>
> Use portions of the $787 Billion dollars on paying off the mortgages
> of defaulted loans of American homeowners so they can be bailed out
> just as the large banks and large corporations.
> There are about 40 million people or more over age 50 in the work
> force;

Apr 07 07:45 PM

[billddrummer:]

The $65/hour number that all you auto workers are bashing was taken from the GM 2007 10-K!

That's what GM said it cost to pay its production workers including legacy costs, health insurance, etc., etc., etc.

I didn't say you got it in your paycheck. But the company paid it out on your behalf anyway.

Apr 07 08:04 PM

[fireball:]

i have a skill that i can sell anywhere between $30 to $100 dollars an hour depending on circumstances of need, location, and duration if i choose to use it. however i spent a lifetime of practical application honing the skill. that is using it as my means of income in my own little business.

gedanconomist and billddrummer-thanx-you kind of answered my earlier question to bylo.

Apr 08 11:54 AM

[User 387439:]

Gm did make some unwise product choices and could have made some better management choices in the past ( Roger Smith era). That said, in the last 15 years GM, and Ford made heavy inroads into reducing wages and benefits, substantial competitive productivity ( as per Ron Harbor and others ) , and had industry standard cash flow.
Let's not forget, it was run away fuel prices first that slowed all auto makers down, and then the Financial meltdown by irresponsible Financial gurus that stopped them short. With the internal and internal logistics that a large company such as GM has, the materials, inventory, dealer network, etc required month to month revolving credit on a huge scale. When that was halted because of bad investment banking, CDS , etc, the money flow , of course, stopped. Then the $22 billion or more that GM had in reserve quickly got used up to meet monthly needs along with no money coming in from new car buyers ( also the finance gurus fault).
Instead of restating over and over again why GM should be allowed to fail, think about this:

There is a lot of " ingrained thinking" about GM going on in the country. What the real pity is that so many are ready to bash GM, or Chrysler, or Ford when in Europe , Japan, and other countries, they support their auto makers and their companies in general. Regardless of your politics, financial status, career or occupation it wouldn't hurt to get past petty jealousy, class prejudice and more by having a more altruistic attitude. Lately, I wonder about whether this whole country deserves to survive. GM didn't pull a Berny Madoff. AIG employees and bondholders didn;t have to take a hit like they want from GM. What's with that?
I for one, am getting more than a little concerned about the "kick 'em when their down" heartless attitude of so many Americans.

Apr 09 01:26 PM

[User 387439:]

What about AIG , Citi Corp, etc? They are the ones getting HUGE allocations of money, NOT A LOAN like GM needs. And ALL those AIGs, Citi's etc did not have to make multiple trips to Washington, did not have to justify themselves or their companies positions, did not have to have ongoing arguments about bondholder/shareholder values, did not have to reduce employee wages, did not have to fire anyone like GM did. And they got , I don't know, over $800 BILLION so far and your are not angry of upset about that??? They ripped people off, sold CDS, derivatives of dubious value, lied to investors and the government. And your angry at GM , it's many more workers and their families who did not do what AIG, Citi Bank, Countrywide, etc did? I don't get your perspective here?


Gm did make some unwise product choices and could have made some better management choices in the past ( Roger Smith era). That said, in the last 15 years GM, and Ford made heavy inroads into reducing wages and benefits, substantial competitive productivity ( as per Ron Harbor and others ) , and had industry standard cash flow.
Let's not forget, it was run away fuel prices first that slowed all auto makers down, and then the Financial meltdown by irresponsible Financial gurus that stopped them short. With the internal and internal logistics that a large company such as GM has, the materials, inventory, dealer network, etc required month to month revolving credit on a huge scale. When that was halted because of bad investment banking, CDS , etc, the money flow , of course, stopped. Then the $22 billion or more that GM had in reserve quickly got used up to meet monthly needs along with no money coming in from new car buyers ( also the finance gurus fault).
Instead of restating over and over again why GM should be allowed to fail, think about this:

Apr 09 01:27 PM