Archive for category: Economics

I was talking with mr. emptywheel about what one of the bad–but by no means worst–case scenarios in a GM bankruptcy would be. This scenario is just one of several that might happen–by no means guaranteed, and Congress would fight the scenario at every stage, though with increasingly less leverage. But it is a scenario that follows a great deal of logic about possible outcomes. It is this scenario, though, that explains why both Toyota (I’ve seen reported–looking for the link) and many in Congress want to bailout GM before it gets to bankruptcy.

Here’s the short version: more details below.

1. GM files for Chapter 7 bankruptcy
2. GM’s Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)
3. GM/SAIC starts importing Chinese-made Buicks and Chevys, undercutting Toyota’s cost advantages
4. GM/SAIC owns the Volt technology, requiring US firms to lease it if they wanted to use it

GM Files for Chapter 7 Bankruptcy

As Jonathan Cohn points out, an imminent GM bankruptcy is more likely to be a Chapter 7–total liquidation bankruptcy–rather than a Chapter 11 bankruptcy. That’s for the same reason why GM is begging for cash right now in the first place: no one is lending.

In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can’t build cars without parts, and it can’t get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That’s why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. 

So if GM goes bankrupt in January, as may happen, it may well have to sell itself off (unless the government guarantees the same kind of financing that it is refusing now). And I believe one company is one of the most likely–and indeed sensible–buyers: Shanghai Automotive Industry Corporation, or SAIC, the Chinese company with which GM partners to do business in that country.

GM’s Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)

SAIC is, in my opinion, by far the most sophisticated of China’s automobile companies. Read more →

A lot of people are (justifiably) beating up on the auto industry for lobbying to have CAFE standards eased so they could continue to produce gas-guzzling behemoths that used to be but are no longer profitable.

But while we’re beating up short-sighted corporations, we ought not forget the credit industry–who demanded changes to bankruptcy laws that are now having adverse effects on the industry.

Federal bank regulators have rejected a request by banks and consumer advocates for a program to let lenders forgive huge portions of credit card debt.

The Office of the Comptroller of the Currency rejected the request for a special program that would allow as much as 40 percent of credit card debt to be forgiven for consumers who don’t qualify for existing repayment plans.

[snip]

The Financial Services Roundtable, which represents more than 100 large banks, brokerage firms and insurance companies, will "continue to look for ways to help consumers in these extraordinary times," said the group’s senior vice president, Scott Talbott.

Travis Plunkett, legislative director of Consumer Federation, said that with the number of deeply indebted consumers growing dramatically, "we still hope to work with bank regulators or Congress to create an alternative" to bankruptcy for them.

Gosh. If you hadn’t gotten greedy and just kept the old bankruptcy process in place, it would have been a lot easier to get partial payment on credit cards in lieu of nothing. 

As the NYT reported yesterday, Nancy Pelosi and Harry Reid have written Hank Paulson requesting he provide relief to the auto industry using TARP funds. First, in her statement on the meeting with the auto industry, Pelosi emphasized what I did in my first post on this–the need to preserve manufacturing in this country.

It is essential that we preserve our manufacturing and technology base in this country.

In addition, in their letter, Pelosi and Reid stress accountability and energy efficiency–pushing precisely the kind of goals that many commenters described in this post.

Were you to determine that the automobile industry is eligible for assistance under EESA, we would urge you to impose strong conditions on such assistance in order to protect taxpayers and maximize the potential for the industry’s recovery.  An automobile industry that is forward-looking and focused on ingenuity, competitiveness, and the creation of green jobs for the future is essential to its long-term viability.  Other taxpayer protections should mirror those required of financial institutions currently participating in the Troubled Assets Relief Program (TARP), such as limits on executive compensation and equity stakes to provide taxpayers a return on their investment upon the industry’s recovery.  Any assistance to the automobile industry should reflect the principles contained in EESA that guard against the need to recoup costs to the taxpayers.

We must safeguard the interests of American taxpayers, protect the hundreds of thousands of automobile workers and retirees, stop the erosion of our manufacturing base, and bolster our economy.  It is our hope that the actions that Congress has taken, and that the Administration may take, will restore the preeminence of our domestic manufacturing industry so that it can emerge as a global, competitive leader in fuel efficiency and in new and path-breaking energy-efficient technologies that protect our environment. [my emphasis]

While Pelosi and Reid seem convinced the auto industry needs this bailout, they seem intent on placing conditions on it–with the goal of energy efficiency paramount.

I am pessimistic that Paulson will respond to Pelosi and Reid’s request–he has thus far resisted GM’s requests to be considered for funds under TARP–and that Treasury has the capability to offer the kind of oversight that this would require. Read more →