14.12.08

NO CASE FOR SPECIAL FAVORS. On Saturday, I stopped at a convenience store to pick up a paper. As I left, there was a man standing near my car with an embarrassed expression. He'd bumped my bumper backing out. I looked at where he said we hit and noticed nothing that couldn't be rubbed out, or weathered away by the road salt, and told him to not worry about it. His car suffered a small crack in its bumper. My car, a Volkswagen Golf, his, a Chrysler PT Cruiser. Not exactly the kind of product that disposes me to governmental protection beyond the standard social safety nets and bankruptcy codes.

An example is not determinative. On the other hand, the logic is compelling. Via Capital Commerce, two essays making the same case. First up, Lawrence Lessig.

People speak about this as if not bailing out Detroit means automobile production in America ends. That's not what failing to bailout Detroit means. Not intervening now would mean these automakers would enter bankruptcy. And bankruptcy means the assets of these dinosaurs get reorganized: Someone else buys these companies, at a price the market sets, and runs them profitably, because of the price the market set.

Obviously, that change would not be painless. And I'm all for minimizing the pain where the pain is doing no good -- with workers, or others depending upon these industries. But I'm against interventions designed to minimize the pain where the pain would do good -- by radically changing how that industry is managed. The whole justification for insanely high executive compensation is, in part, so they can weather such storms. I don't see why the government should be in the business of building safety nets for the (relatively) well off.

I'd amend that last sentence to read "extending additional safety nets" and otherwise concur.

Next up, Joseph Stiglitz:

Financial markets are supposed to allocate capital and monitor that it is used to good effect. They are supposed to be rewarded when they do that job well, but bear the consequences when they fail. The markets failed. Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.

What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.

The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

I'd amend that to request assurances more stringent than those placed on Chrysler in 1980, under which "being repaid" mattered, never mind that the money for the repayment went for minivans and pickup trucks, otherwise known as more of the same.

A Milwaukee Journal-Sentinel column from the perspective of a supplier to the automobile manufacturers offers this.

Yet top-quality vendors will suffer the most collateral damage from a meltdown in Detroit, a crisis caused in large part by mismanagement on Wall Street and in Washington, D.C., of the financial and housing industries. The same politicians wearing angel wings in the debate over the future of the auto industry were presiding when the financial crisis was being created.

Certainly, American automakers bear their share of the blame for the problems they're having. But for the most part, the problems of 2008 were not of their making. The collapse of the credit markets and resulting confidence drop by consumers was not caused by Chrysler, General Motors or Ford.

If any or all of them go into bankruptcy reorganization, the first people to get flushed will be the common shareholders. But right behind them will be the automotive vendors, many of them in Wisconsin.

Trade creditors have little standing in a bankruptcy action, and it is almost impossible at this point to buy credit insurance or hedges of any kind.

Let's say a vendor is doing $1 million a month in parts business with one of the Detroit automakers. That means it would be carrying at least $1.5 million in receivables. Without getting into all the legal complications of bankruptcy, that amount gets wiped clean in Chapter 11.

The vendors that are 100% automotive will be in big trouble with those kinds of write-offs. Some will go under. Several dozen parts companies already have disappeared.

Allocating scarce resources among competing uses sometimes means resources have to be withdrawn from less productive uses. It's not always pretty. On the other hand, laptop computers and tankless water heaters didn't happen by magic. The columnist also notes that many of the parts suppliers provide the new North American automobile makers, who, presumably would be affected adversely by the failure of their suppliers and who might behave accordingly.

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