Big Three Bailout?

[SCSL]

Here is the real story

From time to time, a few of you have asked thru PM or email for me to comment on some of these financial matters. So far I've just been watching, but the events of this week are so monumental (and so unreported) that I could no longer resist. So here it goes.

Here is the real story, the one you won't hear on the news:

As you now know, Treasury today hinted it may now be willing to use TARP funds to fund a short-term bail-out for the Big Three. You may ask yourself why the reversal.

If you remember, GM brought in the BK attorneys earlier in the week to consult. This move was aimed at the capital markets: GM has $1 trillion in outstanding credit default swaps.

There are over $40 trillion in unresolved CDS out there. The problem of unwinding these swaps in the absence of a CDS exchange (to monitor liquidity or carry out liquidations to cover positions) is at the heart of this financial crisis. As you remember me saying over a year ago, this has little to do with mortgages. This is a financial markets crisis.

This is why a reorganization through BK court has not seriously been entertained.

If a BK court was allowed to resolve credit default swaps, it would rattle the financial markets beyond the control of the central banks. The decisions of the BK court would set precedent that could then be used to challenge CDS agreements in court. Further, these precedents would stand in other BK procedings (think Lehman) and major financial institutions (already functionally insolvent) would collapse.

That's the play.

And it appears to be working. Expect bailout money on the table for GM (and, by default, Cerebrus and Ford). As with TARP, your elected representatives cannot stop this, even if they wanted to.

So much for implied consent...

-S

 

[apg]

At a closed-door GOP lunch Wednesday, Cheney reportedly warned that it will be "Herbert Hoover time" if an auto bailout failed to pass. However, Republican senators then blocked a $15 billion bailout to General Motors and Chrysler late last night, after insisting that autoworkers accept cuts in pay and benefits next year.

Reacting to the news, stocks tumbled around the world and the dollar slumped, threatening to deepen the global recession. Meanwhile, the Swedish government is preparing a $3.5 billion bailout for Saab and Volvo, a plan consisting of credit guarantees and rescue loans, but then such bailouts are nothing new.... Who remembers when the UK bailed out British Leyland?

http://www.nytimes.com/2008/11/18/business/economy/18car.html?_r=1&em

Meanwhile, General Motors is hiring a bankruptcy counsel to prepare for a filing if Congress does not authorize the emergency loans.

 

[SCSL]

Meanwhile, General Motors is hiring a bankruptcy counsel to prepare for a filing if Congress does not authorize the emergency loans.

Congress won't have to pass it. Treasury or the Fed will handle it if Congress won't.

As I said above, this has nothing to do with cars.

 

[apg]

Indeed....

 

[roverover]

Haven't read this whole thread yet but, IMHO, there is a lot of fear mongering going on. The unemployment numbers quoted are the total number of employees. The actual number of unemployed will not differ if they get the bailout and actually restructure or if they go chapter 11 and restructure. And if they do go under and shut the doors completely then all the people who used to buy that or those makes will still buy cars just from a company who has or is operating a responsible operation...so if some people in Detroit loose their jobs someone in Ohio will get one...Capitolism at work

 

[noee]

Steven, it seems you're implying that BK court trumps Fed Reserve/US Treas. It seems to me that with the "newer" BK laws now in place, they're one and the same.

Or did I miss your point...?

 

[MarkP]

Congress won't have to pass it. Treasury or the Fed will handle it if Congress won't.

As I said above, this has nothing to do with cars.

I think it was brought up some time ago, probably within the mortgage thread, that many companies had become 'finance' companies. That they were NOT manufacturing companies.

GM is one example. GE is another.

 

[MarkP]

Chrysler on COD


R.I.P.



Who gets Jeep after the dust settles?

 

[emmodg]

Where the HELL have you been Steven? Once again, you seem to have the uncanny ability to "cut to the fat" of an issue. I wholly agree with you!

 

[WNYDiscoIIErik]

I say that if the Automakers have to take pay/benefits cuts, then so does Congress.

Why are they after a guy making $58k/year with some benefits? When Senators make roughly $162,000/year to start, plus benefits which cost nothing to them, and they attain them for the rest of their lives?

So now all of a sudden they are worried about the Taxpayers money??


Why don't THEY take a cut in pay and benefits?

 

[SCSL]

Steven, it seems you're implying that BK court trumps Fed Reserve/US Treas. It seems to me that with the "newer" BK laws now in place, they're one and the same.

Or did I miss your point...?

Mike- the newer BK laws apply to personal bankruptcy, not corporate.

It's not that BK court trumps Treasury or the Fed, per se. They just perform different tasks. Treasury and Fed cannot unwind a contract. They cannot liquidate a companies assets or force them to take any specific action. All they can do is give them money, perhaps with some agreed-upon strings attached.

A BK court, however, has the power to compell action. A BK court can force a company to liquidate assets, it can unwind contracts (supplier, labor, or financial contracts), etc. Behind any court's decisions, ultimately, is the power of the state to compell.

[edit: To answer your question directly- yes, any court has the power to trump the other branches of gov't. If legislation is passed, or an executive order decreed, that is found by the Supreme Court, for example, to be unconstitutional, then it can be unwound by the court. Treasury decisions are trumped by the Supreme Court. Technically, a challenge could be filed with the Supreme Court regarding allocation or TARP funds, or the whole concept of TARP, though I doubt it would. The extent to which Federal Reserve decisions are subject to review by the Supreme Court is unclear, as it is untested. The Constitution does not address the Federal Reserve as it is a fairly new super-governmental institution- a private corporation operating under the guise of a government entity, but is not subject to any direct balancing by any branch of government.]

The problem, as the banks (including the Fed) perceive it, with allowing a BK court to set precedent in unwinding CDS is that it poses a risk to the capital markets, and to the institutions on various sides of a $40+ trillion dollar universe of CDS. This is not a direct threat to Treasury or the Fed, but it adds another layer of systemic risk that, ultimately, both Treasury and the Fed will work to prevent, as we have seen, even if it means handing out vast sums of money to financial companies that are deeply underwater as it regards the market value of their CDS. What the Fed wants to prevent is instability. In an unstable environment, the Fed wants to limit uncontrolled instability. As for Treasury, it's really just an arm of the Fed. Anyone who doubts this hasn't been paying attention. The financial companies, with support by both Treasury and the Fed, are trying to prevent the great unwind or, more precisely, an 'uncontrolled' unwinding of CDS.

Take CDS out of the equation and you have a very straightforward manufacturing company that has creditors, union contracts, facilities, suppliers, equipment, etc. It's tangible and can be reorganized in court.

With the financial issues as they exist, suddenly there are many other (larger) players with great interest in preventing the more complicated derivatives to be unwound by a court.

 

[apg]

I say that if the Automakers have to take pay/benefits cuts, then so does Congress.

Why are they after a guy making $58k/year with some benefits? When Senators make roughly $162,000/year to start, plus benefits which cost nothing to them, and they attain them for the rest of their lives?

So now all of a sudden they are worried about the Taxpayers money??

Why don't THEY take a cut in pay and benefits?

---

From the Borowitz report:

The proposal by the CEOs of the Big Three automakers to work for $1 a year has
gone over like a lead balloon with taxpayers, a new survey shows, with a clear
majority believing that the car bosses do not deserve such a bloated salary.

The University of Minnesota/Opinion Research Institute poll released today
shows that 87% of those surveyed "strongly agree" with the statement, "If the
CEOs of General Motors, Ford and Chrysler earned $1 a year they would be
egregiously overpaid."

But according to the University of Minnesota's Davis Logsdon, the poll numbers
do contain some good news for the embattled CEOS: "While taxpayers do not want
to pay each of them $1 a year, there is a consensus that the three gentlemen
deserve to share a single $1 salary between them."

When asked how the three auto execs should divvy up their $1 payday, the poll
yielded interesting results: "People believe that the Ford guy and the
Chrysler guy should each get 45 cents and the GM should only get 10 cents,
because the whole Hummer thing was just retarded."

 

[WNYDiscoIIErik]

---

What is your point? Did you read what I said, carefully?

 

[noee]

Steven,
Roger, makes sense.

BTW, did you see that Levin has gone on record stating GMAC is "bound up" for something over $1T in CDS.

 

[SCSL]

Oh, and did I mention that the Big Three account for roughly 25% of all corporate bonds outstanding? These bonds are owned by pension funds, banks, mutual funds, etc - both domestic and foreign.

Get ready for the next bail-out.

 

[MarkP]

Chrysler shutting down ALL plants till 3rd week of January . . . . .




for now.

 

[SCSL]

And so it comes to pass...
http://www.cnbc.com/id/28312112

Funny, no mention of the fact that GM owns more credit default swaps than it does axle grease.

 

[noee]

There appears to be no upside to any of this.

Maybe the gov't should just take over the US auto industry, pass laws to restrict competition, and then force everyone to buy one of their cars. :banghead:

 

[landrovered]

Like the Lada?

 

[MarkP]

Cramer is saying "Forget Moral Hazard -- We Need a Bigger TARP, The government must back the consumer credit space."

So the government should pay off consumer credit so we can . . . . . . . spend?

ZIRP - don't save.

:banghead: