There’s some interesting stuff out there to read about the Chrysler bankruptcy, like people asking “why wasn’t this done in the beginning”?
Simple answer – in the beginning there was no way to secure the UAW a majority stake in the company. Now, as Felix Salmon points out, that’s been accomplished:
The broad outlines of a deal are already clear: Fiat will take a 35% stake in the company and manage it; the UAW will have a 55% stake; and all the government’s TARP funds will be converted into a 10% stake. Present-day creditors do not get equity but rather get cash; the sticking point is exactly how much cash they will get. And of course present-day shareholders — Cerberus and Daimler — are wiped out, and top management will be replaced.
Of course the reason Chrysler is headed into bankruptcy is because all of its bondholders weren’t satisfied with the deal offered through taxpayers money. As you might imagine, Think Progress has the “progressive” spin on the situation:
As Bloomberg reported, “Obama’s team had first offered secured lenders $2 billion for their $6.9 billion in loans, and then raised the offer to $2.25 billion. In a game of chicken, the holdouts asked for $2.5 billion, and Obama’s patience ran out.” Steven Pearlstein put these numbers into perspective:
What you need to know about these vultures is that their idea of fairness is throwing 100,000 people out of work and denying retirees their pensions and their health benefits just so they can liquidate the company and maybe squeeze an extra 15 cents on the dollar from their Chrysler debt. Of course, to get that extra 15 cents, the hedge funds would probably have to fork over a penny or two to pay the army of $700-an-hour lawyers needed to spend two years working it through the bankruptcy process.
The greed factor here is really appalling, but bad intentions can sometimes produce a good result.
The greed factor here certainly is appalling, but not on the part of the group Think Progress would like us to believe is the problem. I mean, how dare secured lenders ask for more money than a paltry 30% of what they lent Chrysler? In the new world of what’s fair, apparently asking for 30% is unfair and greedy. And frankly with an administration which has tossed trillions around like they were beads at Mardi Gras, it seems that somehow $250 million more was just a “bridge too far” when it came to keeping the deal together.
More importantly, what in the hell is the President of the United States doing involved in this sort of process to begin with? Oh, wait, the UAW gets 55% ownership?
All of this is necessary but not sufficient for Chrysler to have any hope of a long-term future. One of the more interesting things going forward will be how Chrysler manages to turn itself into a smaller, nimbler, change-oriented company while being majority owned by the UAW — which is nobody’s idea of a change agent. In general, if you need a dose of creative destruction, big unions are not the place to look.
You think? Another wonderful deal put together by the folks who want to run your health care. And yes, I know this isn’t perfectly analogous to the British Leyland situation, but it certainly has some striking similarities. A labor union will most likely have to decide between it’s previous decades of focus and producing cars that people want and can afford. And government involved in the deal up to its armpits. In case you missed it, the government will appoint four of the nine member board and the Canadian government will appoint one. Fiat is essentially a management entity with only 3 on the board and a 35% stake. And while the UAW will only have one seat, it will be a seat representing 55% ownership.
Yeah, nothing can go wrong with that.
Well here we go – the government apparently plans on getting further into a business in which it has no track record of success. Yes friends, if “Amtrak” doesn’t remind you of why this isn’t a good idea, how about doubling down on it?
You remember Amtrak:
In FY 2007, Amtrak earned approximately $2.15 billion in total revenue and incurred about $3.18 billion in expenses. Amtrak relies on an annual federal appropriation, which in FY 2007 totaled $1.294 billion, including $521 million in operating funds, $495 million in capital and $277 million for debt service. While Amtrak relies on federal appropriations to support its operating and capital needs, the federal government’s investment in Amtrak was less than 2 percent of the entire federal transportation budget for FY 2007.
Only 2%? Well, we’ll take care of that:
The president’s plan identifies 10 potential high-speed intercity corridors for federal funding, including California, the Pacific Northwest, the Midwest, the Southeast, the Gulf Coast, Pennsylvania, Florida, New York and New England.
It also highlights potential improvements in the heavily traveled Northeast Corridor running from Washington to Boston, Massachusetts.
Of course Amtrak runs service in all of those places.
The president cited the success of high-speed rail in European countries such as France and Spain as a positive example for the United States.
And, of course, Spain and France are physically so much like the US it is frighting:
US - 9,161,923 sq km
Spain – 499,542 sq km
France – 545,630 sq km
Texas – 691,030 sq km
Travel by train has been a part of the culture of both France and Spain for literally centuries. Not so in the US. This is not an “if you build it they will come” moment.
“My high-speed rail proposal will lead to innovations that change the way we travel in America. We must start developing clean, energy-efficient transportation that will define our regions for centuries to come,” Obama said at an event near the White House.
You can read the plan here. It can pretty much can be summed up by Obama’s statement. Not a single bit of analysis about whether there is a demand, whether or not it will be profitable, and, frankly whether it’s economically viable at all. It’s all about social concerns, not how much it costs.
This is government betting your money that it can change your habits. It isn’t a business plan that’s been produced, it’s a social engineering plan.
Is this the role you’ve imagined for government? As most who understand economics would tell you, if there is a market and it is a profitable market, some entrepreneur or entrepreneurs will enter that market. But you can be assured that won’t enter a market unless there is a profit to be made – which should tell you all you need to know about this boondoggle.
And whether or not you ever board a single one of these trains in your lifetime, you will pay for it.
This should disturb a good number of you – it certainly did me. It shows you how effective the indoctrination of our youth has been. Don’t forget the radical students of 1969 are the tenured professors of ’09. It also demonstrates something else just as disturbing that I’ll get too at the end of the post:
Only 53% of American adults believe capitalism is better than socialism.
The latest Rasmussen Reports national telephone survey found that 20% disagree and say socialism is better. Twenty-seven percent (27%) are not sure which is better.
Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided. Thirty-somethings are a bit more supportive of the free-enterprise approach with 49% for capitalism and 26% for socialism. Adults over 40 strongly favor capitalism, and just 13% of those older Americans believe socialism is better.
Investors by a 5-to-1 margin choose capitalism. As for those who do not invest, 40% say capitalism is better while 25% prefer socialism.
As you’ll note, the older someone is, the more likely they are to understand what socialism is and how it is inferior to captialism. The under 30 crowd, with no wisdom and little practical experience outside of academia – not to mention having not yet completly traded their utopian fantasies for the best practical system which has been shown to work – have a large group who either believe socialism is better or just aren’t with it enough to have an opinion.
Once past 30, and having put a few years under their belt in the real world, suddenly the utopian scales begin to fall from their eyes and they have a bit of an epiphany. As for those over 40 being so strongly for capitalism, most of them remember the old USSR and how well socialism worked there.
As you might imagine, there’s an ideological divide as well:
There is a partisan gap as well. Republicans – by an 11-to-1 margin – favor capitalism. Democrats are much more closely divided: Just 39% say capitalism is better while 30% prefer socialism. As for those not affiliated with either major political party, 48% say capitalism is best, and 21% opt for socialism.
Compare the results above to a poll taken in December of 2008:
As the incoming Obama administration and the Democratic congressional leadership scramble for ways to right the U.S. economy, 70% of U.S. voters say a free market is better than one managed by the government.
Just 15% say a government-managed economy is best, according to a new Rasmussen Reports national telephone survey. Fifteen percent (15%) are undecided.
Question: In the intervening months, what system and what players has the Obama administration demonized?
Answer: Capitalism and capitalists.
Gee, I wonder why?
Bankruptcy. Something many of us advised before the government threw 20+ billion of our dollars down the proverbial rat hole:
A week into his new job as chief executive of General Motors, Fritz Henderson said on Sunday he was confident in the future of the company but a structured bankruptcy remains a possibility.
Mr. Henderson has just 55 days remaining to meet President Obama’s timetable to come up with a new plan to save the struggling car giant. Speaking on NBC’s “Meet the Press,” he said that the company was working to avoid bankruptcy, but that if it failed to meet its goals for cutting costs and shrinking the company, it “may very well be the best alternative.”
“If it can’t be done outside of a bankruptcy process, it will be done within it,” he said.
Ah, how nice. And what, we had to fire the CEO, put a new board together and essenitally give control to the government to come to this conclusion?
Even Timothy Geithner, the tax-cheat of a Treasury Secretary, is now saying the “B” word is a possibility:
Treasury Secretary Timothy F. Geithner stressed Sunday that G.M. “is going to be a part of this country’s future,” but said that a managed bankruptcy was among the options for the company.
“These guys have made some progress in putting together a restructuring plan, but they’re not there yet,” Mr. Geithner said on CBS’s “Face the Nation.” “We wanted to give them the time to try to get it right. But, again, our objective is to allow — is to help these companies emerge stronger in the future so they can survive without government assistance.”
Of course had they left this all alone, we’d be 20 billion to the plus side and they’d already be in the middle of the bankruptcy process and well on their way to emerging as a stronger auto company.
Irony of ironies, I just picked up my new company car – a Chevy Malibu. It is a very nice car and has a lot of standard bells and whistles that I wouldn’t expect for a car of its price range. Frankly it’s not the engineering or the quality, as I see it – its legacy costs. And bankruptcy is the only way those are going to be actually approached and dealt with properly.
And you can’t lay this all off on the Obama admistration either – the Bush bunch was the first to throw money at the problem. However you can blame the Obama administration for continuing to do the same thing.
Time to back off, let the legal process that has worked for literally thousands of companies do its thing and see what comes out the other end. My guess is a stronger and more competitive GM.
The siege against capitalism continues unabated. Yesterday, leaders of the 20 largest national economies reached a consensus that they needed to reel in unfettered free markets, which they all agreed was the cause of the world’s economic crisis. The medicine consists of further funding of the IMF (to the tune of an addition $1 Trillion) and an increased regulatory state.
Setting aside differences in philosophy and national character, at least for now, the leaders agreed to make available more than $1 trillion in new lending to spur international growth. While leaving it to individual nations to enact, they promised tough new regulations aimed at banks and other financial institutions whose freewheeling activities sparked the crisis. And they vowed renewed support for trade and more help for the globe’s poorest countries.
“The world’s leaders have responded today with an unprecedented set of comprehensive and coordinated actions,” Obama said, in the spotlight on his first overseas trip as president. “Faced with similar global economic challenges in the past, the world was slow to act, and people paid an enormous price. . . . Today, we have learned the lessons of history.”
For some reason, the bulk of the reporting on the G-20 conference outcome is limited to describing how wonderful everyone feels about the loose agreements, and how industrious they all were to come to terms with one another. Very little press has been devoted to the actual agreements. The media seem to be under the collective impression that the most important aspect of these meetings is the conduct of the diplomacy. They could not be more wrong:
FINANCIAL market “cowboys” who wreaked havoc on the world economy will be brought undone by the G20 agreement, Prime Minister Kevin Rudd says.
Mr Rudd says the $US1 trillion ($A1.4 trillion) deal agreed on at the G20 summit in London, will benefit “tradies”, young people and small business with real commitments against real timelines.
“Today’s agreement begins to crack down on the sort of cowboys in global financial markets that have brought global markets undone with real impacts for jobs everywhere,” Mr Rudd told reporters at the conclusion of the summit overnight.
The summit has agreed to a restructure of the financial regulatory system, reform of and a trebling of funding for the International Monetary Fund (IMF) to $US750 billion ($A1.08 trillion), an extension until the end of next year of a ban on nations introducing trade protection measures, a curb of excessive executive payouts and agreement to co-ordinate further economic stimulus.
Make no mistake. What the G-20 leaders (as stated by PM Rudd above) are saying to world is that none of this would have happened if they had been in charge. “Financial market cowboys” (meaning US and UK bankers), the faces of capitalism, are entirely to blame for the woes of the world. If only there had been more government involvement, according to this theory, then the financial crisis would have been averted or severely curtailed. Accordingly, the G-20 have decided that the way to fix this mass is to assert greater control over the world economy. The immediate targets of this new world order? Tax havens of course:
Switzerland, Singapore, the Cayman Islands, Monaco, Luxembourg and Hong Kong are among 45 territories blacklisted on Thursday by the Organisation for Economic Co-operation and Development and now threatened with punitive financial retaliation for their banking secrecy.
Among the sanctions being considered by the G20 are the scrapping of tax treaty arrangements, imposing additional taxes on companies that operate in non-compliant countries, and tougher disclosure requirements for individuals and businesses that use shelters.
Illegal tax evasion through offshore shelters has been a long-standing irritation for Gordon Brown, President Barack Obama and French President Nicolas Sarkozy. An estimated $7 trillion of assets are held offshore and, according to pressure group Tax Justice Network, developed countries lose $180bn a year in evaded taxes.
Under the OECD definition, countries will be considered non-compliant if they have less than 12 bi-lateral agreements to exchange tax information with foreign governments on request. “Authorities should have access to the information to effectively crack down on tax evasion,” Andrew Watt, director at law firm Alvarez & Marsal Taxand, said.
Jeffrey Owens, director of the OECD’s centre for tax policy said: “This is the major breakthrough we have been trying to get for 13 years. If you intend to evade tax through offshore bases, you will think hard about it now you know tax authorities can trace you.”
Mr Sarkozy added: “Sixty percent of hedge funds are registered in tax havens. Putting hedge funds under supervision isn’t going to generate jobs in the textile industry. But we have to put behind us the madness of this time of total deregulation.”
The reactions of Owens and Sarkozy are like being annoyingly puzzled at why the whipping boy continues to move, seeking to avoid the lash.
Clearly the aim here is not at fixing anything other than the ability of wealthy nations to collect taxes. Small countries typically designated as “tax havens” tend to have one thing in common: they have no other means of competing in the world market place other than in the area of business taxation. If the economies of these countries were all dependent upon growing and selling corn, then the G-20 actions would be met with a much different response. Instead, companies that wish to minimize their tax burden, so that they may instead fund R&D, expand (create jobs), or re-invest, are treated as outlaws, unworthy of little more than scorn. And the small countries that have been willing to host these companies as a means of boosting their own economies, are labeled pariahs to be sanctioned by the wealthiest nations in the world. The message: “Don’t muscle in on our territory. That’s our tax money and we’re here to collect.”
In addition to punishing tax havens, the G-20 decided that the favorite whipping boys of statists needed to be better restrained so as to prevent their squirming:
Leaders agreed to craft tighter controls over hedge funds and establish more rigorous regulations to prevent the buildup of toxic assets that poisoned the U.S. financial system in and spread overseas.
The leaders agreed to set benchmarks for executive pay and make accounting standards more uniform across borders. Most would be drafted by a new Financial Stability Board, where central bankers, regulators and finance ministers from the more than 20 nations represented at the summit will eventually hash out the details.
Credit agencies — whose top-notch ratings of instruments linked to bad U.S. subprime mortgages gave false indications of their relatively safety — would be subjected to new oversight and regulations. But there was no call for a global regulator that could overrule decisions made by individual countries.
While I’m glad to see the ratings agencies (whom have inexplicably been absent from public criticism and ire) taking their turn at the post, everyone should be dismayed at what these sorts of agreements portend. The collective effort to rein in “cowboy capitalism” is little more than a barely disguised effort to place the European bit in the mouth of American (and, to a lesser extent, British) mouth. Business decisions are no longer to be made in the interests of the shareholders, but in favor of “public good.” What constitutes the “public good” will be determined by the special interests who exact the most influence upon, and best line the pockets of, the political forces in charge. In short, consumers no longer rule the market place; bureaucrats do.
As with all movements based on collective will, such as that which the G-20 has furthered, an unfettered free market is featured as the main culprit. America is widely considered to be an economic jungle where the capitalist beast roams freely, devouring the innocent and maiming cautious outsiders. Ironically, Leviathan himself has identified capitalism as an unrestrained beast in need of controlling. Yet, we have nothing like an uncontrolled free market here. It only appears that way because the remainder of the world has cloaked their industries in thick blankets of protectionism and shackled their businesses with an alarming array of bureaucratic chains. Comparatively, America does look like a free market jungle.
But therein lies the problem. As the Washington Post stated it:
Along with declarations of optimism came the recognition of at least a temporary shift in attitude away from two decades of intense reliance on free trade, deregulation and market-knows-best policies that fueled stunning growth across the planet.
Brown — the leader of a country closely associated with that philosophy — declared “the Washington Consensus” over, using a term that recognizes the American roots of an economic system seen by many in the world as unfair and unhealthy.
As far from a pure free market as we are, it is our relative distance from the nanny-statism of Europe and beyond that props up the economies of the world. That stunning growth was made possible precisely because of what the rest of the world refers to as “cowboy capitalism” and they were all happy to join in the ride. But now that woe times betide us, thanks primarily to government meddling (e.g. CRA, Fannie Mae, Freddie Mac, Fed policy, etc.), the world is ready to chop down the last pillar of capitalism, and assert government control over everything. With that final support gone, the capitalist beast will be brought to heel, confined to the zoo where it will live its remaining days as little more than a novelty. Unfortunately, it will take its wealth producing powers with it.
I‘m sure some will find this surprising. Others will say, “yeah, baby!” It certainly is the logical extension of what happened to GM’s CEO. I, for one, still find it to be very disturbing:
On the heels of the resignation of General Motors CEO Rick Wagoner, the Service Employees International Union is urging President Barack Obama to oust Bank of America CEO Ken Lewis.
“It defies logic, common-sense, and responsible governance to punish the auto industry while letting financial institutions off the hook,” SEIU President Andy Stern said, announcing his call for Lewis’s job Tuesday.
The same could be said for letting the union leadership off the hook.
Aren’t they responsible for declining membership? Aren’t they as much a part of the problem as the management of the auto industry? Why isn’t the SEIU calling for union heads as well?
Of course I ask that facetiously. Obviously we’re now going to hear every whiner and complainer in the world will demand the government fire their boss. Hey, the precedent has been set with one of the worst decisions I’ve seen in a while. Now we begin to see the results of such a blatantly dumb move.
At least when it comes to spending money. Business takes a hard look at the potential and when there doesn’t seem to be any, it pulls back. Government, on the other hand, decides it believes something has a future and spends money to try to make their belief a reality.
Oil Major Royal Dutch Shell Plc doesn’t plan to make any more large investments in wind and solar energy in the future and does not expect hydrogen to play an important role in energy supply for some time.
“We do not expect material amounts of investment in those areas going forward,” Linda Cook, head of Shell’s gas and power unit told reporters at a press conference on Tuesday.
“They continue to struggle to compete with the other investment opportunities we have in our portfolio,” Cook said of solar and wind.
Shell’s future involvement in renewables will be principally limited to biofuels, which the world’s second-largest non- government-controlled oil company by market value believes is a better fit with its core oil and gas operations.
Now let’s be clear. “Oil companies” such as Royal Dutch Shell understand that in reality they’re “energy companies”. They realize that somewhere in the far distant future, we’ll wean ourselves from fossil fuels and they need to be in a position to supply what we decide is the viable alternative fuel(s) for that time. And my guess is, they’ll do so.
However, on a purely business assessment of “potential” (that would be potential profit) for some of the favorite alternatives of this era, Shell just doesn’t see a real future, at this time, in solar, wind or hydrogen.
With one exception:
In the past year, the company said it was refocusing its wind business on the U.S. as it pulled out of European projects.
Can anyone guess why that may be? Well, whether or not wind works or has a real application anytime soon, there’s money being promised for R&D. Why not get a little of it even while pulling back in Europe where it sees no real future for wind at this time? They’d like to keep researching it, but why spend their own money when it would appear they can use yours?
Meanwhile, I’m sure we’ll hear all about the government no longer subsidizing Big Oil with tax breaks (while you pay the difference at the pump).
I’m no arguing for tax subsidies or anything else. I’m just pointing out a few things. Shell obviously believes there’s no real business potential in the alternatives it’s backing out on right now. But it will certainly accept subsidy money for wind research if our government is handing it out, all the while our government is telling us it is no longer subsidizing Big Oil. It’s an irony thing.
In the meantime, given Shell’s decision, I don’t expect much from the billions of your money the government plans on throwing at alternatives any times soon. But I could be wrong. After all, isn’t there a new emerging “conventional wisdom” about markets among the anti-capitalists among us?
Markets – they’re always wrong, aren’t they?
David Brooks had started down the road to Damascus when he was called back into the fold by Dear Leader. His Op-Ed in today’s NYT is the result.
Most of Brooks’ offering is a rather transparent attempt to shame congressional Republicans into supporting Pres. Obama’s agenda:
The Democratic response to the economic crisis has its problems, but let’s face it, the current Republican response is totally misguided. The House minority leader, John Boehner, has called for a federal spending freeze for the rest of the year. In other words, after a decade of profligacy, the Republicans have decided to demand a rigid fiscal straitjacket at the one moment in the past 70 years when it is completely inappropriate.
The G.O.P. leaders have adopted a posture that allows the Democrats to make all the proposals while all the Republicans can say is “no.” They’ve apparently decided that it’s easier to repeat the familiar talking points than actually think through a response to the extraordinary crisis at hand.
There are myriad problems with Brooks’ line of reasoning, including many in just to two foregoing paragraphs (e.g. How much input did Republicans have into the recent legislation? By “adopted a posture” is he referring to “not having control of either the House or the Senate”?), but I wanted to focus in on a couple of points in particular.
After some platitudinous admonitions, Brooks launches into his prescription for Republicans to save capitalism:
Third, Republicans could offer the public a realistic appraisal of the health of capitalism. Global capitalism is an innovative force, they could argue, but we have been reminded of its shortcomings. When exogenous forces like the rise of China and a flood of easy money hit the global marketplace, they can throw the entire system of out of whack, leading to a cascade of imbalances: higher debt, a grossly enlarged financial sector and unsustainable bubbles.
I really don’t know what point Brooks thought he was making, but he failed miserably on any score. First of all, “exogenous forces” cannot be “weaknesses” and/or “shortcomings” with capitalism since, by definition, they come from outside that system. At best, examining such forces can be used to understand better ways of protecting capitalism from them. In the context of the entire Op-Ed piece, however, it appears that Brooks is pitching the tired line that capitalism must be reigned in so that people don’t get hurt. That’s like diagnosing the problem with house, finding termites, and then thinking of ways to protect the termites from the house.
Furthermore, Brooks cites a “flood of easy money” (which, of course, is caused by government) as an example of an exogenous force, and then lists the following “shortcomings” of capitalism: “higher debt, a grossly enlarged financial sector and unsustainable bubbles.” What do any of those things have to do with capitalism? If anything, these are once again a failure of government skewing incentives.
In fact, when the government does its darnedest to make the cost of borrowing money historically low, people would be really stupid not to take advantage of that. We all know that rates fluctuate, and that the cost of money will be more expensive when they go back up. Logically therefore, it only makes sense to borrow when the Fed turns the money spigot on and then to find some sort of an asset to grow that money in. That, of course, is what leads to bubbles as everyone has barrels of money but not as many clear ideas of what makes a good investment. Instead of taking the time to really investigate what opportunities are available, and which ones fit a particular person’s portfolio, the herd mentality takes over and we all tend to keep up with the Jones and Smiths whether that means buying tulip bulbs or a run-down house we intend to flip.
The bottom line, however, is that these sorts of scenarios start with government intervention into the market place. In addition to turning on the money spigot, the federal government was also encouraging lenders to make high-risk loans, and for the Freddie Mac and Fannie Mae to buy them up, securitize them and sell them into the derivatives market. Again, that’s all fine and dandy (until it it all goes to hell), but it has nothing to do with “weaknesses” and “shortcomings” of capitalism, and everything to do with government sticking its big fat honker where it doesn’t belong.
If the free market party doesn’t offer the public an honest appraisal of capitalism’s weaknesses, the public will never trust it to address them.
The “free market party”? Who does he think he’s kidding here? The Republicans haven’t acted like a free market party since … well … it’s been so long I can’t remember.
Moreover, I simply can’t fathom how Brooks thinks a “free market party” would ever be able to reconcile itself to joining hands with Obama on his completely anti-capitalist agenda.
Power will inevitably slide over to those who believe this crisis is a repudiation of global capitalism as a whole.
Earth to Brooks: that’s already happened. Look who the president is for crying out loud, or take the time to read your own newspaper. Each and every day we hear about how the excesses of capitalism caused this crisis, and how the “libertarian” policies of Bush (HA!) have landed us in this awful spot. Capitalism didn’t get a trial, Mr. Brooks, it was rounded up, convicted and summarily shot as soon as the latest grand experiment in government do-goodism failed (again).