I haven't chimed in very much about the auto bailout given the level of emotions that the financial bailout caused, but in case my few posts on this topic went under the radar, I am all for it. The amount of it is chicken feed compared to the banks' financial bailout, and obviously an auto bailout will prevent catastrophic increases in unemployment.
To put in perspective how small the auto bailout is compared to just the Treasury portion of the financial bailout, the entire amount of the auto bailout
could be paid for by just the income the Treasury will receive on the bank bailout in about a year and a half -- assuming the bailed out banks don't go under (which probability has just increased because the Republicans refused to bailout the auto companies -- about which, more below).
But I'm much more familiar with the financial side of the economy so that's what I tend to post about.
As halo experiment's post at the top of the Greatest Page right now makes abundantly clear, Senate Republicans opposed the auto bailout because they want to break the auto workers union.
But just
how much do they hate the unions? How ideologically rigid and fanatic is their opposition to auto workers getting decent wages and being organized in unions?
How much are they willing to "pay" to break the unions?
It should be obvious that they are willing to provoke an unemployment crisis among auto workers and the employees of all the auto companies' suppliers, which would devastate not just Detroit, but much of the mid west and upper South.
It should also be obvious that they are willing to suffer a generation of political irrelevance after causing that crisis, assuming the electorate properly blames them for the carnage that will result if the auto companies are not assisted in some way.
But what may not be obvious is that
the Senate Republican are also willing to cause financial Armageddon in order to kill the unions. They are willing to cause the complete financial meltdown that the Treasury, Federal Reserve, Congressional Democrats and incoming Obama administration have been trying to avert (however ineffectively) since September. Failing to assist the big three auto companies could cause a financial meltdown that could be much worse than anything we were worried about earlier in the fall, and could include the complete meltdown of the already stressed credit markets and worst of all,
perhaps the collapse of the Federal Reserve Bank.
That's because in the same way that pundits have been joking that GM is a health care company that happens to also make cars, GM, Chrysler and Ford are also financial companies that happen to provide health care and make cars. And worse, a lot of the financial products they've been producing lately have been purchased by the Federal Reserve as the buyer of last resort.
I'm sure the Republicans must be aware of this. Yet they want to see the big three auto companies forced into bankruptcy just so that the union's collective bargaining agreements can be trashed.
In order to understand how a big three bankruptcy can cause the financial meltdown that we've just barely averted (while suffering a recession anyway), let me take a minute to explain just what a bankruptcy reorganization is, and why the Republicans are playing chicken with the world economy (or maybe not; maybe they don't care if it collapses).
Most of us think of bankruptcy as "going out of business." But bankruptcy for corporations can also mean "reorganization." It means that the corporation gets breathing space to reorganize its debts, and gets the legal power to cancel and renegotiate contracts -- including contracts with the unions, but also contracts with creditors.
A "pre-packaged" bankruptcy reorganization can be very fast. It can be negotiated before the corporation actually goes into court and declares bankruptcy, and can involve canceling and renegotiating just a few contracts. (That said, no one thinks that a pre-packaged bankruptcy of any of the auto companies will be fast, and certainly not fast enough to avert both an unemployment and financial catastrophe.)
But any bankruptcy also is a default (breach of contract) with every bondholder and creditor of the corporation. No matter how prepackaged, no matter how pre-arranged, no matter how quick, a bankruptcy of, for example, GM means all of its outstanding bonds, commercial paper and bank loans will automatically be in default. Almost no one under those conditions, will buy those bonds (except certain specialized firms that speculate in the bonds of bankrupt corporations).
Bankruptcy reorganization almost always also means, "everyone moves over one" -- that is, every type of security issued by the corporation moves down one step and new money comes in at the top with the most protection, or seniority. That's how the corporation attracts new capital to get going again. So, the common stock is completely wiped out and the stock holders get nothing. The preferred share holders and junk bond holders (actually "unsecured convertible debenture" holders) become the common stock holders; the senior secured bondholders become junk bond holders; the bank loan holders become senior secured bondholders; and so on.
So
in order to "get" the United Auto Workers union members, the Senate Republicans are basically saying they are willing to destroy the contract rights of GM's stockholders, junk bond holders, senior bond holders and bank lenders.
That's a lot of hatred, or ideology, or both.
So now let's tally up how much financial carnage the Republicans are willing to cause in order to "get" the unions?
The amount of financial damage the Republican are willing to cause is about $200 billion, just from GM securities and debt alone.
This does not include the potential damage to the recently bailed out banks or the Fed, which I'll discuss below. Nor does it include analogous carnage from Ford and Chrysler. Taken together, the damage of big three bankruptcies would dwarf the size of the Treasury's bank bailout -- even though the big three bankruptcy could be averted for about $25 billion.
GM had about $43.3 billion in total outstanding debt, as of September 30, 2008. About $36.1 billion is long term debt, consisting of unsecured bonds ($16 billion), convertible junk bonds ($8.4 billion), Euro bonds and other foreign currency bonds ($4.8 billion) and other debt, most of which seems to be various revolving credit arrangements from a group (or "syndicate") of large US commercial banks (about $5.7 billion) (you know, they guys that Paulson shoveled $250 billion at). Other big chunks of GM debt include its backing of municipal bonds by localities that gave it breaks to build plants and a big commitment to help the UAW set up a health care trust to get health care costs off GM's accounting books.
All that debt would go into default. All the banks that hold those bonds would have to write it down, the same way they had to write down mortgage backed securities when they went into default. That syndicate of big commercial banks would have to declare GMs loans non-performing.
All that just to "get" the unions.
The roughly 700 million shares of common stock would be wiped out. While many "fat cats" own those shares, so do millions of 401Ks through mutual funds, so do employee pension funds, university endowments and other institutional investors.
GM recently had a lot of its convertible junk bonds converted to shares. All those shares would be wiped out, which would make GM's $8.4 billion in still outstanding convertible junk bonds virtually worthless. After all, who wants to hold a bond that is convertible to shares that have just been wiped out?
And I wonder how our European, Chinese and Japanese "friends" will react to the Republicans forcing GM to stiff them on $4.8 billion in foreign currency bonds?
GM also has about $7.2 billion in short term debt. While GM's
financial disclosure forms are not paragons of clarity, I have to guess that a big chunk of that short term debt is commercial paper and
senior notes.
I know a lot of DUers are angry and suspicious of Bernanke's use of the Fed to buy commercial paper, using powers created by Franklin Delano Roosevelt, to keep the money markets and commercial paper markets working. But, in fact, Bloomberg New reports that Bernanke has been modestly successful. Thanks to Bernanke's program,
the commercial paper market has begun to unfreeze and expand.
The $1 trillion or so that the Fed committed to the commercial paper market, some of which was scheduled to be paid back by around the time Obama is inaugurated, will have been spent in vain if GM defaults on its commercial paper. That's because a big default of GM and GMAC commercial paper will once again freeze the commercial paper markets.
And GM's securities are chicken feed compared to the debt and commercial paper of GM's closely related financial arm, GMAC (which used to stand for General Motors Acceptance Corporation).
GMAC's basic job is to provide car loans to consumers who want to buy cars, and loans to GM dealers who need to finance the purchase of cars for their lots. Just as we learned during the mortgage meltdown that banks don't actually have the money to lend you for mortgages, and they get that money by securitizing mortgage loans, car finance companies like GMAC don't have the money to lend you, but raise it by securitizing car loans or selling other debt securities.
GMAC has outstanding $161 billion in secured and unsecured debt securities, a lot of which is commercial paper. Moreover, we know that GMAC has registered with the Fed's commercial paper program, which means that the Fed has been purchasing GMAC commercial paper as a buyer of last resort.
If the Republicans force GM into bankruptcy, billions in commercial paper purchased by the Fed will suddenly be worthless, and instead of Bernanke being able to give Obama an inauguration present of the first tranche of repaid commercial paper, the Republicans could hand him a Federal Reserve that has lost billions on the commercial paper program and that no longer can keep the commercial paper market recovering. Considering the Fed was planning to issue debt itself to fund its purchase of commercial paper, turning itself into a hedge fund, the Republican strategy could cause the Fed to go the way of Iceland.
So let's see.
In order to reduce the hourly pay of auto workers by $5, $10 or $20 an hour, eliminating some of the last good union jobs in the country,
the Senate Republicans are willing to "spend" (of course all of it
other people's money):
$40 billion in GM defaults,
$161 billion in GMAC defaults, billions in Detroit and Michigan (and other state and local government) muni bond defaults, the collapse of the GM/UAW health plan, the wiping out of billions of the balance sheets of the banks that were just bailed out, and
perhaps the collapse of the Federal Reserve Bank -- all of which could be averted for $25-35 billion in federal loans to the big three.
The Senate Republicans must know this, or at least their staffers must know this. If so, this isn't just bad policy; this isn't just ideological free market absolutism; this isn't just the most vicious class hatred the world has seen since Marie Antoinette contemplated the san culotte of Paris and starving peasants of the French countryside.
No, this is a form of stark raving insanity.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aHRKfArikySU&refer=newshttp://www.bloomberg.com/apps/news?pid=20601087&sid=arKtg2jokwgo&refer=homehttp://finapps.forbes.com/finapps/jsp/finance/compinfo/secfilings/SECFilingsFullFiling.jsp?cn=GENERAL+MTRS+CORP&tkr=GM&secn=0000950152-08-009040http://www.quantumonline.com/ParentCoSearch.cfm?tickersymbol=GMhttp://finapps.forbes.com/finapps/jsp/finance/compinfo/secfilings/SECFilingsFullFiling.jsp?cn=GENERAL+MTRS+CORP&tkr=GM&secn=0000950124-08-000921
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