What if the Obama Administration Treated Detroit like Wall Street?

What if the Obama administration treated the auto industry like Wall Street?

There'd be no talk of potential bankruptcy, no firing of executives, no demands to shed failing subsidiaries, no demands for honest accounting, no insistence that creditors share some of the companies' pain. And we certainly wouldn't hear about re-writing contracts, heretofore described as sacrosanct.

Instead, we'd be hearing about a scheme to get private sector players "now sitting on the sidelines" to invest in absorbing the auto industry's excess capacity.

We'd see the Treasury Department announcing a Public-Private Investment Plan to tap hedge funds' pools of capital and expertise to create demand for autos that GM and Chrysler could manufacture but are presently unable to sell at a satisfactory price. These excess cars would be called "legacy assets" (the euphemism for failing mortgage-related securities, more widely called "toxic").

If the plan really paralleled Treasury Secretary's Timothy Geithner's proposal for dealing with Wall Street's toxic assets, it would "incentivize" the hedge funds to buy up hundreds of thousands or millions of cars, and hold them for later sale, when the overall economy improves. The idea would be that the private investors may be willing to pay a price below the list price, but above the price at which GM and Chrysler could actually sell their excess cars right now -- a price high enough to help GM and Chrysler.

What would be the incentive for the private investors to take this gamble? The government would offer to contribute $13 for every dollar contributed by the hedge funds. Thus, an investor could spend $1 billion to buy cars -- bought well below sticker price -- while paying only $71 million out of pocket.

With that kind of deal, it's possible the private investors would pay enough to help GM and Chrysler. In doing so, they would be taking on enormous risk -- they would be betting that they someday could sell the cars for more than $1 billion -- but if they couldn't ... well, taxpayers would bear all of the losses except for the $71 million.

Does this sound crazy?

It is.

The Treasury plan for the banks' toxic assets is impossibly complex, but its core feature is a massive, disguised taxpayer subsidy to Wall Street (Jeffrey Sachs of Columbia University roughly estimates the giveaway component as $276 billion, based on realistic assumptions about the risks embedded in buying the assets).

The Geithner plan for the banks contrasts starkly with the very tough and hard-headed approach taken by the Obama administration to the automakers.

The administration's response to the automakers is deeply flawed. It should be faulted for continuing to demand still-more givebacks from unionized workers; for focusing too much on short-to-medium term results and not enough on investments in fuel efficiency and transformative technologies; and for threatening the use of bankruptcy, a move which would undermine efforts to direct the companies to major investments in R&D and sustainable technologies. These are very major problems.

But the overall approach is right in asserting: If the taxpayers are going to provide tens of billions in supports, then they have the right to make demands on the beneficiaries. They should demand the firing of CEOs who drove firms into insolvency. They should demand specific plans for transformation. They should demand creditors accept some of the cost of insolvency.

Why the tough love for Detroit and kid gloves for Wall Street? You can make up whatever story you like about the systemic importance of the financial sector as compared to auto manufacturing, but it is utterly uncompelling -- especially as we move out of the phase of acute crisis and into chronic economic downturn.

There's just no escaping that Wall Street has bought its gentle treatment through a long-term investment in Washington, the effect of which goes far beyond any specific policy. At the Treasury Department, they understand the point of view of Wall Street -- there is a unity of culture between top officials at Treasury and Wall Street, not least because the decision makers at Treasury so often come from Wall Street. Treasury Department officials can't imagine themselves in the shoes of auto executives, let alone auto workers.

The administration's plan for the auto industry is deeply flawed, but at least it has the right attitude. Quick consideration of what it would like if the government treated Detroit like Wall Street shows how ridiculous the idea is.

What everyone should be asking is, What would it look like if the government treated Wall Street like Detroit? And, why isn't that happening?

Comments

[itolduso]

Wall street should be facing criminal investigation ....I'm still trying to get a handle on why everyone's so ticked off at Detroit. The deck has been stacked against them for a long time. We all preach about wanting small, fuel efficient cars, yet when we're driving down our monster 6 lane highways, we want tons of steel and a V8 engine. Americans for the most part spend hours & hours everyday in our vehicles..­.our 'Master Planned' communities are built far out in farmland - just miles & miles of road & no public transportantion between homes & our jobs. This nation's railroads are not even a shadow of their former glory ...starvin­g on a tiny fraction of the money that's pumped into highways. Few buses, no trolleys, even in our towns autos are the only option. Detroit built the cars we demanded. But they can't compete against subsidized foreign car companies that don't have health & pension plans. Southern states spend millions luring foreign auto makers to open plants in their states - offering tax exemptions, cash, sometimes giving them land for free.....t­hey brag about the hundreds of 'jobs' they'll bring (never mind that the jobs don't offer the same salary & benefits of the domestic auto plant that's already here - never mind the thousands of good paying jobs that are lost when the domestic auto plant shuts down) The Chamber of Commerce loves politicians that bring in non-union jobs - it helps to keep them a "Right to

[itolduso]

I still believe this has more to do with killing off the unions than anything else. The car makers are being treated like crooks & the crooks on W.S. are being treated like they actually make something. For almost 4 decades I've listened to the MSM & Corporate shills blast American carmakers, a steady drumbeat of FALSE statements such as: "Detroit can't build fuel efficient cars" and "The Japanese build cars with better fuel efficiency". It's BULL! As far back as 1984 the Ford Tempo was getting est. 42 mpg hwy ....exactl­y the same as the 1984 Toyota Tercel. The Dodge 400 Series were getting est. 35 mpg (that's with automatic transmission) The Ford Escort, Chevy Chevette, Pontiac Sunbird...­all got great mileage, and were really great cars to drive. Detroit built fuel efficient cars. They also built luxury gas-guzzlers & S.U.V.'s- cause that's what we wanted.

[RoloTomassi]

"What everyone should be asking is, What would it look like if the government treated Wall Street like Detroit? And, why isn't that happening?"

Quite right on that, but I fear the answer to that question growing steadily every day by example; unless we see a definitive turn-around in the coming years of the Obama administration, we will have been witness to the biggest theft ever foisted upon US taxpayers at the hands of a Democratic president and supported in full by the Democratic party--I doubt anyone retains any illusions when it comes to the GOP and this issue.

I am offended by additional demands on unionized labor, but I am even more offended by the Obama administration's attitude towards Wall St. in general; I resent the complete lack of transparency that is allowed for Wall St. firms' continued operation, the Obama administration's decision to ignore the best economic minds of the day, and the blatantly disproportionate favoritism shown to the "too-big-to-fail" firms.

I now have the distinct feeling that the Obama administration assumes that if the finanical industry can recover--never mind effective regulation, or the need to break-up the mega banks--then we US citizens will fall back into fat & happy mode at the first signs of recovery and will be too relieved to worry about the details.

And that really pisses me off....