It’s been a long and winding road for GM and Chrysler. But according to investment advisor and blogger par excellence Barry Ritholtz, overripe pensions and undercooked cars aren’t the only reasons taxpayers are now paying up for the carmakers’ bankruptcy filings. In his new book, Bailout Nation, Ritholtz traces our save-the-system syndrome to the bailout first of Lockheed in 1971 and then to the 1980 rescue of Chrysler.
Once, going broke was a sign of health. It was the Tao of capitalism. The excesses of the unwise, the unlucky and the imprudent would be wrung out from the system clearing the way for the wiser, luckier and more prudent — presumably to create more jobs and wealth. But somewhere along the line, Uncle Sam lost the will to tolerate failure. Fear crept into the system, corroding the economic backbone of capitalism.
Ritholtz slams the lack of fortitude. Further, he argues the Administration response to the economic misery today is not comparable in substance to the New Deal, which he says focused on saving the economy and industries — not individual companies. The difference in responses then and now is the difference between addressing the Achilles heel of an economy (we need steel and rubber in wartime) and corporate hubris (whoops, shouldn’t have called those securities triple-A).
Lockheed was the watershed moment, Ritholtz writes. The defense contractor had dramatically underbid competitors for government work and then began barreling toward bankruptcy. Uncle Sam agreed to provide a $250 million loan guarantee. It was the beginning of the end, Ritholtz says. Next up, the Chrysler rescue, which involved six times as much in government-backed loans and another $2 billion in “commitments or concessions from ‘its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments.'”
In theory, 200,000 jobs were saved. And in the end, recalls Jonathan Reiss of Analytical Synthesis, the government made money on the warrants issued in the deal. (And Chrysler, flush in the early 1990s, bought former chairman Lee Iaccoca a seven-figure house.) But the gains have been ephemeral, Ritholtz argues and the price we pay now much, much worse. $50 billion in loans to GM (which said in the bankruptcy filing today that it owes $172.8 billion and has assets of $82.3 billion). Crushing employment losses. From 1979 to now UAW membership has plunged from a peak 1.5 million to less than half a million today. The NYTimes reports that since the start of this recession, auto manufacturing has lost 289,000 jobs out of 1.6 million — an 18% drop. More layoffs are likely; factories this summer are slated to be idle for two months instead of the more typical two weeks. The economy in the Middle West has been flattened (amazing graphic). The pain goes on and on.
For a moment, Ritholtz imagines a parallel universe: Zoom back to 1980. Chrysler flirts with going broke. Only this time, Uncle Sam lets Chrysler fail. The company files not to reorganize, but to liquidate. Chapter 7. Ritholtz postulates:
The sight of Chrysler in flames may very well have sent paroxysms of fear into the senior management of General Motors and Ford. All three companies had been engaged in long, slow declines, but the baby boomer generation’s growth and consumption habits had masked the decline somewhat. Sure, the Big Three were selling more and more vehicles each year, but they were losing market share; their slice of the expanding pie was shrinking…
Had senior management been forced to confront one of the Big Three actually going under, it would have served as a wake-up call to the (all too many layers of) management of the remaining two companies.
What happened instead was a failure of imagination at Ford and GM. Instead of causing introspection and contemplation, there was snickering and gloating.
Bailout Nation, by Barry Ritholtz (Wiley)
Imagine, Ritholtz continues: What if smart, tenacious entrepreneurs had picked up the pieces of Chrysler in a liquidation, perhaps the US auto industry would be more competitive today. Hard to know. But one thing is clear: The incentives put in place with Lockheed and then Chrysler have become embedded in our economy and we are the no better for it. We fear failure when the ability to fail without bringing down the economy should be the hallmark of capitalism. Think AIG. Citicorp. And now GM and Chrysler. We are betting the US Treasury on cars, financial institutions and anything else we fear will weaken our economy, giving a license to these very same people to make mistakes that create systemic threats. We are betting the futures of the next generations on our fear of the present. We are putting our relationships with major investors on the line.
Late last night I happened to tune into Twitter to check on the bankruptcy buzz. David Buffalo (@IRON100) was sharing songs form 1980, a tribute I had assumed to the first auto bailout. It wasn’t but after I pointed out the coincidence between his musical musings and my assumptions, Buffalo shot back: Yes, that’s when interest rates were at historic highs. It was a chilling reminder. As Treasury pumps out money to save us today, the prospect of a worthless dollar and double-digit interest rates looms. Fifty billion is the price today for GM. In the coming years, it may seem laughably understated in the cost to our economic integrity.
Treasury, the Federal Reserve — they say they can handle their bloated balance sheets and wary investors. But the incentives government has cemented to socialize the downside of risk are likely to weigh on us for generations. The corporate bailouts are just bad karma.
Image via Wikipedia