Will the Dems cave on Detroit's latest "dire warning"

Obama's first major task in office won't be related to terrorism or abortion or education - it is going to be what to do with Detroit.

With Wall Street busy digesting its $250 billion dollars in direct payments from the bailout package (on top of the hundreds of billions floated by the Treasury and the Fed before the bailout package was raced through Congress) - that leaves the rest of the country to start picking about the carcass so see what is in it for them.

Treasury Secretary Paulson has said this:

`The rescue package was not intended to be an economic stimulus or an economic recovery package,'' Paulson said in testimony to the House Financial Services Committee in Washington. The $700 billion Troubled Asset Relief Program was designed to stabilize financial markets and the flow of credit and ``is not a panacea for all our economic difficulties.''

Ben Bernanke, head of the Federal Reserve was quoted as saying this:

He [Bernanke] told lawmakers at the hearing that using the TARP for buying stakes in banks is ``critical for restoring confidence and promoting the return of credit markets to more normal functioning.'' He warned that lending in the U.S. is ``still far from normal.''

Barney Frank, one of those lawmakers and Chair of the House Financial Services Committee, said this:

Frank, who heads the House panel, took issue with Paulson, urging the Bush administration to step up efforts to stem record foreclosures. Democrats are also pursuing legislation to deploy part of TARP to prevent General Motors Corp., Ford Motor Co. and Chrysler LLC from collapsing due to lack of cash.

All quotes from Bloomberg.

The interesting aspect of this is: What was the $700 billion TARP (Troubled Assets Relief Program) originally intended to do?

1. Help banks and banking specifically?
   
2. Help companies in distress because of the financial crisis precipitated by the banking industry?
   
3. Facilitate the revision of mortgages for homebuyers to more favorable terms (because the banking industry couldn't restrain themselves from engaging in an orgy of exotic loan originations)?
   
4. Some combination of the three options?
   

So I cruised over to Wiki and here is the lead blurb of the entry:

The authority of the United States Department of the Treasury to establish and manage a Troubled Assets Relief Program (TARP) managed by a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424, enacting the Emergency Economic Stabilization Act of 2008 and several other acts.[1][2] The law which created the fund authorized the Treasury to draw up to $250 billion for immediate use, then requires the President to certify that an additional $100 billion in funds are needed; a final $350 billion are subject to Congressional approval.[3] As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[4] Secretary of the Treasury Paulson indicated that reviving the securitization market for consumer credit would be a new priority in the second allotment[5], while legislators proposed loans to the struggling automobile industry.[6]

So Henry and Ben got their $350 billion and shot their wad. But now they want the next $100 billion to continue their "rescue/bailout" (someone needs to come up with a new word for this - like "rezbail" or "bailscue" - defined as floating a plan to save something or someone when actually it is just providing them resources to continue behaving badly).

But the next $100 billion is up to the president to decide when and how to use them. Since W is firmly against helping Detroit - he is going to need to come up with a way to spend that money before Jan 20th. He probably will (more to Wall Street would be my armchair QB bet - housing prices continue to tumble in many of the worst affected areas) and the price of oil is headed down to $40 shortly (all those speculators are almost shaken out of their speculative positions). Commodities (i.e copper, nickel, zinc, iron ore etc) have, like oil, plummeted rapidly over the past 3 months - too quickly in fact (more speculative money has been flowing out to cover stock positions thus bringing prices back into line with demand). Thus banks are taking steep hits on the mortgage debts and also their long term commodity puts/bets which they have had to quickly sell for cash to cover margin calls.

So then things get interesting - the final $350 billion will be decided by Congress (ostensibly with the President's approval in some form). Thus it was not lost on a lot of people that not even 2 days after the election, all of Detroit descended upon Congress to start the drumbeat for money. Obama has stayed above the fray (his true gift) but at some point he will have to make a stand on this position. So far what I have heard him say is that Detroit will have to make more fuel efficient cars as a condition for money.

That is a nice thought - I'm really warm and fuzzy thinking that all Detroit needs is to start making fuel efficient cars and they get their check and we all live happily ever after.

One problem is that Toyota and Honda have already cornered the market on fuel efficient sedans - finding a new Prius is harder than finding a new Wii. Another problem is why would anyone actually want to buy a sedan from Detroit, much less one that runs on a new platform (i.e. either batteries/hybrid or electric)? A further problem is how are you going to retool your factories to do this?

Obama cannot punt on this and push the choice onto Congress - that is not "Change we can believe in" - Congress will cave (if left to its own devices) and slice and dice the money to every "worthy" constituent group with a lobbyist. Obama will need to lead this discussion and use his mandate for change to start fixing Detroit. And that is a political minefield.

The simplest solution is to let the companies go under - it sounds more dire than it is. Some clarity that bankruptcy will bring:

1. Get rid of middle management - Detroit suffers from excessive bureaucracy - how else would you get the Cavalier from GM or the Five Hundred from Ford? They look and feel like BAD rental cars.
   
2. Break the lock unions have on plant closings. Unions are not exclusively at fault here - there is plenty of blame to go around - but unions are hamstringing the companies in the prevention of capacity reduction and efficiency gains. This unfortunate situation was brought on by management continually caving to the unions year after year until the tail now wags the dog.
   
3. Get rid of upper management. Everyone knew this day was coming and upper management at these companies have done their best to stick their heads in the sand. I mean, if we are going to talk tough that Wall St shouldn't pay for failure - that should translate to Detroit.
   
4. Get rid of the Jobs Bank program - Detroit continues to pay people who were displaced to sit around and respire.
   
5. Pensions will have to go too - this is the most reasonable bailoujt out there. If the Feds take on the legacy costs of pensions in bankruptcy and the unions are busted - there should be no reason that these companies can not come out of bankruptcy slim, trim and efficient.
   

Note that all of the problems that Detroit is having are, as Chris Dodd put it, self-inflicted. Why on earth should we give one dime to these companies in their current state? I say the rescue/bailout money should be dangled like a carrot to the Boards of the companies - i.e. Washington will come to the rescue of the Board if the Board cleans house and pushes the companies into Chapter 11. The promise would be that the Board would get some money to help out with the reorganization and a stock option in the refloated shares (note that in bankruptcy, the common shares would have a value of $0.00) and that it would be incumbent upon the Board to reshape the companies with new blood and new ideas without the distractions of the legacy issues. There is no one else in the company outside the board that will willingly take the companies into Chapter 11 until it is far too late. Thus management is now playing a game of chicken with Washington to prop them up a little longer - sounds like the drunk to me (This bailout is the last one, I mean it this time, I will become a good company, I swear to you, but I just need the $25 billion this one last time).

If the Boards of the companies take the bitter dose of medicine now, they might actually come out very competitive in a few years (albeit with a massive additon to the Treasury's responsbilites to cover penions and unemployment) - however, we are going to have to pay for it anyways so that is just a question of when, not if.

Obama will have a tough decision because the last thing that anyone in Detroit wants is meaningful change. Not the unions, not the mayors, not the elected leadership in the state, and certainly not the company white collar leadership. Those are some mighty big chips stacked against Change and Obama will not be able to duck this issue for much longer.