[R-G] What if the Obama Administration Treated Detroit like Wall Street?

[Sid Shniad]

April 1, 2009 

What if the Obama Administration Treated Detroit like Wall Street? 




Why the tough love for Detroit and kid gloves for Wall Street? Wall Street has bought its gentle treatment through a long-term investment in Washington 



By Robert Weissman 




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? 


Robert Weissman is editor of the Washington, D.C.-based Multinational 
Monitor, <http://www.multinationalmonitor.org> and director of Essential 
Action <http://www.essentialaction.org>. 

(c) Robert Weissman 

This article is posted at: http://lists.essential.org/pipermail/corp-focus/2009/000315.html