Pass the Cognac

A long time ago there was this skinny young kid from Pittsburgh, and when he was at Westinghouse High School he was reading the New Yorker and learning French – an odd thing for a young, gay black man. And young Billy Strayhorn was studying to become a classical pianist, and dabbling in composing and arranging.

 

But he had to get out of Pittsburgh and escape the life he’d be stuck in there if he stayed. Of course he dreamed of Paris. Luckily, in 1938, when Duke Ellington was performing in the city, he introduced himself. He played for Ellington and showed him a few of his compositions, and re-imagined arrangements of some of Ellington’s charts, and the rest is history. Strayhorn became Ellington’s arranger, and a composer for him, and the other pianist. That was the rest of his life, as it was supposed to be.

 

One of the tunes Strayhorn wrote as a teenager became a jazz standard – Lush Life (the link is to the Johnny Hartman, John Coltrane version, which is the benchmark for everyone else). The chord changes are very Debussy in a way, all chromatic with those major ninths, and the lyric contains the classic line – “A week in Paris will ease the bite of it, all I care is to smile in spite of it.” Some of us, also from Pittsburgh, have tried that out – the week in Paris, usually two weeks – repeatedly. It does help, a bit. Paris is not Pittsburgh, and it is certainly not Pittsburgh in 1938, in the depths of the Great Depression.

 

But many feel we’re in the same straights now. The economy is collapsing. Flying off to Europe could ease the bite of it all – there is something about walking the gray streets of Paris in the cold rain, alone, with a rueful smile on your face, that makes you feel as if you finally understand things, and that you can accept them. Cognac in a clean, well-lighted place after that confirms it all.

 

So, on Tuesday, March 31, another skinny black kid flew off to Europe – but Obama is no longer young, nor is he gay. Still, a rueful smile would have been quite appropriate:

 

Desperate but divided on ways to lift their nations from economic misery, world leaders converged for an emergency summit Tuesday holding scant hopes of finding a magic-bullet solution for the crisis that brought them hurrying to London.

 

The big G20 meeting was in London, not Paris – France came next – but things looked dismal. Our government had already pretty much acknowledged that our European allies would not go along with any substantial burst of stimulus spending, while at the same time they had been forced to give up their hopes for tighter international financial regulation. No American president could sell that to America – we don’t let other countries make rules for us – never have and never will.

 

No one was going to be happy. The AP item puts it this way:

 

Instead, leaders are trumpeting the limited common ground they could reach, including more money for the International Monetary Fund and closer scrutiny of hedge funds and tax havens. As for the broader issues, they’re hoping for the best – or at least that they will do no harm.

 

It was a time for rueful realism, and a spot of cognac perhaps.

 

Oddly, there was the French Drama Queen:

 

Adding to the pressure, French President Nicolas Sarkozy said Tuesday the leaders cannot afford to let the week pass without making substantial progress in fixing the world’s economy. “We have to obtain results, there is no choice, the crisis is too serious to allow us to have a summit for nothing,” he said.

 

Sarkozy threatened to walk out unless everyone agreed to strict international financial regulations – but he will be humored until he calms down. This meeting was about what’s possible, not what’s ideal – even if trade is deteriorating, protectionism is on the rise – everyone protecting their own industries and workers, to stay in office – and joblessness is rising fast everywhere. Yeah – street demonstrations have increased and widespread protests spread around the world. But you do what you can.

 

And the AP also adds this bit of dismal background:

 

London does not have a good history for successful economic summits. One held in London in 1933, attended by more than 1,000 world leaders and financial officials – although not President Franklin D. Roosevelt – met for six weeks and then gave up.

 

Yep – “All I care is to smile in spite of it.”

 

Still, in Making the G20 Mean Something, Matthew Yglesias thinks the summit is a good idea, even if “nobody’s actually expecting anything incredibly useful to come out of this week’s meetings.” You just need to have meeting like this, even if there is a bit of a problem:

 

Ultimately, however, in economic terms the world is suffering not just from a lack of institutions but from something of a leadership gap. The United States is a major economic player. But the economic realm isn’t like the military realm where we have a hegemonic position. By some measures, the European Central Bank actually presides over a larger economic unit than does the Federal Reserve and by all measures the European Union as a whole is bigger than the United States. Then beyond the two economic superpowers, there are a number of other really major players. That means the world really can’t just assume the US is going to pull a rabbit out of a hat and put everything back together. But at the moment, nobody else seems especially interested in stepping up.

 

There’s little wonder in that, as there’s little hope for a rabbit. The market have been up a bit, and there’s chatter about a bottom forming and things rising, but Paul Krugman, with his Nobel Prize in Economics, explains how he sees things:

 

I’m detecting a trend in commentary that I find slightly ominous. Some of the economic news lately has been slightly better than expected, which was bound to happen at some point (on average, after all, half the news should be better than expected). Mostly this is in the form of things getting worse more slowly, but it wouldn’t be surprising if we see, say, an uptick in industrial production in a few months, as the inventory cycle runs its course.

 

If so, that doesn’t mean the worst is over. There was a pause in the plunge in early 1931, and many people started to breathe easier. They were wrong.

 

So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.

 

There’s nifty chart of the markets in the thirties at the link, if you like historical precedent.

 

Ryan Avent thinks Krugman is way off base:

 

Whoa! There is nothing pointing to a recovery at any time in the future? As I said, the world spent four years doing everything wrong, and yet the Depression finally came to an end. Even if we’re not taking all the steps Krugman would have us take, we are at least avoiding the big errors that doomed the economy before. Krugman is basically saying that this downturn will last as long as the Depression or longer, despite the drastically different – and economically orthodox – policy path taken by the world’s large economies. This seems crazy to me.

 

Yes, yes – we know more now and all that.

 

But in another odd way, and bad way, this is not the thirties. Yglesias argues that now, higher skill levels may mean slower recovery.

 

Just look at the thirties:

 

A majority of Americans hadn’t so much as set foot inside a high school. These days, about 80 percent of Americans have a high school diploma and about a quarter have a bachelor’s degree. As the 2007 CPS report on educational attainment says “this reflects more than a three-fold increase in high school attainment and more than a five-fold increase in college attainment since the Census Bureau first collected educational attainment data in 1940.”

 

This reflects a large-scale increase in the skill-level of the population which has done a great deal to drive prosperity. But it also points to a problem with recovering from economic downturns in modern circumstances.

 

It’s just common sense:

 

Unskilled workers do work that, by definition, requires few skills. You need to be willing to show up and work hard, but beyond that it’s easy to teach you how to do the job. That means that an unskilled worker can, broadly speaking, be a generalist. If there’s a downturn in demand for maids in a given labor market but an uptick in demand for CVS cashiers, then unskilled workers can shift from one sector to another without much of a problem.

 

Skills, by contrast, tend to be somewhat specialized. When a fifteen-year veteran newspaper writer gets laid off, his fifteen years worth of experience leave him with skills that have some value outside of the newspaper sector – general writing and verbal ability are always useful. But fifteen years worth of newspaper experience is most valuable in a world where there continues to be robust demand for newspaper writers and that’s not the world we live in.

 

So while the skill-base of the American workforce “is the cornerstone of our prosperity” it may be killing us now. Work is not generalized. We all work in sectors, as they say:

 

A large economic dislocation typically forces some sectoral shifts. And when you have large sectoral shifts, the value of your workforce’s skills diminishes. I believe something similar is true for capital goods. The cars manufactured in the 1920s and 1930s were crude compared to today’s cars. And the tanks of the 1940s were crude compared to today’s tanks. So it was easier to convert the car factories of the 30s to tank production than it would be to effect an equivalent transformation these days. Or, more to the point, it was easier to do that than it will be to convert capital goods related to the production of houses into capital goods related to the production of import-substituting manufactured goods.

 

And he points out that our key export industries – aviation and entertainment – “are both in long-term structural decline.” Pass the cognac.

 

So we bail out failing industries. How dumb is that?

 

Actually, in spite of McCain and the Republicans saying let them all fail and be done with it, bailouts may not be a bad strategy. Timothy Noah, in The Bailout Record, offers the history of such things:

 

1971: The Nixon administration guaranteed $250 million in loans to the Lockheed Aircraft Corp. The government ended up netting the equivalent in 2008 dollars of $112 million in loan fees.

 

1974: The Nixon, Ford, and Carter administrations spent the equivalent of $7.8 billion in 2008 dollars to bail out Franklin National Bank, the 20th-largest bank in the country, eventually selling off its assets for the equivalent of $5.1 billion in 2008 dollars.

 

1980: The Carter administration provided Chrysler with $1.5 billion in loan guarantees. Chrysler finished paying off the loans in 1983. The US government netted the equivalent in 2008 dollars of $660 million.

 

1984: The Reagan administration assumed an 80 percent share of Continental Illinois National Bank and Trust Company. This remains the “most significant bank failure resolution in the history of the Federal Deposit Insurance Corporation,” according to an official FDIC history. In 1991 the government sold off Continental Illinois at a loss to the FDIC of $1.1 billion. This was the bailout that bequeathed the catchphrase, “too big to fail.”

 

1989: The first Bush administration bailed out the savings-and-loan industry at a cost to the taxpayer equivalent to $220 billion in 2008 dollars.

 

2001: After 9/11, the second Bush administration lent the airline industry $10 billion and gave it $5 billion outright. A stock warrant provision in the deal netted Treasury somewhere between $140 million and $330 million.

 

These transactions did not take a bad situation and make it worse – “The evidence suggests that the government tends to lose money when it bails out banks and to gain money when it bails out other sorts of companies.” But things get saved from collapse. Sneer if you want, but bailouts work.

 

Still, what Yglesias notes – that we’ve become too specialized to get out of this mess easily – is not insignificant. A prime example of that might be a fellow who worked as a shrimper and ditch digger before he turned to systems programming. That would be Michael Osinski. In New York Magazine he tells his tale – he helped bring about the financial crisis as the behind-the-scenes wizard who wrote the widely-used software application that sliced mortgages into bonds, spreading appalling risk in clever ways so that no one would be left holding the bag, ever. He now says it was like grinding up chicken and labeling it steak. He blew it. Osinski is still proud of his work, but he is grappling with the results – “To know that a dozen years of diligent work somehow soured, and instead of benefitting society unhinged it, is humbling.” Perhaps we don’t bail out that industry – and Osinski can go back to the shrimp boat.

 

But that is the one industry that made us successful. See this video clip – David Shuster interviews the former IMF chief economist Simon Johnson, about whether the United States could be headed for another Great Depression. There’s a bunch of talk about all this getting tough with the auto industry and why Wall Street is not getting the same treatment, but they come down to discussing Johnson’s article at The Atlantic The Quiet Coup:

 

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government – a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the US, it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

 

That article is an eye-opener. For the last ten years almost half of our growth came from the financial services industry – nothing of intrinsic value was made, no products, no services, no big buildings, no nothing. We passed promises around, buying and trading them, and everyone made a cut on the sale. But there was nothing there. Johnson has the data, and charts. America’s business was trading promises and lying to each other. And all the hypothetical wealth was made possible by a cadre of those who became very rich doing such things offering massive goodies to those who wrote the rules, or more precisely, those who eliminated one rule after another. No one knows the country’s real GDP from 1990 forward. That accounting is just beginning. A rueful smile is appropriate.

 

The hypothetically wealthy will fight hard to hold onto their hypothetical wealth. They produced it, damn it, and they’ll keep it, such as it is. Those losing their jobs or homes or healthcare will hate them for that – they feel they’ve been scammed. If there is any wealth it’s time to make sure everyone gets a fair deal.

 

This may be tearing the country apart. Andrew Sullivan thinks so:

 

The new cultural divide will not be on guns, gays and God. It will be between the makers and the takers, the producers of wealth and the recipients of redistribution. And it will be about tempering the over-reach that the Democrats will be unable to resist.

 

But that means the critique should not be undermined by mindless partisanship now, and it should be based upon clear and constructive policy proposals to advance individual liberty and restrain the cold, clammy hand of the state. That’s the medium term challenge for the sane, imaginative, serious right. It requires discipline and thought. And it also requires time.

 

One of his readers rips into him for that:

 

The vast majority of Americans are just like me: we’re “makers” who are also “takers.” We have jobs; we work hard and take care of our personal business even though we don’t have much money. Broadly speaking, a lot of us middle-class “makers” are also “recipients of redistribution” in that we don’t, by conservative standards, pay our fair share of taxes. And thank God; spread the tax load evenly and an awfully lot of productive and self-sufficient people are going to be suddenly poor. I, personally, would suddenly be without healthcare and unable to keep my son in the local public university he attends. (There are few things more subsidized than public education.)

 

This reader suggests the defenders of those who create wealth, or what passes for wealth, are going to be in deep trouble:

 

Do you really think the Republicans are going to assemble a majority out of those who want to gut Social Security (one of the most successful “taker” programs in human history), healthcare, and just about everything else government does to make our country a more civilized place to live? Maybe you ought to define just exactly what you mean by “makers.” Then calculate how many of them aren’t going to be offended even a little by the Democratic agenda. Then figure out how conservatives are going to find majority support without resorting to the same kind of divide-and-conquer strategy they’ve worked since Nixon.

 

The key to Republican success in the last few decades has been getting people angry enough about crap issues like flag burning and gay marriage that they’ll vote against their own economic interests. Now we’re staring into the abyss, and one of the good things that is happening is that those largely irrelevant social issues don’t have the punch they used to have. If a conservative is a liberal who’s been mugged, a liberal is a conservative who’s lost his health insurance. At that point, you don’t really care that much who is sleeping with whom.

 

And this is also tearing CNBC apart – the business channel, considering this:

 

Kinda surprised that few have picked up on the news which broke late last Friday that CBNC’s Dylan Ratigan had abruptly walked off the set of his “Fast Money” show and announced his immediate departure. Ratigan was a true rising star at the under-fire network, hosting two shows daily, as well as making many mainstream media appearances on Leno, The View. He also recently guest hosted MSNBC’s “Morning Joe” for an entire week.

 

Ratigan was consistent in his opinion that the average investor would never return to the stock market until we saw some Wall Street CEOs being hauled away in handcuffs. His riffs on the stupidity of 30-1 leverage were legendary. He was one of the most visible and outspoken staffers there. Regardless of the spin from the network, it’s a huge loss for them. I’m sure the Cramer/Stewart thing didn’t help either.

 

Actually, Marisa Guthrie, at Broadcasting and Cable had the full story:

 

Dylan Ratigan’s abrupt departure from CNBC last week was the latest blow to the top-rated financial news network. The CNBC anchor was among the network’s more outsize personalities whose star had ascended as the financial markets plummeted.”I’m willing to take the risk of not renewing my contract at CNBC and looking at opportunities in cable and broadcast,” said Ratigan during a phone conversation on Monday.

 

Ratigan came out early against the rampant greed of Wall Street. Months before populist outrage over the bailout and AIG bonuses reached a fever pitch, Ratigan was railing against the “vampires” on Wall Street who were bleeding our 401Ks dry. It was a point of view that put him in opposition with many of his colleagues at CNBC.

 

He got fed up with the bullshit – or the bulls:

 

Ratigan’s departure underscores some of the programming issues at CNBC. Ratigan’s star vehicle was the ribald stock-picking show Fast Money. (Melissa Lee is filling in as host until a permanent replacement is named.) And while the tone of Fast Money had gradually shifted from wealth accumulation to wealth preservation as the financial crisis deepened, it is still primarily a show for a bull market. How long Fast Money can persevere in a decidedly bear market remains to be seen.

 

All of the internal upheaval comes as CNBC has endured two very public episodes – the fallout from Rick Santelli’s Howard Beale moment and Jon Stewart’s public lashing of Jim Cramer. And while both of these incidents brought CNBC a modicum of mainstream media notoriety, they haven’t exactly burnished the brand.

 

Dylan Ratigan should take a vacation. A week in Paris will ease the bite of it. And oddly, down in Santa Monica, Digby has been watching CNN:

 

Rick Sanchez just asked Wolf Blitzer if the fact that Europe loves Obama will hurt him at home. (Blitzer said he didn’t think so.)

 

But I have to wonder: aside from a handful of neocon nutballs and the far right fringe of the Republican Party, do villagers actually believe the rest of the country hates Europe? Really?

 

If that’s the case, perhaps the better question is “who don’t Americans hate?”

 

If Europe really is considered an enemy to the extent that Europeans liking our president is a liability, then I’m hard pressed to think of any country we could consider a friend.

 

Hey, let’s all go to Paris. It’s a fine place, and as Strayhorn implied, a place where you actually do figure out what’s what.

 

Pass the cognac.

 

The Fat Lady Is Singing Now

You remember your first new car – the one after the used junker that got you through the last years of college and was forever breaking down. It was the summer of 1969 and the new car was a shiny new Corvair coupe – or coupé if you want to be French about it. But it wasn’t French, although it was a Chevy and Louis Chevrolet was Swiss-French – close enough. But the thing was from General Motors and assembled at Willow Run, north of Detroit, where they used to make B-24 bombers. It was very American, and it was one of the last one of these cars made – from the final months of production – with the swoopy new body style. And everything Ralph Nader said was unsafe at any speed had been worked out. And the rear-mounted air-cooled engine hardly leaked any oil. It was fun.

 

But nothing last forever, particularly cars from General Motors. That became painfully obvious a few years later with the midnight blue Chevrolet Vega – assembled by the disinterested and distracted in Lordstown, Ohio. This was the GT with the turbocharger, and it looked super – and it went fast. But the aluminum block engine tended to work on disintegrating all on its own, and when something by your foot seemed odd and you looked down and you could see the road, you knew there were issues with what they call structural integrity. Rust was the issue, along with body flex. It seemed more like a neat idea for a car, not the real thing. And then, after that, the new Chevette was a really bad idea – but it was kind of cute and the first wife named it Ernie. It was earnest, but not much else. It was dark brown and finally came to seem like a turd on wheels.

 

And that was it for GM – no more of their products. Here is Hollywood the six-year-old Mini-Cooper does just fine – assembled in Oxford, England, by the German folks from BMW, with a supercharged engine from Brazil. Heck, everyone drives mongrel cars now – Japanese cars built in America, Chryslers built in Mexico, and the police driving their Ford Crown Victoria cruisers built in Saint Thomas, the one in Canada, across the lake from Cleveland. GM builds a lot of its SUV’s in Mississauga, one the edge of Toronto. The world has changed. And General Motors may be gone soon. The fat lady seems to be singing.

 

Monday, March 30, the rumors from the previous evening were confirmed. We had pumped a lot of money into GM and Chrysler to keep them afloat, and they had come up with recovery plans – but we, who had provided the funds, had looked at the plans and decided they were inadequate, and the administration had asked GM’s CEO to step down and it was time for tough love:

 

President Barack Obama ordered General Motors Corp and Chrysler LLC to accelerate their survival efforts and brace for possible bankruptcy, saying neither company had done enough to justify the taxpayer money they were seeking.

 

Obama, describing the industry as a pillar of the economy, nevertheless gave GM and Chrysler a little more time and money to wring further concessions from workers, creditors and other stakeholders.

 

“We cannot, we must not, and we will not let our auto industry simply vanish,” Obama said in White House remarks on Monday that were partly overshadowed by his decision to force out GM CEO Rick Wagoner. 

 

And of course the markets tanked – the Dow down 254 or so. It just wasn’t pretty:

 

The Obama administration is giving GM 60 days to rework its survival plan. The new CEO of the biggest U.S. automaker said a court-supervised restructuring in bankruptcy might be necessary.

 

Chrysler’s operation would be funded for the next 30 days as it works to complete an alliance with Italy’s Fiat SpA, considered the No. 3 U.S. maker’s best chance of surviving.

 

If this doesn’t work out, it’s Chapter 11 – bankruptcy for restructuring with some disassembly – not Chapter 7 – liquidation, although that may be best for Chrysler. The Canadian government jumped in too – same deadlines, with a loan of a few billion so Chrysler could meet payroll this week.

 

And the guys at Fiat smiled:

 

Chrysler LLC has reached an agreement on a framework of a global alliance with Italian automaker Fiat SpA (FIA.MI) that has the support of the U.S. Treasury, Chrysler’s CEO Bob Nardelli said on Monday.

 

“We appreciate the willingness of the (autos) Task Force, along with industry and financial experts, to consult closely with us in order to achieve this significant step,” Nardelli said in a statement.

 

At the absurdly flawless and slick new White House website you can find the Obama administration’s new auto industry plan – with full video of the president’s address announcing all this. But if you’re an impatient sort, as we all are, the best analysis of what this all means comes from Matthew Yglesias:

 

The first thing to say about this is that unlike a lot of other things that have raised the cry of “socialism!” – This really sort of is socialism. You have the President of the United States firing the CEO of General Motors, and simultaneously ordering Chrysler to pursue a process of selling itself to Fiat. The administration is wisely trying to avoid an extended period of state-directed management of industrial firms producing consumer goods, but that’s certainly the situation they’re in at the moment and it’s something we ought to try to bring to an end as soon as possible.

 

But one of the two firms is far sicker than the other:

 

My understanding of the Chrysler portion of the deal is basically that if Chrysler and Fiat can’t come to terms within 30 days, then Chrysler is going to enter into a Chapter 7 liquidation process – at which point Fiat could buy whatever it wants. Consequently, Fiat is likely to be able to extract favorable terms on whatever deal they reach.

 

General Motors, meanwhile, is in effect being put into a debtor-in-possession bankruptcy. They haven’t technically been put in such a scenario, but the firm’s restructuring plan has been rejected and the panel is offering a 60 period in which to put together a more radical restructuring, featuring haircuts from bondholders and labor unions and dealers. This is basically what would happen in a DIP bankruptcy. The thinking is that given current conditions in the economy and the credit markets it wouldn’t be possible to arrange that through the private sector, so a bankrupt GM would need to be liquidated rather than reorganized. The government is stepping in to, instead, facilitate reorganization.

 

Yglesias thinks “these seem like economically reasonable courses of action” but he has his worries:

 

The American auto industry isn’t really going to be “saved.” General Motors is going to shrink radically, and Chrysler’s production facilities will basically become “transplant” factories of an Italian firm. In job terms, the auto industry is going to continue to shrink as a source of employment. In particular, the Chrysler-Fiat merger scenario is consistent with massive job losses in the United States since it is not obvious how many Americans Chrysler would really want to employ. If GM succeeds in getting out of a lot of its debt obligations, the resulting company isn’t going to be well-positioned to expand when the broader economy recovers since it’ll be hard to borrow on favorable terms. And the “good jobs” nature of blue collar work in the auto industry is going to further erode.

 

So while “this looks like an economically responsible way to avoid a cataclysmic implosion of these firms at an inopportune moment” it is bad news:

 

…this isn’t going to prevent the conditions facing the population of Michigan from further deteriorating. That state more-and-more looks like it’s going to be the 21st century version of the Great Depression’s Dust Bowl. The most important policy question facing us in this regard thus continues to be what can be done to help the people of the Rust Belt that doesn’t just involve indefinitely propping up shrinking firms. The first step is simply to turn around the shrinkage in the larger economy, but the question will remain even if recovery reaches the rest of the country.

 

What do you do with a dying industry, or one that is shrinking and becoming a minor player in a much bigger game? It is no wonder the markets dropped like a rock, although Kevin Drum isn’t that impressed:

 

As for the news that the stock market plunged on the news – spare me. Investors are idiots if they think this is bad news. A tougher restructuring plan is better in the long run for everyone but the auto industry’s bondholders, and I’ll bet that even most of them have either hedged their positions or else sold off their holdings at 70 cents on the dollar to speculators. Save your tears for someone else.

 

Daniel Gross addresses that in Paid Cadillac Prices, Got a Chevrolet – the bondholders will get hammered:

 

In addition to pushing out General Motors CEO Rick Wagoner, Obama also sent unwelcome tidings to other stakeholders of both GM and Chrysler. Given that Obama is being advised on these efforts by Steve Rattner, a veteran private-equity manager and investment banker, it’s not too hard to divine the unpleasant message he was delivering to Wall Street hotshots.

 

The Wall Street hotshots lose, big time, and the problem is structural:

 

At GM, the action is all about the company’s debt, not its equity. GM’s market capitalization was about $2.23 billion before trading opened today and is less than $2 billion as I write. By contrast, the company has loads of debt. (Here’s a list of outstanding bonds.) The most recent quarterly results indicate long-term debt of more than $29 billion. And since the firm’s credit ratings have been pushed deep into junk territory, that means most of the holders of this debt are hedge funds, private-equity firms, and other investment vehicles.

 

Gross notes that mutual funds and institutional investors like pensions or insurance companies don’t deal in junk, and GM debt is trading at “distressed levels” – they run the other way, for good reason. Gross links to this – GM bonds due in less than two years are trading at twenty cents on the dollar. You don’t want to play in that sandbox – unless you’re a master at shorting and trading by the millisecond. But the game is over:

 

Many of those who bought GM’s bonds did so because they hoped to 1) convert the debt into ownership in the case of bankruptcy filing or 2) see the bonds rise in value should the government step in and formally guarantee GM’s corporate debt. Obama made clear today what they suspected: No such guarantee would be forthcoming. While GM had tried to restructure, Obama noted, it hasn’t yet done enough. “I’m absolutely confident that GM can rise again, providing that it undergoes a fundamental restructuring. Have they cleaned up their balance sheets, or are they still saddled with so much debt that they can’t make future investments?”

 

The answers are no and a yes – the end. And what comes next is clear:

 

Holders of GM’s debt, like other entities to whom GM has made financial commitments – dealers, the auto unions -are going to have to cut a deal, sooner rather than later, and accept less than they think they’re entitled to.

 

And then there is Chrysler:

 

The company’s equity – its stock – is owned not by public shareholders but by the private-equity firm Cerberus, which paid $7.4 billion to buy an 80 percent stake in the company. Cerberus sold off big chunks of its equity to other professional investors, which reduces the amount of capital it has at risk. But last year it agreed to lend $2 billion to the struggling firm. According to the viability plan Chrysler submitted to Washington, the company has about $24 billion in debt outstanding.

 

Effectively, Obama told Chrysler that the government wouldn’t be providing much – if any – new cash and that he didn’t foresee much of a future for the company as an independent firm.

 

So they deal with Fiat. But that screws the hotshots even further:

 

The equity that Cerberus and other investors have put in was already severely impaired. After today, it’s worth even less. … Should Fiat and Chrysler cut a deal – which would dilute Cerberus’ impaired equity even further – “we will consider lending up to $6 billion to help their plan succeed,” Obama says.

 

If not, “and in the absence of any other viable partnership, we will not be able to justify investing additional tax dollars to keep Chrysler in business.”

 

In other words, big haircuts all around – for owners, bondholders, and creditors – even if Chrysler survives.

 

The markets loved Geithner and his odd plan to run a rigged auction of all those toxic assets that could well be worthless, or not – potential big profits and no risk at all. This is a different kettle of fish – smelly, dead fish. And bankruptcy would be disastrous for Cerberus. Wall Street has no idea what to make of Obama.

 

Of course the left is none too pleased either, with “a senior administration official, briefing reporters late Sunday night on the condition of anonymity in order to speak freely, said Obama will call for more sacrifice from carmakers, their investors and automotive unions.” Susie Madrak is not pleased:

 

Billionaire bankers (and their investors) walk away from the table with their pockets stuffed with taxpayer cash while members of the auto workers union are told they’ll have to sacrifice even more – in this case, the Obama administration wants the companies to get rid of “old liabilities” – i.e. retiree pensions. (You know, while bankers complain about having to sell the house in the Hamptons.)

 

No, Obama’s not talking about the insolvent banks. He’s talking about Detroit. Could he make it any more obvious that the wealthy are a protected class?

 

“If they’re not willing to make the changes and the restructurings that are necessary, then I’m not willing to have taxpayer money chase after bad money.”

 

Funny, that’s just how I feel about Citibank!

 

She thinks the workers matter the most here:

 

And what’s all this crap about bringing the cost of wages in line with Japanese auto workers – whose government provides free health care? Why are workers the only ones expected to bear that burden? That’s a right-wing meme if ever I heard one.

 

I’m not even arguing with the concept that deep cuts have to be made now to save the industry for later. For all I know, the union really is dragging their feet in negotiations. But how can the administration not see how it looks to the rest of the country?

 

Elana Schor also comments:

 

It’s an admittedly over-simplified question, but one that’s lingered in the background today after the Obama administration insisted on the resignation of GM CEO Rick Wagoner: Is the government insisting on stronger concessions from Detroit than it is from Wall Street, despite the latter’s receipt of a far bigger taxpayer bailout?

 

And she finds this from one of the two Michigan senators puzzling:

 

Sen. Carl Levin (D-MI) just told reporters that he believes there has been “a double standard for a long time in terms of the treatment of the financial industry, compared [with] the way the auto industry has been treated. It’s something we’ve fought against … but something we’ve got to live with and deal with.”

 

It seems Levin thinks it would be “a distraction” to gripe about banking CEOs’ keeping their jobs – while, she says, “boasting of managerial records nearly as dismal as Wagoner’s…”

 

It doesn’t seem fair.

 

But one reader at Talking Points Memo offers this:

 

As a 30+ year veteran of the auto industry let me make the difference very clear; the banks can exist without the auto industry. The same cannot be said for the reverse. The automobile business, from the manufacturers down to the consumers, relies on banks for one reason or another.

 

While the current economic situation has brought the oversight deficiencies in the banking industry to the forefront, the automakers have spent the better part of the last 40 years ignoring their core businesses and focusing on short term profits and muddled business plans. Anyone with a clear view of the industry knew this day was coming – it was just a matter of when. The fact that banks aren’t making loans in order to buy cars just accelerated this downfall.

 

And he has his anecdotes:

 

I was meeting a friend in the GM building in downtown Detroit about 18 months ago and was astounded to learn how few people there were actually involved in making cars and how many were involved with other GM business interests.

 

In Chrysler’s case, this was a weak company driven into the ground and thoroughly looted by its “merger” with Daimler-Benz. It was funny going to hotels around the Chrysler headquarters in Auburn Hills and thinking you were in Germany due to the huge number of German speaking guests. Each staying for long periods of time on the company dime and all being charged to Chrysler.

 

Ford has been the most proactive of the three and should be alright with minimal interruption, although any changes in the basic labor agreement with the other manufacturers will impact Ford union employees as well.

 

And on the right, things are just odd. See this video clip from The McLaughlin Group, March 27, 2009 – Monica Crowley Thinks Bailouts are the Government “Jackboot” on the Private Sector:

 

McLaughlin: Question. Are these bailouts sufficient to restore the economy I ask you Monica?

 

Crowley: No, because you put out a consecutive list of companies, institutions, sectors that have required some money over the last couple of months. In just about every single one of those cases there was a redundancy there. AIG coming back. The auto industry coming back. What we have poured into all of these sectors has not nearly been enough and it will not be enough. This is like spitting into the ocean. It’s not going to be enough to restore the economy and if we keep going down the path of having the government jackboot on the private sector, the private sector which will be the engine of this growth (crosstalk).

 

[Eleanor] Clift: The government jackboot on the private sector… uh, the private sector had its jackboots on American taxpayers for a good long while and we had companies like AIG basically operating like a hedge fund selling a little insurance on the side. And it is totally appropriate that we now try to get a handle on the new financial world that is… it’s a titanic struggle between the Treasury Department and the financial community and who’s going to run the economy.

 

Maybe the financial community does run the country. From the Boston Globe, see this report about how the Pension Benefit Guaranty Corporation, the agency that insures retirement funds, like those of the auto companies, decided to play in the stock market at exactly the wrong time:

 

Just months before the start of last year’s stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

 

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

 

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent – and all of its stock-related investments were down 23 percent – as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.

 

These folks are the backstop against major losses by private pension funds, to keep the parent companies from slipping into bankruptcy. A structured bankruptcy by GM or Chrysler would mean that massive liabilities would be passed on to this agency. The fellow who made the decision was a Bush appointee.

 

David Kurtz thinks he sees what is going on:

 

A finance professor who had previously advised the agency not to make the switch away from bonds compared the move to an insurance company writing policies to cover hurricane damage and then investing the premiums in beachfront property.

 

Bush was able to do for the Pension Benefit Guaranty Corporation what he tried and failed to do for Social Security.

 

Josh Marshall agrees with that – “Incompetence doesn’t cut it as an explanation.”

 

Marshall sees it this way:

 

One of the big drives behind Social Security privatization was the desire to find more money – in the case of Social Security, a lot more money – to keep the fires burning on Wall Street. Not just more fees for the people handling the money, but more money to keep pushing asset values higher. This looks like the same thing just using slightly different means.

 

Maybe there is much more going on here, beyond the ultimatums to GM and Chrysler, and the jackboots and all the rest. We not only have to get out of this big mess and that, then we have to decide who is running this country, and for whom.