Sacred Cows

As we enter the Year of the Ox, it is instructive to see whose ox is being gored.

Amidst all of her considerable posting goodness today, Yves Smith offered up this excellent piece, "Treasury Soliciting Bankruptcy Funding for GM, Chrysler" in which she says (my emphasis):

Let's see. Citigroup has gotten $45 billion of TARP funds, and backstops on a net of roughly $250 billion of crappy loans after Ciit's first loss and allowing for the split between Uncle Sam and Citi on the balance. And it is pretty unlikely that we have seen the end of Citi's funding needs.

GM and Chrysler, by contrast, have borrowed (un, loans are higher in priority than TARP-y equity) $17.4 billion and are seeking an additional $21.6 billion. So the total they want is less than that already handed to Citi, well less than what AIG received.

The Treasury is threatening to put the two car manufacturers into bankruptcy, and is moving forward in exploring feasibility. This may merely be high stakes poker, but the bluff looks pretty serious.

Do we see anywhere near as rough treatment for companies that not only drove themselves off the cliff, but are taking the economy with them? Ah, but of course. Who has given more to pols in DC, Wall Street or Detroit? Case solved.

I think it's a little more complicated than that, though Yves has put her finger squarely on the problem. Let's jump over to Barry Ritholtz who asked much the same question today from the opposite direction, "Why Bankruptcy For Autos But Not Banks?". He wants to find some silver lining in the cloud, mostly because he prefers cleaning out the stables to moving piles of horseshit around, but his honesty brings him up in the end (my emphasis):

The Obama administration is undergoing a battle between its own good instincts with those of its Treasury Secretary.

Away from Treasury, on the side of intelligence, new policies, a clean break from the Paulson/Bush plans — I believe during the campaign, it was called CHANGE — and inevitability, are prepackaged bankruptcies, clean balance sheets, and a fresh start. This is reflected in the Fed exploration of $40 billion in bankruptcy funding for GM.

On the side of more of the same, bad decision making, regulatory capture, worshiping sacred cows, and a hard-to-understand goal of saving the banks rather than the financial system, is the utterly absurd proposal to somehow spend 10X the market cap of Citigroup for a 40% stake in the apparently insolvent firm.

This is an accounting maneuver, a convertible preferred that greatly dilutes the common shares, and adds no new capital. Put on paper, it allows the leverage to look less egregious.

One can imagine an incredulous junior Treasury staffer — one who hasn’t been captured by the big banks, and is capable of basic arithmetic — saying the following:

"Explain this to me again: We put in many times the value of this company — we have already given them $45 billion dollars, and guaranteed almost $300 billion dollars worth of bad paper — and we get less than 50%? WTF? How the hell does THAT work?"

Its apparent that this sleight of hand doesn’t work to just about everyone except Tim Geithner (and a few others).

At the same time, an industry that had nothing to do with the current crisis is on the fast track to a healthy pre-packaged bankruptcy.

Moral Hazard aside, the different approaches reflect the relative importance of different sectors. Banks must be saved at all costs, but GM and Chrysler must go the bankruptcy route. The only explanation in treating the two industries so radically differently is an overt hostility to Unions on the part of many.

Moving a step away from Yves' blunt (and not innacurate) assessment that there is a financial quid pro quo at work here, what Barry gets to almost by accident is the class bias that has been present in the current administration since the primary campaigns began, the one I wrote about month after month last year. I think the situation is more nuanced than just hating unions, though that is certainly a major contributing factor, and has a great deal to do with Whole Foods Nation's disdain for the laboring class and its entirely too good opinion of the value of its own work in the cubicle cities and cool development spaces that symbolic analysts occupy.

Motor City vs. Wall Street.

There are two ways to look at the contest, neither of which are more right but each of which captures aspects of the contesting constituencies. One is of core political interest groups. Obama explicitly campaigned on a platform of throwing away "the old" base Democratic interst groups and of bringing new voters (i.e., constituents) into the mix. His economic policies, the attention to the financial industry, directly rewards the people who were most likely to compose that group, which is more than just the bankers and brokers. Any industry that, like the finance sector, delievers intangibles and/or goods inseparable from the professional services that support them is an industry where Obama supporters are over-represented. The constituencies that rejected him in the primaries and again in the general are more likely to be found in industries where the goods to be delivered can be divorced from the service and support provided. This is in accord with the argument Yves puts forward, where the people who bought you are the people who you serve.

The other way to view this is as a cultural argument, whereby the cultural losers, the people who have been falling further and further behind since the Movement Conservatives came to power with Reagan, are not seeing any change in the attitude that they are losers and need to be dismissed, pushed away, wiped out (get rid of the old junker car and get a Prius, why don't you?), while the cultural winners, the Masters of the Universe and the other hip and cool guys who know an Apple a day keeps the dull PC work away, are being treated as due the spoils of their electronic wars - trading shares and doing deals as though it is just another RPG, like World of Warcraft. The executives of the auto industry are not dumb and no doubt gave generously to open doors and bend ears with the new administration (and who will personally be just fine, no matter the economic fallout), yet they find themselves lumped together with their own lumpenproletariat manning the assembly lines in Detroit, determined to be unworthy of the care lavished on the people who created the crisis in the first place. This is more in keeping with Barry's claims about hatred of unions.

Clean creative class types get the benefit of the doubt, not just to preserve their stock values (and, btw, as a holder of some substantial retirement accounts, I really don't want to see their value trashed. Just sayin...) but to preserve their way of being in the world. They are presumed to be doing a good job, as befits members of the winner class.

The Bunkers and Bubbas who (it is imagined) live in the burned out cities and trashed trailers of sweaty America are told they will feel pain, their greedy unions having killed the goose and brought to a permanent end the golden eggs they never deserved in the first place. No health care for you, no seriously expanded public works projects which might employ you, penurous loans and enforced bankruptcies instead of bags of money and lavish bonuses for having screwed things up beyond hope of repair.

The sacred cows watch, chewing their cuds, while the oxen are turned into stew meat.

Anglachel