The news this morning would be amusing if it weren’t so sad.

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.

My views are that they ALL need to go to a prepackaged bankruptcy — banks, autos, etc.

Here’s some excerpts:

The NYT:

Citigroup approached the regulators with a plan that would allow them to convert a large amount of the government’s $45 billion of preferred shares, which is treated as debt, into common stock, this person said. The government owns a stake of roughly 8 percent, but that could grow to as much as 40 percent.

Converting the preferred shares while also issuing more common shares would bring Citigroup closer to the mix of equity that the government is likely to demand when it introduces the stress test. But that would severely dilute the value of shares held by existing Citigroup stockholders

WSJ:

Outside advisers to the U.S. Treasury have started lining up the largest bankruptcy loan ever, talking with banks and other lenders about at least $40 billion in financing for General Motors Corp. and Chrysler LLC, in case the two auto makers need it, said several people familiar with the matter.

While acknowledging the grimness of the task, administration officials involved in the auto talks said they are trying to find a way to restructure the two companies without resorting to bankruptcy proceedings. They stressed the latest efforts were “due diligence” on the part of the government advisers, and that bankruptcy financing may not be necessary.

Still, people involved in talks with senior Obama administration officials said that the administration believes that the option of Chapter 11 filings by the two auto makers needs to be seriously considered.

>

Previously:
Why Are Banks So Different From Autos? (December 9th, 2008)

http://www.ritholtz.com/blog/2008/12/why-are-banks-so-different-from-autos/

Favoring Nationalization Are . . . (February 20th, 2009)

http://www.ritholtz.com/blog/2009/02/favoring-nationalization-are/

Sources:
Citi presses US to take 40% stake
Francesco Guerrera and Krishna Guha
FT, February 23 2009 00:40 | Last updated: February 23 2009 11:05

http://www.ft.com/cms/s/0/806418a0-0140-11de-8f6e-000077b07658.html

Bankruptcy Funding Solicited for Car Makers
JEFFREY MCCRACKEN and JOHN D. STOLL
WSJ, FEBRUARY 23, 2009, 1:16 A.M.

http://online.wsj.com/article/SB123535613910745405.html

As Doubts Grow, U.S. Will Judge Banks’ Stability
EDMUND L. ANDREWS
NYT, February 22, 2009

http://www.nytimes.com/2009/02/23/business/23bank.html

Obama Bank Nationalization Is Focus of Speculation
Linda Shen
Bloomberg, February 23, 2009 04:05 EST

http://www.bloomberg.com/apps/news?pid=20601087&sid=anGxzRYhVF_Y&

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “Why Bankruptcy For Autos But Not Banks?”

  1. Bruce in Tn says:

    People may get tired of this in a hurry…

    http://www.guardian.co.uk/uk/2009/feb/23/police-civil-unrest-recession

    Britain faces summer of rage – police

    “Superintendent David Hartshorn, who heads the Metropolitan police’s public order branch, told the Guardian that middle-class individuals who would never have considered joining demonstrations may now seek to vent their anger through protests this year.

    He said that banks, particularly those that still pay large bonuses despite receiving billions in taxpayer money, had become “viable targets”. So too had the headquarters of multinational companies and other financial institutions in the City which are being blamed for the financial crisis.”

  2. rktbrkr says:

    Whatever happened to KISS (Keep It Simple Stupid)? These solutions keep getting more complicated and expensive but are producing the same results. Geithner was a real bad a choice, a more of the same guy.He’s in over his head. We all are

  3. rktbrkr says:

    Does CITI bust a buck today? When do they halt trading? Or will they trade sideways or perhaps up the next couple weeks during the stress testing LOL

  4. rktbrkr says:

    Who was leaking this story to ever financial publication under the sun, CITI hoping to stem it’s decline? This is like a NAZ stock reissuing 2 or 3 versions of the same dream scenario to try and jack their price. CITI is using the Treasury as a PR tool.

  5. 10 cc says:

    “Why Bankruptcy For Autos But Not Banks?”

    Because the country (and most of the world) is not run by an international automobile cartel.

  6. BR,

    is 10 cc going to get any bonus points for providing the correct answer? or, should the readers of this conditioning page: http://www.emergency.com/cntrterr.htm
    be notified?

  7. rktbrkr says:

    Rumors, wasn’t the SEC going to crack down on rumor mongering in the financial industry? It sounds like CITI is using Treasury as their favorite rumor tool.

  8. AndrewShaw says:

    “Why Bankruptcy For Autos But Not Banks?”

    Some other good questions that may have similar answers:

    Why are there secret laws at the TSA area of the airport?
    How is it possible for a DA to get a grand jury to indict a ham sandwich if he wanted to?
    Why are drugs illegal?
    Why do we have to depend on bloggers for news?
    Why did Obama hire lobbyists immediately after banning lobbyist hiring?
    Why is it the same captured bureaucrats, even in a “changed” administration?
    Why are roadside checkpoints legal?
    Why can ones home be taken and given to a private company which covets the land it sits on?
    Why are mass drug tests of high school students legal?
    Why during a financial crisis, was Congress holding hearings of baseball players?
    Why do over-age-65 republicans not notice they have socialized medicine already?
    Why do public pensioners think they actually earned a full salary for life?
    Why pay $12 for a $2 bank stock(citi)?
    Why can the govt pump the market with rumors at key moments, when someone else would be prosecuted for it?

    The answer is because, you whining children, BECAUSE. Now move along and do some covering, party’s over for a couple days.

  9. mathman says:

    Since the entire ecosystem right down to our “way of life” is all interconnected, the corporate sector must change with the times and re-invent the way we live (not only SELL us sustainability, they have to DEMONSTRATE it (from changing the way resources are extracted – and where – to manufacturing and distribution changes that use less energy, for example). It all has to change or it won’t work. “It” should have changed way back when, but we can’t do anything about that now – just hopefully learn from the lack of fore-thought in the design and disposal stages, if not the entire concern) . Everyone has to have a stake in it or they won’t participate.

    As it is, i’m pessimistic (what, with mankind’s glorious track record?) that we can accomplish what’s necessary, let alone sufficient, for our contiued survival at our current rate of occupancy.

  10. try2bamused says:

    The banks have owned Treasury for years. Geithner is merely doing what he is tasked to do: make the bankers whole. What were you expecting, enlightened service in the public interest? From this generation of policy makers and elites? Are you kidding me?

  11. mlomker says:

    I understand the arguments for saving GM from a jobs perspective, but what impact are we having on the auto industry? Ford isn’t taking a bailout. We’re going to give GM a pile of money for their incompetence so that they can stick around and try to put Ford out of business? There are a lot of moral issues in this whole ordeal.

  12. Stuart says:

    Geithner was cut from the cloth as Paulson and is proving himself to be a bad choice. No change will come in Treasury tactics. Obama needs to replace him ASAP IMO.

  13. wally says:

    Sad, isn’t it?
    Money from future income of middle class America extracted by the government and given to the guys who bought Congress.

  14. OGS says:

    I haven’t seen anyone propose this, so I assume that more likely than not there is something that makes it a non-starter, but here is the general idea:

    What if the treasury set up a program which purchases toxic assets off the balance sheets of banks with cash or equivalents at what it determines to be fair value and then had the banks issue them preferred stock in the amount of the delta between the determined fair value of the toxic asset and the value at which the asset was being held on its balance sheet. This would have the benefit of replacing any recorded loss on the sale of the asset with new regulatory capital, eliminating the reluctance of banks to participate in previous efforts to address the illiquidity of banks but not the insolvency. It would also be the first government program that separated the healthy financial institutions from the sick ones: those who are holding their assets closer to fair value would not see much equity dilution, while those who are holding their assets well above fair value will be effectively nationalized by the magnitude of the government’s preferred shares (and maybe warrants) relative to the common.

    Finding something that approximates fair value is still difficult, but doesn’t become as much of a sticking point, because there won’t be a hole left in the banks balance sheet if the price is too low and there won’t be the incentive to do a back door recapitalization through elevated prices, because the recapitalization will be explicit. You could also toy around with various private co-invests on both the toxic assets and the preferred stock if you were so inclined.

  15. MikeinMass says:

    BR is right about reasons…..Republicans are walking to different tunes when it comes to bankruptcy for the banks (non-union) vs. the auto manufacturers (union). What is disgusting is these guys are clearly thinking of elections instead of the good of the nation.

  16. Stuart says:

    Karl Denninger wrote some of his thoughts this a.m. on nationalization of the banks. Some pretty good food for thought IMO too.

    “Unfortunately we are unable to “nationalize” the banking system on the grand scale that some have put forward. Doing so risks the destruction of America; there is roughly $1.2 trillion in debt on the balance sheets of Bank America and Citibank alone, ignoring the “off balance sheet” conduits and other “guaranteed” interests. The total debt thus involved is likely in excess of $3 trillion if we were to do Bank America, Citibank and, for example, Wells Fargo

    The public float of treasury debt is somewhat over $5 trillion dollars. To take these onto the balance sheet of The United States Treasury would add more than 50% to that float immediately; this might provoke an immediate sovereign debt rating downgrade for The United States and that (or the jitters that could lead to one) would spike borrowing costs for Treasury. Since we’re running a deficit of nearly $1.6 trillion in the current budget year this would be catastrophic.

    This same issue, by the way, is why Fannie and Freddie have not been consolidated onto the Government Balance Sheet (even though the CBO says we should) and why despite the bleating of Asian Nations we have not issued a “full faith and credit” guarantee for their debt. Bluntly put, we can’t without serious and perhaps catastrophic consequences for a government that simply refuses to live within its means.

    This is where people like Roubini get it wrong; Treasury simply cannot afford a bond market dislocation or any significant increase in short-term borrowing costs when it is running deficits of $1.5 trillion annually. Any consolidation of these bank balance sheets onto the debt of the United States, whether announced or de-facto, is very likely to produce a near-immediate funding cost spike which could start a destructive or even fatal spiral in treasury funding costs, with the potential outcome being a sovereign default by The United States. Treasury, over the last few years, has committed the same idiocy that many corporations did in shifting borrowing to the short end of the curve in order to hold down financing expense – at the cost of adding significant rollover risk. Should that risk become realized the outcome would be catastrophic. Many corporations got “schooled” when commercial paper seized up and the dangers of their attempt to shift long-term debt to short-term paper became realized instead of theoretical; we cannot afford such an event on a national scale.”

  17. krice2001 says:

    Seems to me that the Barry nails it again, which is why I read this blog. “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.” “… they ALL need to go to a prepackaged bankruptcy — banks, autos, etc.”

    The other aspects to the disparity in treatment would appear to be the close connections between the government’s problems solvers (e.g. at Treasury) and the banking industry versus the auto industry. I don’t see a lot of former auto industry representation in the government. I think in part it’s human nature to align yourself more closely and be more protective of your own.

  18. Dan Duncan says:

    Damn there’s a lot of Doom and Gloom around here.

    Chill out people! Sure we’re in a little over our head. No worries though.

    Just think: After we take our stake in C, BAC, GS, GM, F, etc., etc…there awaits for all of us—one kick ass concert!

    Bono and Geldolf are in the pre-planning statges of a WE Are The World USA Debt Relief Extravaganza. The Boss, Coldplay, Police….the list goes on and on….It’s going to be both dope and fly!

    I’ve heard it from a well connected source that the Treasury is going to issue 100 year bonds to pay for it. Indeed, when Geithner was asked about the legitimacy of such an offereing, he responded: “Sure, there’s a small amount of irony in issuing debt to pay for a debt relief concert….but dude…this is going to be ‘The Concert of the Century!’”

    So chill out people.

    Help is on the Way!

  19. dead hobo says:

    It’s time to close some banks down and sell them off

    There’s no mystery here. It’s just Uncle Stupid being Uncle Stupid. I can clearly see the making of a brain eating zombie bank. The last capital infusion didn’t work so, for some idiotic reason, they want to do it again. This is Uncle Stupid at his best.

    I don’t profess to know the best solution to fix weak banks, but I can clearly see the solution to dead banks.

    Citibank must have some profitable parts that would be worth real money if divested. It’s stock is already worthless so letting it take a hit for completing the write down process is basically free to the stockholders and to the people of the USA. Uncle Stupid might get some cash back from the divested assets.

    Frankly, it’s a good plan. Wait for the stock to be worthless, according to market valuation. Close the bank down, sell it off, and move on. And then ask the Justice Dept to look into bank management to see if any type of fraud turned the bank into a house of cards, prompting the collapse.

    Giving these people any more cash without a clear and successful end game in sight is criminal.

    It doesn’t make any sense to shut down a bank with the hope of market valuation. It seems brain dead not to take advantage of the opportunity to shut it down when a zero valuation point arrives. The closure and divestiture will be as cost free to society as it ever will be, and should restore confidence to the banking system.

    If implemented, it should be illegal to short bank stocks. I don’t know if that ban is still active or if it was repealed. But if a “close the banks with no market cap” policy is adopted, shorts will try to shut down every bank in sight, if allowed.

  20. ottovbvs says:

    Stuart Says:

    February 23rd, 2009 at 8:47 am

    Hooray. A bit of sensible analysis of one of the reasons and there are others why the Treasury doesn’t want to nationalize the banks. BR, Roubini et al are always full of reason why we should nationalize the banks but if it’s the silver bullet they claim why are the govt so unwilling to do it? A cultural aversion to the word “nationalization.” An absolute committment to free market economics that would make GWB feel proud. It doesn’t seem very likely does it. So come on BR, or any of the nationalization chorus here, why not tell us what are the arguments against nationalization.

  21. Lugnut says:

    Barry, why do you hate our financial oligarchy so?

  22. ottovbvs says:

    dead hobo Says:

    February 23rd, 2009 at 8:58 am
    “There’s no mystery here. It’s just Uncle Stupid being Uncle Stupid.”

    …..Actually it’s a considerable mystery.

  23. davossherman@gmail.com says:

    Perhaps hallucinogenic drugs have been legalized. If so, I suppose the trillion dollar question these days is who are the users? The ones who dream up “change” or the ones who accept “change”.

    So much for truth. President Oboma the truth is insolvency. Oh, and you are listening to morons who can’t even advise you that the USA is insolvent and so are the banks, the car companies, the….

  24. dead hobo says:

    About seizing banks with no market cap and incompetent management:

    Upon reflection, immediate closure would throw the economy into turmoil. Instead, turning operation over to a competent authority would be better. Then there would be no bank runs or second level effects while divestiture was going on. Besides, I suspect a lot of buyers would come out of the woodwork for the retail bank operation and other parts.

    The FDIC has a mechanism in place to operate failed banks. It shouldn’t take a genius to figure out how to assure a nervous public that no losses will occur to customers due to seizure and sale.

  25. ottovbvs says:

    Lugnut Says:

    February 23rd, 2009 at 9:03 am
    Barry, why do you hate our financial oligarchy so?

    …I can think of a few reasons.

  26. ottovbvs says:

    dead hobo Says:

    February 23rd, 2009 at 9:09 am
    Upon reflection, immediate closure would throw the economy into turmoil. Instead, turning operation over to a competent authority would be better. Then there would be no bank runs

    …….The fact you think this has anything whatever to do with bank runs says it all……And whose the competent authority…..Uncle Stupid?

  27. VennData says:

    Indeed, why does bankruptcy absolve you of your contractual obligations EXCEPT for your first mortgage on primary residence?

    And why is it the “Sanctity of contracts” so important for Homeowners with mortgages they can’ afford but not for the UAW? … Or the auto suppliers … or the pension plan? etc…

  28. d4winds says:

    10 cc & Mark E. Hoffer:
    these comments were a treasure.

    other possible answers:
    1) because “blame the victim” works.
    2)because we must make investment banking services–it’s the future!!!!–but not cars, which will be made in China anyway (sorry, AL, KY, & TN).
    3)because it’s cost effective to spend $787bn to create 3mn jobs and even more cost effective to save $100bn to kill off the same #.
    4)because egregiously insolvent bankers deserve their deferred comp. (not to mention bonuses)

  29. Marcus Aurelius says:

    We keep thinking that the Fed is a whore to the bankers, when in fact, it’s a slut. Value traded for performance does not come into the equation. There is no business model.

  30. dead hobo says:

    I’m really getting sick of government corruption and government stupidity that is so egregious it is equal to corruption. Government stupidity is so common and that nobody expects them to do anything that even approaches a good idea. The Mafia just needs to get elected. The money is free after that and you can get away with it if you just act stupid. Al Quaeda, don’t do anything, We’re doing it to ourselves.

  31. dead hobo says:

    ottovbvs,

    FDIC insurance doesn’t cover all deposits. Everyone need access to their cash. Not making the close down process totally costless and transparent to retail banking customers will create a mess beyond description if dead banks are shut down as a matter of policy. Try to think of banks as being more that an abstract concept. Real people who have nothing to do with bad assets depend on them.

  32. ottovbvs says:

    Those wanting to get beyond the “cancel my subscription” emotion should read Denningers comments on bank nationalization. They are lucid and insightful…… and he’s no fan of the govt so that should keep you happy. Here’s the link.

    http://market-ticker.denninger.net/

  33. ottovbvs says:

    dead hobo: banks runs are irrelevant to the whole issue of nationalization. FDIC insurance covers up to $100k and there’s a process in place to handle it at seized banks. It is not a material issue.

  34. PrahaPartizan says:

    Because: “ALL ANIMALS ARE EQUAL, BUT SOME ARE MORE EQUAL THAN OTHERS” [- George Orwell, Animal Farm, Ch. 10 ] ?

  35. super_trooper says:

    How about a poll?
    How many days/weeks/months before citi and or BA goes bankrupt/receivership/nationalization?

    Winner gets a free copy of bailout nation?

    SFCG Filing for Bankruptcy causes further problems for citibank, another 71 billion yen in the hole
    http://www.bloomberg.com/apps/news?pid=20601087&sid=avP37JtL5E.U&refer=home

  36. Ny Stock Guy says:

    I say one of them goes belly up by Saint Patrick’s Day.

    Please get my book warmed up.

  37. Ny Stock Guy says:

    Saint Patrick’s Day 2009, that is!

  38. PrahaPartizan says:

    Ny Stock Guy, actually you would have been more accurate if you had refined your prediction to Saint Patrick’s Day 2008. That’s when they went belly up. We’ll just officially acknowledge it this year, 2009

  39. @AndrewShaw: Sorry, must disagree. The answer is actually: SHUT UP.

    (‘Up Yours, Kid’ is also acceptable.)

  40. Hulkster says:

    Autos have the preception of being plagued by permanent competitive disadvantage. Legacy costs, wages, etc. Only a BK will address impediments to sustainable operating profitability.

    Banks could eventually absorb their hangover losses with their core profitability. Banking is not fundamentally a money losing business. They don’t have unions preventing them from doing downsizing and once they are right sized, they could feasibly turn it around. Their Fed borrowing costs are next to nothing. Give me $5 trillion at 1% and I’m sure I could turn them around. Not so with GM.

  41. willid3 says:

    i suspect the difference in treatment (banks vs Autos) is strictly political. the banks tend to have more white collar workers (sort of) than the auto industry. and then there is that union thing. and besides when was the last time the government really cared about anybody but the rich any way? and while we have a new administration it still takes time for a new direction to take place (it has been only a month at most).
    its probably just a continuation of the wall street agenda of destroying the middle class (all the while redefining it in ways that make it unrecognizable). and after all they lead us into this mess, the rest of us need to rescue them from their mess. but don’t rescue any body else.

  42. DL says:

    Mish doesn’t mince words:

    “Not only is Citigroup a black hole from which no taxpayer dollars can escape, but Geithner’s brain is a black hole from which no intelligent thought can escape”

    http://globaleconomicanalysis.blogspot.com/

  43. DL says:

    “Why Bankruptcy For Autos But Not Banks?”

    One can argue that the glass is “half full”. If Obama can get one out of two right, we should be thankful for that.

  44. Urkel says:

    This is Obama’s really big test:

    Fire Geithner.

  45. JoWriter says:

    Why save the banks, esp C & BAC? Have you looked at the assets in state and union and corporate pension funds? Have you looked at the assets in university endowment funds? Have you looked at the assets in many mutual funds residing in millions of 401ks and IRAs?

    So you see, this has nothing to do with who bought whom (not arguing whether banks bought Congress),

    I rest my case.

  46. batmando says:

    At this juncture, the only hopeful construction I can put on the Geithner apptmt and subsequent “actions”
    (and inactions) is that Obama is playing rope-a-dope with the TBTF asshats and when C, BAC, etc go to zero, suddenly Geithner et. al. will find the administration doing a volte-face.
    Hey, I can have my small hope, can’t I? y’know some “change”, what I thought I could believe in.