The Chrysler bankruptcy is a fascinating development in the great financial crisis of 2008-09. It may be a enormously significant milestone in the evolution of the banking crisis and the response from the Obama administration.

Or, it may be that autos and banks are perceived so differently in D.C. that not much can be read into it.

Let’s explore possible reasons potentially supporting the former rather than the latter.

When team Obama hit Washington on January 20 2009, the crisis was in full throat. Markets were plummeting, credit was frozen, and panic was widespread. I give the benefit of the doubt to a new administration to simply withstand the initial waves of fear, stop the freefall, and achieve some stabilization.

Sure, the usual crowd (including my buddy Larry Kudlow) blamed the inherited mess on Obama, as did the speak-first-think-later pundits like James Cramer. I noted at the time the blame was misplaced. I doubt any credit for the rally will be forthcoming; consistency is not the strength of partisans or carnival barkers.

Most DC watchers were disappointed when the Obama team continued the Bush policies of massive monetary giveaways to insolvent firms, run by incompetent management. And the appointment of Larry Summers and Tim Geithner, two people involved in either contributing to the credit crisis or helping to make it worse was not encouraging. The Bush Paulson Bailout policy of shoveling unconscionable amounts of money at these firms were continued by the new Obama economic team.

During W’s reign of error, I was a consistent basher of his ruinous decision-making; I have since been named one of the 14 most most strident critics of Obama’s economic policies. This isn’t partisanship, its legitimate policy criticism.

There is some hope for a break formt he past: Rumors that Rahm Emmanuel and David Axelrod wanted to allow an FDIC recievership/liquidation/nationalization and were overruled by Summers and Geithner were enormously disappointing to many economic observers. Some people think that you are supposed to follow the rule of law and allow the FDIC to do its job. Last I checked, the size of the insolvent bank was irrelevant to whether the bankruptcy and liquidation laws were applicable.

Despite all of those disappointments, the Chrysler bankruptcy is encouraging. Why? Consider the circumstances. Here we are 100+ days later, and some stabilization has occurred. The economic data is still “not good,” but it has become “less bad.” The market has rallied from 6,500 to 8,000, and the sentiment levels have dramatically improved.

This is an environment that should encourage the emergency footing of the economic team to stand down. One would also imagine that David Axelrod and Rahm “never let a good crisis go to waste” Emmanuel will want to push forward on some of the Obama agenda, rather than merely continue the Bush policies.

If there is a time to do so, it would be now.

The bank stress tests will be out in days, and the need for private capital will be a turning point. Rumors that Citibank needs $10B and Bank of America needs $60B are circulating.  The public has been infuriated at all the monies going to the banks, but they still mostly blame W.  If the post panic Obama admin wants to make a break from those policies, forcing the banks to raise private capital or go into FDIC liquidation is the way to do that.

Or,they can continue the Bush policies — a surefire way to “own” the mess they inherited.

Are banks really so different than automakers? So far, the answer has been yes. The policy response has been to pour trillions of dollars into the companies that caused the problem. Perhaps we have finally reached the point where these horrifically expensive, wasteful policies will come to an end.

That would be change we can believe in . . . .

>

Previously:
Was the ‘00-03 Crash Bush’s Fault? ‘09 Obama’s? (March 5th, 2009)

http://www.ritholtz.com/blog/2009/03/2000-crash-bush-09-obama/

The 14 Most Strident Critics of Obama (April 30th, 2009)

http://www.ritholtz.com/blog/2009/04/the-14-most-strident-critics-of-obama/

Category: Bailout Nation, Bailouts, Credit, Politics

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.

43 Responses to “How Will Chrysler Bankruptcy Affect Insolvent Banks?”

  1. call me ahab says:

    I am on the side of the secured creditors who are objecting to the sale of Chrysler to Fiat- if Chrylser is liquidated it would seem that Fiat could pick and choose what it needs anyway- i.e. brands and factories- the Chrylser name itself having zero value. Let’s put this put this dog down already.

  2. RockyR says:

    The only way I go along with this analysis is if Chrysler is liquidated. Last time I checked, the government was still offering to pour billions into the failed auto company as part of the bankruptcy restructuring. This bankruptcy still smells an awful lot like a bail-out to me.

    After the trillions that have been spent to save the TBTF banks, $10bln in private capital is insignificant. It’s akin to Obama’s arrogant stunt to cut $100M out of his $2T deficit budget.

  3. rob says:

    This whole stress thing is a joke! It makes no difference if the bank passes or fails, they’ve already firmly established failing is not an option. So at the expense of a discounted future, we will continue down that road some more.

  4. Gene says:

    Unfortunately, there never will be change we can believe in. Once inside the Beltway, it’s what can you do to help me get re-elected and what can I do to help you get re-elected? I wonder that perhaps it’s time to throw the whole lot out and re-elect rookies and tenderfeet for all of Congress. We need new and different mistakes, not the same old mistakes re-hashed.

  5. what has not changed from the bush team’s response to the obama team’s response and handling of the banks is the interconnectivity of our financial system

    they wont let the big ones fail because of counter-party stuff that they know is a high stakes domino game

    the question is how these financial institutions are regulated and cordoned off to a greater extent than they were going into this mess, the incest and co-dependence has been a real MF and probably the reason why the FDIC hasn’t really been brought in on a Citi or a BAC

  6. wally says:

    “Are banks really so different than automakers? So far, the answer has been yes.”

    Are some banks really so different than other banks? Are some wealthy individuals more important than the future budgeting ability of the US government?

  7. ZackAttack says:

    One thing I hope the Chrysler bankruptcy will do is plant the idea that bank bondholders can take a cramdown, too.

  8. jc says:

    I think the secured creditors have a legit beef. If Chrysler were offered for sale piecemeal somebody would snap up Jeep at a price Fiat couldn’t/wouldn’t meet.

    Did you see Fiat is exploring the purchase of GM Europe? Opel, Vauxhall and SAAB in addition to Fiat & Chrysler? Talk about a bag full of cats!

  9. jc says:

    In too deep to quit, with the first 700B, not counting guarantees and Fed subsidized funding, the US government was immediately in too deep to quit on day 1. Thats why these insolvent banks won’t be turned over to FDIC for rational liquidation. It will continue like this until Tiny Tim returns to Congress, after he runs out of accounting gimmicks and tail tucked behind his lags, and asks for another trillion due to unimaginable complications with the original plan. And they pummel him like a Punch & Judy show and tell him to fuckoff. Then BB will kick into overdrive, overstepping his bounds to help the TBTFs

  10. Blissex says:

    «Are banks really so different than automakers? So far, the answer has been yes.»

    Automakers are unionized, banks aren’t. That makes all the difference. Sure, by letting the automakers fail there is a short term cost to some security and business owners, but destroying the last mass unions in industry is a big long term win for financial and industrial businessmen.

    For the past 30 years the policy of government, business and finance has been to destroy or offshore as many jobs as possible in unionized industries, and to subsidize and favour non-union, mostly service, industries. It is a matter of power even more than money.

  11. ZackAttack says:

    Fiat kinda reminds me of a little kid, wearing a Halloween cape, up on the roof, ready to launch himself.

    I don’t see what makes Fiat think it can make a go of Chrysler when everyone else has failed miserably.

  12. Transor Z says:

    Obama used the term “lifeblood” to describe financial functions in the economy in last week’s NYT interview with David Leonhardt. So yes, clearly the Administration views the two industries differently philosophically.

    You might say that jobs are the lifeblood of an economy, but you’d have to qualify “jobs” as “competitive jobs in a competitive industry.”

    Don’t forget that Daimler-Benz unloaded Chrysler after an unhappy marriage (2000-07) and the mighty Cerberus era is now ending with a whimper. Fiat is going to do better? Gimme a break.

    I don’t know about other banks, but this seems sure to impact GMAC LLC.

  13. Bruce N Tennessee says:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=awCyiNlvcfUA&refer=worldwide

    GM Bankruptcy Probable as Obama Favors UAW Against Bondholders

    “This confirms the fear, which right along has been that the Obama administration is more sensitive or beholden to the unions than the bondholders,” he said. “It makes it clear that GM bondholders aren’t likely to be able to work out anything outside of bankruptcy.”

  14. HCF says:

    @ZackAttack:
    >I don’t see what makes Fiat think it can make a go of Chrysler when everyone else has failed miserably.

    This reminds of me of a great quote:
    ‘The Italians have a saying, Lemon, “Keep your friends close and your enemies closer.” And, although they’ve never won a war or mass-produced a decent car, in this area they are correct.’
    - Jack Donaghy (Alec Baldwin), “30 Rock”

    HCF

  15. The next 100 days is when we will get the true read on the O administration.
    He can either continue down the path Bush blazed or he can make his own roads.
    After the next 100 days Bush is history and this baby is square in the O mans lap.
    Gentlemen start your engines.

  16. DonRobbie says:

    I have a lot of doubts about Fiat’s shopping spree. Trying to grow too fast is a path to heartbreak. I doubt that they can make Chrysler work, much less do it while absorbing Opel and what ever else they can get “cheap”. Fiat is a better fit with Chrysler than Daimler (trying to share components and platforms between Chrysler and Mercedes didn’t work on a price and quality basis). Cerberus had more money than sense, a condition quickly cured by entering the auto sector (the former more than the latter). I really don’t see how they are going to keep Chrysler alive long enough to get the new Fiat derived product Federalized and tooled and rolling off the lines. Chrysler’s products are stale, the pipeline is dry and the talent pool depleted by the panicked headcount reductions in Cerberus’ last days. The business could be rebuilt but that would take a lot money and time than anyone is budgeting.

    I wouldn’t be surprised if in a couple of years we see Fiat/Chrysler/Opel broken up and sold off in very small pieces.

  17. [...] Picture: Barry Ritholtz writes that “the Chrysler bankruptcy . . . may be a enormously significant milestone in the evolution of the banking crisis and the [...]

  18. willid3 says:

    while i have no doubt that the FIAT deal is worthless until about 2012 or so at the earliest as their products can’t be sold here until then (if they can find the money to even do that work. its not going to be cheap to do) and have no idea what will keep the company a float until then. and since it sounded like the secured creditors (i.e. the those who have an interest in assets, which are loan not bonds) were willing to take a bath, it was the bond holders who essentially trashed any chance of the company staying out of bankruptcy. the only upside for the secured creditors is if they have CDO/CDS. and if they actually get paid for them too (and what are the odds of not getting paid?). the bond holders and equity folks are doomed to get whats left. will the company end up in 7? maybe. will it hurt every one else if they do? yup. will any body by the assets that are left? nope. nobody is interested in the plants (Toyota just put a BRAND new plant into moth balls before it produced any thing. so why would anybody need the plants? the equipment might be of interest to the Chinese, but its an out side chance of that happening before 2014. and whats the impact? well the parts companies will crash also tanking the domestics and transplants with them, plus maybe even take Japanese home market with it (since they all share the same parts companies). might even take the Chinese parts makers too. probably will collapse a big media company (car companies being the biggest buyer of adds).

  19. aitrader says:

    Chrysler is a dress rehearsal. A little chimp. An organ grinder’s monkey. The gorilla in the room is GM. Perhaps Obama and team are using it as a walkthrough to gear up and ready the US economy for the main event.

    And on that note, just how the f*** can Ford still claim they are “doin’ fine” with an utter collapse of their two nearest domestic competitors and an unheard of drop in auto sales across the board. Am I the only one that holds his nose whenever Ford CEO Mulally shows up and claims they’ve got plenty of cash? Something here smells here. Stinky like sewage and doctored accounting.

  20. call me ahab says:

    airtrader

    maybe foreseeing trouble ahead or a last ditch effort to remain viable- Ford mortgaged itself for 23 billion in 2006- turns out that it was not a bad plan

  21. [...] for Chrysler, FusionIQ CEO Barry Ritholtz wonders whether the automaker’s bankruptcy will mark another turning point in the economic collapse. [...]

  22. aitrader says:

    ahab – yep, well aware of it. If they had problems in 2006 why are they A-OK today? GM says they need 17 billion just to survive the summer. And Ford is doin’ fine after nearly 3 years with 23 billion? Still holding my nose and waiting for the truth to leak via a newly laid off Ford whistleblower.

  23. [...] How Will Chrysler Bankruptcy Affect Insolvent Banks? | The Big Picture The Chrysler bankruptcy is a fascinating development in the great financial crisis of 2008-09. It may be a enormously significant milestone in the evolution of the banking crisis and the response from the Obama administration. [...]

  24. aperian says:

    ‘things are bad but not getting worse’ is the most asinine comment going around right now….go shoot yourself in the heart. at some point you wont bleed any faster but you will still bleed to death…………

    ………..you’ve lost half your blood and now you can go run a marathon.

    people keep equating that the auto makers going bnk is a ‘form of stabilization’…what utter BS !!! without free unlimited credit who will buy cars from these companies?

    i am waiting for my obama capital one credit card offer in the mail…………….

  25. aperian says:

    @ Foghorn Longhorn

    right on! i am sick of the democrats stating ‘they inherited the problem’….i have never heard a president make a statement like that… what a f’ing loser! he is the president of the united states..he is responsible for everything from day one……….we are truly f’cked

  26. Chubby Davis says:

    Chrysler, fuck Chrysler…. Jump in Homeless Families up 29% in DC area….

  27. Brendan says:

    First of all, no retooling or retesting is necessary if Fiat intends to slap their badge on the front of Chrysler’s cars and call them their own. If Fiat cuts production to a third or so of 2007 levels and offers a good warranty, that may work, given the price they pay for Chrysler is low enough. Chrysler’s name is mud, so a Fiat badge probably couldn’t hurt much. They can then start offering true Fiats one by one as market conditions allow and as the Chrysler models are due for overhauls anyway.

    Secondly, I have to agree that this may be a test case for D.C. more than anything else. If this goes tragically, then the pols can say oops, at least it wasn’t B of A we did this with. If it goes well, then they can try GM; and if that goes well, then the banks. I have to assume that these are bankruptcies in name only.

    At the end of the day, I have to believe that the Obama administration has their reasons. I suspect that it’s more politically expedient to take a big political hit once every 3 moths injecting hundreds of billions into the banks, then owning every little problem and mistake the banks make and suffering a death by a million cuts. On top of that, if a dollar panic is created by BKing the banks, the political price of that would be huge. Once the banks get more stable, then we might see something more philosophically palatable. I think to suggest bankrupting the giant banks is an ideological approach rather than a practical one. I would think that splitting up the big banks is the ultimate goal, and the FDIC is not the right vehicle by which to do that, and now is not the right time. It seems odd to me that Barry himself, along with so many posters on here are willing to accept that the ideological approach is right for the banks but wrong for virtually everything else. I know that everyone hates the banks right now, myself included, and ideologically I’d like to see them go down, realistically, that’s not the best thing for the country or the dollar. The populist thing to do would be to kick out the higher ups and split the big banks up today, but that’s not feasible. So the next best thing to do is wait until the time is right and do it then. I could be wrong, but I think this is the approach being taken. Of course, the wind can change direction quite quickly.

  28. willid3 says:

    European standards are very different than US standards so there will be a need to spend money on adapting them . and that will require money and time. will there be a need for retooling? maybe. they won’t want to make the investment in Italy for cars they can’t sell there. but its possible i suppose. but not likely.

    aperian Says:
    May 4th, 2009 at 11:47 am

    @ Foghorn Longhorn

    right on! i am sick of the democrats stating ‘they inherited the problem’….i have never heard a president make a statement like that… what a f’ing loser! he is the president of the united states..he is responsible for everything from day one……….we are truly f’cked

    i seem to recall that W said he didn’t know to watch out for Terrorists and that was 9 months. in office

  29. Mannwich says:

    Good point, willid3! Bush and many in the GOP implicitly blamed 9/11 (and whatever else they could) on Clinton.

  30. DL says:

    Obama loves and adores the bondholders of the big banks; at the same time, he absolutely despises the bondholders of the auto companies.

    Not very consistent.

  31. DL says:

    aperian @ 11:43

    “…without free unlimited credit who will buy cars from these companies?”

    Don’t be so sure that won’t happen.

  32. Mannwich says:

    @DL: Weren’t some of the autos already offering no down payment, no payment for 12 months, and can return it offers within that 12-month period if you lose your job?

  33. DeDude says:

    If the political wing of the administration has anything to say, they will take down at least one or two of the big banks. Unless they do that there will be hell to pay at the midterm elections. After they have declared most of the big ones solid, there is no reason to think that taking down a few of them would have severe systemic consequences.

  34. DL says:

    Mannwich @ 12:54

    I suppose so. But my point to aperian (@11:43) is just that if GM and Chrysler have trouble selling cars, Obama (i.e., the taxpayers) may step in and provide low-rate financing.
    Anything for the UAW.

  35. DL says:

    DeDude @ 12:56

    I’ll take the other side of that trade. Obama won’t “take down” Citi or BAC or any of the other big ones.

  36. Mannwich says:

    DL: Agreed. The geo-political implications of taking down either are too large at this point. For better or for worse (I still think worse), O has tied his wagon to these bank bailouts. He’s not going to take them down now.

  37. jpo says:

    Barry, according to you the post-panic policy should be to stroke the panic again. Remember, the panic was the disastrous result of what you think should be done next: let the banks fail (like Lehman). Do you really wan’t to go back to October and stare into the abyss again?
    Note: I don’t mind pre-privatization, but another Lehman is not what we should ask for. Besides, the G20 promised in November that no big bank would be allowed to fail. This is an international commitment that the US is bound to honor.

  38. aperian says:

    @Mannwich
    @DL

    thats what an obama credit card will be………………also you really think that bush blaming 911 is the same as the wimpy bs that comes out of the obama whitehouse…jesus ……..obama needs to take charge and be a leader instead of a whiny spoiled child

    also the fiat can not be sold in the usa in its current form. doesnt meet dot, epa, blackbox, etc. also can not be sold in canada because of the bumpers and running ights are wrong which cant be fixed (running lights) easily.

    they wont sell any anyway….we have toyota yaris and nissan versa and they dont sell and they are larger than the 500. we also wouldnt get the abarth which would be cool but would never be legal in the usa. wouldnt even come close to competeing with the mini…americans didnt buy fiats in 1972 and they wont today!

  39. [...] From Barry Ritholtz: Will the Chrysler bankruptcy mark a milestone in the evolution of the banking crisis and the Obama administration’s response. [...]

  40. [...] How Will Chrysler Bankruptcy Affect Insolvent Banks? | The Big Picture The Chrysler bankruptcy is a fascinating development in the great financial crisis of 2008-09. It may be a enormously significant milestone in the evolution of the banking crisis and the response from the Obama administration. [...]

  41. DeDude says:

    Citi or BAC may be too big, but there are 17 others on the list (12 with less than a trillion in assets). Now that they have had time to look, they are likely going to know a lot more about the specific geopolitical implications of letting each of them fail. There are a lot of good reasons to pick one or two out for failing, and I see no strong arguments for why all 19 must be kept alive. But maybe they will not dare, and instead just let government take big stakes in the weakest of them (do a half swede). Yet, they have to deal with the fact that there is a lot of blood thirst out there, and that letting Chrysler fall raises some political dynamite about why they are so soft on the financials.

  42. jc says:

    Renault invested in AMC and tried the same things as Fiat, retooling the old AMC plants for new fuel efficient vehicles

    …While initial sales were promising, these (quality) concerns hurt sales. AMC’s declining profit picture, combined with Renault’s concerns with declining sales, hurt the Alliance’s chances in the American market.

    The Alliance afforded AMC the opportunity to field a new compact car without the expense of its design and tooling… The damaged reputation of the Alliance would also affect attempts to launch other Renault cars, including the brief appearance of the Renault Medallion, and Eagle Premier

    If you think Fiat will get it right just remember those famous words “this time it will be different”

  43. [...] From Barry Ritholtz: Will the Chrysler bankruptcy mark a milestone in the evolution of the banking crisis and the Obama administration’s response. [...]