That’s the Trouble with Troubled Assets
November 13th, 2008 . by economistmomShould we really be surprised at the latest word on TARP–the acknowledgment by Treasury Secretary Paulson that scooping up these “troubled assets” hasn’t been going so well?:
Treasury Secretary Henry Paulson said Wednesday that the government would broaden the reach of its $700 billion bailout plan to support non-bank financial institutions that provide consumer credit, such as credit cards and auto loans.
In this second stage of the bailout, officials also hope to attract private capital, possibly through matching investments, to give the government’s injections more heft.
Paulson also said the government is no longer planning to buy troubled mortgage assets, the original goal of the plan…
When the Treasury Department first announced the rescue plan in late September, it said it could help homeowners because the government could more easily modify mortgages if it owned the troubled securities.
Those “assets” have often been labeled, oxymoronically, not just troubled, but ”toxic assets” after all. Too bad the federal government had already made the decision that it was worth a $700 billion increase in the federal debt to “rescue” those troubled assets, and too bad that although they’ve now changed their mind, they’ve already burned through (essentially wasted) a lot of that $700 billion. Combined with this week’s news about relaxing the terms of the AIG bailout, we’re left with the sinking feeling that we can’t trust Secretary Paulson’s “reassurances” about the $700 billion (in what’s still officially the “TARP”) being the end of it:
Paulson said he does not have a timeline for when the Treasury Department would need congressional approval for access to the remaining $350 billion in the rescue package. At this time, he doesn’t think stabilizing the system will require more than $700 billion.
And of course, that’s even before we think about taking on the “troubled assets” in Detroit… I am worried about Detroit’s auto industry, but not exactly for the same reasons that the auto executives (and perhaps many of the politicians) are. I say it’s time to stop thinking about rescuing the (bad) assets and start focusing on rescuing the (good) people.
(See the nice Freudian slip that the Washington Post’s Dana Milbank caught Paulson making–at the bottom of this column.)
The case for Auto management:
Many have a preconceived notion that Auto execs are incompetent or “out of touch,” Just today David Brooks wrote an article in the New York Times entitled “Bailout to Nowhere”
http://www.nytimes.com/2008/11/14/opinion/14brooks.html
in which he argues that if we will not let domestic auto makers go bankrupt now, then we never will. Of course the embedded assumption is that we should, because the companies are poorly managed, but many who write such things fail to display any understanding of Detroit management policies over the past 20 or so years, let alone the circumstances in which those policies were made. All fail to acknowledge that Detroit had embarked on recent restructurings that need time and cash flow to bear fruit, and that show great promise. Here then is the case for Detroit’s Big “2 & 1/2″ as I see it:
-1- The Automakers legacy healthcare costs are changing for the better even if the nation does nothing about its own health care expense problems:
I’m sympathetic to the legacy healthcare arguments automakers have been making for a while now, and especially for about the past 4 years – GM has taken steps on its own to cap and separate from retiree health costs steps that ironically will bear fruit on Jan 1 2009, and that hit the cash jar for about 60 Billion in 2008. In addition, it picked up the pension and health obligations for a parts supplier (Delphi) that it spun off initially in large part to rid it’s self of these obligations, so as to make its self look more like foreign manufactures who subcontract out this stuff (and get better user controls out of the bargain.) I think that was about a 10 billion dollar additional hit for 2008. This year’s embedded onetime restructuring costs thus cost the automaker 14 months of cash at a burn rate of $2B/mo. – that is before layoffs, plant closings, and jobs banks costs that are also winding down though the organization right now. Starting Jan 1, 2009, and moving though ‘09-‘10 these more or less flush out of the system, and GM starts to look a lot like Toyota, Nissan, and BMW here in the states (these firms provide health care for workers and dependents here in the US). All of this is in addition to the union contract changes in 2010 that embed significant labor cost reductions from that point forward.
-2- Detroit is much less likely to lose the long game on energy than you might think:
Some of their alt energy investments in fuel cells, plug-in electric, and hybrids are slated to bear fruit beginning in ’10. GM holds a joint patent with Exxon on extracting hydrogen from gasoline for fuel cells that place it well in any service station transition from petroleum to hydrogen. So even if you buy a 2016 model year Ford or Mercedes with a Ballard fuel cell system, GM stands to profit over the medium run when that car needs to get through a section of road without direct hydrogen fuel support (such sections promise to exists for decades even if fuel cells become prevalent). Prospects are not profits, but they speak to management’s awareness of future dynamics—I dare say prospects are not bad.
-3-Rational actors respond to price signals:
I can entertain the thought that the companies have traveled a path wherein they held a comparative advantage in trucks and larger engines, supported over time by the demands of the military, construction and agriculture. US policy additionally delivered cheap energy prices to consumers (foreign policy coupled with low federal gasoline taxes) and thus reinforced the prices that the company took into account when it set its product development strategies over the 1985-2005 period. Wall Street punished divergence from the status quo as recently as 2002-03 when Bill Ford lost his fight to improve fuel economy in Ford trucks.
And by -3- I think that Wall Street has sent Main Street out to fight with one arm behind it’s back from some time now, even as the government pinned the other arm with distorted price and demand signals. Now with credit market ceased in the midst of GMs restructuring is it any wonder the Big 2 and ½ are reduced to begging, screaming, and kicking? The way I see it they are 100 percent invested in a large wrenching change, all their chips are in.
Broadly, I think that efficient markets are a ‘some-of-the-places, some-of-the-time’ thing, and that it is very hard to know when those times are even whilst in the midst of them. “Live by the market die by the market.” While a good story line, is not always the relevant one…
It is alway easiler to destroy than to preserve or recreate… Are you sure you know enough about Detroit to sit in judgement Mr. and Mrs. John Q Taxpayer?