Am I in the Twilight Zone?!

A few days ago I wrote a nice little fairy tale that most certainly did not have a fairy tale ending. It portrayed the current attitude in Washington toward corporate bailout, etc. It used the analogy of the money being candy, and that if you give in once, then everybody will come knocking.

Enter American Express. Yep, now they're knocking at the door. Though their requested amount is a "paltry" 3.5 bn dollars, they actually had to change their business definition just so they could qualify for bailout money. Yep, after an emergency ruling, the Fed now considers AMEX a "bank holding company" which entitles them to bailout dough. Which brings me to my first point, I now wish to be a bank holding company.

However, that's not the main thing I wanted to vent about. I wanted to vent about the very high probability that we will bailout the auto industry as well. Actually, that's not precisely accurate. We will only bailout the 3 automakers which happen to be in Detroit. And happen to be employed by union workers. And happen to be losing money by the truckloads. And happen to make crappy cars. That's right - Toyota, Nissan, Honda, etc. are doing just dandy other parts of the country and there's nary a union worker in sight.

So the "Big 3" want bailout money (or more in the case of GM and Ford, who have already received 25 bn that they burned through in a couple months), and it seems at this point e they will likely receive it. But should they? Should we bail out every failing industry? How about the film industry? It's been hurting for a while; perhaps they're entitled to some help as well? After all, there are hundreds of thousands of jobs at stake in that industry as well. I'm not heartless. I do understand that many jobs will likely be lost if any or all of the Big 3 would go bankrupt. But let's play devil's advocate: if they DO get the bailout money, will they still be able to keep all those jobs? The answer may surprise you: probably not.

Rewind nearly 30 years ago to another government bailout of Chrysler. There is a common myth that this government bailout gave the company a leg to stand on and they bounced back from near death to become successful yet again. However, let's look at the facts. Despite the money being intended to keep the company from going bankrupt and laying off workers, they STILL laid off nearly HALF of its employees. Estimates at the time figured that these losses were comparable to what would have happened had the company actually gone into Chapter 11. So the bailout essentially failed at its main intent. How about bankruptcy? It's true that it never went into Chapter 11, but it essentially went through all the motions, completely screwing creditors in the process. In some cases it was able to pay off hundreds of millions of dollars of loans at 30 cents on the dollar. Sweet deal for the shareholders which would have lost everything had they gone bankrupt. Here's a great article that details the ordeal from a 1983 perspective (isn't the Internet great?).

http://www.heritage.org/research/regulation/bg276.cfm

The two quotes I especially liked that are very pertinent today are:

Confronting the Chrysler myths with Chrysler facts reveals Chrysler's true financial condition and the real impact of those federal guarantees. It shows that if the bailout is indeed the model for an American industrial policy the consequences could be disastrous.

and

When Chrysler was on the verge of bankruptcy in 1979, the marketplace was signaling that the slackening automobile market would only support three U.S. car manufacturers. By granting the Chrysler loan guarantees, Congress ignored that signal. If Chrysler survives, it will probably mean that the shrinking automobile market will be shared by four ailing domestic automakers, rather than the two or three relatively healthy car manufacturers that would have emerged had Chrysler been allowed to go into formal bankruptcy.

Get your damn heads in the game, Washington. If a company is doomed to fail, then let it fail. Don't try to prop it up with my tax dollar when it should fall. You know, there's a nice legal entity for dealing with a failing company that handles creditors, shareholders, and typically, management as well. It's called Chapter 11. Let these companies go bankrupt. The creditors will lose some, the shareholders will lose a lot, the management will be recycled, and the company can refocus and start over. The taxpayers? It won't cost us a dime.

Farmers burn their fields to replenish the nutrients in the soil so they can reuse it. Steel is tempered with intense heat to make it stronger. If these auto companies rise from their own ashes they will be better for it. If they don't, then why would we have wanted to prop them up to begin with?