The Unfettered Market at Work
I was thinking to myself this morning, “gee Matt, you don’t any any houses and yet the current downturn’s made it a buyer’s market, why not pick up 7-12 homes?” The trouble, of course, is that I don’t have the necessary $13 million on hand. But still, normally one buys property with a loan, and since I think there are good values out there right now it would be worth borrowing the money. Unfortunately, despite a FICO score of around 800, I bet nobody wants to loan me $13 million. And if they did, they’d demand a huge interest rate. And even worse, they’d expect me to pay the loan back! If only I had some political allies, I could get a break on my interest rates and the whole “repaying the money” aspect of the situation, irrespective of my creditworthiness:
The plan is for the government to lend some $25 billion to the automakers in the first year at an interest rate of 4.5 percent, or about one-third what the companies are currently paying to borrow, the report said.
Under the proposal, the government would have the option of deferring any payment at all for up to five years, the article said.
Meanwhile, between the time Atrios blogged that story and I got around to making my joke, he noted that the request is now up to $50 billion. People sometimes don’t quite get orders of magnitude, so let’s note that $50 billion is the same as $50,000 million — the government could lop $13 million off for me to buy seven (or twelve) homes and still be left with $49,987 million for this boondoggle. Basically it’s just rounding error.
On a somewhat less jokey note, observe that at the moment the entire market capitalization of General Motors is just $5.91 billion. If it’s genuinely the case that access to a low-interest line of credit would turn GM around (I have no idea if this is true), the government could easily afford to buy the company, use the government’s ability to borrow at low rates to effect the turnaround, and then re-privatize it for a profit. Not saying that’s a good idea, but it seems like a better idea than giving loan guarantees to firms that are objectively bad credit risks. On the other hand, Michigan’s a swing state so who knows what the possibilities may be.
40 Responses to “The Unfettered Market at Work”
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August 22nd, 2008 at 5:32 pm
Well, why not borrow $11 million instead of $13 million and just purchase some smaller homes?
In any case, I like the new topic system for your posts, Matthew. This post filed under “Cars”. Last post filed under “Coffee”. Awesome! I also like the story filed under “West” (see the Topic cloud on the sidebar) – it’s the post about how links add value to posts, which uses as an example a sentence that mentions the west. Good thinking on how that was filed.
Still waiting for the feature showing the last 10 comments, though. You really need to get that back.
August 22nd, 2008 at 5:38 pm
What’s good for GM is good for the country, as they say – or at least the politicians that run the country. Wonder what GM’s political contributions in the next election would look like.
Wonder what their contributions this year look like to get this deal…
And people like Matt want to believe that the corporations don’t run this country.
August 22nd, 2008 at 5:40 pm
In fact, this is the joke about the title of this post, “Unfettered Market”.
There IS NO ‘unfettered market” in this country, Matt. The corporations bribe the state and the state makes sure the corporations don’t get into trouble as necessary using taxpayer money. And you think a society with no state control of the corporations would be WORSE?
Corporations ARE creatures of the state. They don’t exist in an anarchist society and they have no power in an anarchist society that isn’t freely given them.
August 22nd, 2008 at 5:40 pm
“And even worse, they’d expect me to pay the loan back!”
Silly you. If you were a conservative Republican, you could get a non-recourse loan. Only the “little people” are expected to repay loans. Too bad you’re one of them. But you could sell out to Murdoch, and you wouldn’t be one of those “little people”.
August 22nd, 2008 at 5:49 pm
Don’t you want to wait for the Obama position paper before posting on this?
August 22nd, 2008 at 6:04 pm
If it’s genuinely the case that access to a low-interest line of credit would turn GM around (I have no idea if this is true), the government could easily afford to buy the company, use the government’s ability to borrow at low rates to effect the turnaround, and then re-privatize it for a profit. Not saying that’s a good idea, but it seems like a better idea than giving loan guarantees to firms that are objectively bad credit risks.
But what happens if it doesn’t turn around? If it’s owned by the government, it’s never going to declare bankruptcy, the government will just be forced to endlessly subsidize its losses (the alternative being to shut down production and layoff all the workers).
This plan allows the government to help the company survive, in order to save all those jobs, but ultimately bounding their risk and leaving the turnaround job in private hands.
August 22nd, 2008 at 6:08 pm
‘This plan allows the government to help the company survive, in order to save all those jobs, but ultimately bounding their risk and leaving the turnaround job in private hands.
‘
Socialize the costs, privatize the profits.
What jobs are they saving, the ones in Mexico or Canada?
August 22nd, 2008 at 6:18 pm
This from the guy backing the Rezko easy-loan candidate. Not to mention Johnson, late of Fannie Mae.
August 22nd, 2008 at 6:48 pm
What jobs are they saving, the ones in Mexico or Canada?
Seriously?
GM has 110,000 employees in the US (scroll to page 15). It also has 500,000 U.S. retirees drawing benefits.
August 22nd, 2008 at 7:21 pm
The big three have been sucking ass for years now, and putting all their eggs in the SUV and big truck basket is such a stupid business move that they should go under for it. This is just throwing good money after bad.
We are so turning into 1990s Japan. Zombie banks and now zombie automakers.
August 22nd, 2008 at 8:49 pm
No, no, a thousand times no! Let bad businesses go under. The auto makers have extracted so many concessions in recent years the workers might be better off working for Tata Motors or Kia. Sad to say.
August 22nd, 2008 at 8:53 pm
People sometimes don’t quite get orders of magnitude
For another context, this is enough to give a student loan (on around the same terms) for one year of tuition to every freshmen starting school this month -> and for almost 4 years of tuition at a state school
($50B / $30K per student = 1.7 million students -> google sez this is about the number of college freshmen every year)
August 22nd, 2008 at 9:34 pm
Lessee: GM’s market cap is $5.91B, and Ford’s is $10.11B.
Chrysler is now owned by a private capital firm, Cerberus Capital Management, so I guess they don’t have a defined market cap. If they don’t want to sell stock in Chrysler on the market to raise money for it, then I can’t see any reason why Uncle Sam should loan them money. They’re playing a different game.
So we’re down to Ford and GM, worth $16B, who are asking for $50B in loans. I’d say the Federal government should just buy them up for $16B, rather than loaning them $50B. The Feds would of course be on the hook for the pension and health care liabilities of Ford and GM, which would make it less of a short-term net loss for the Federal government to go to universal health care, after which it could sell Ford and GM free of their health care obligations, and probably turn a nice profit.
Sounds like win-win-win to me.
August 22nd, 2008 at 10:11 pm
I don’t have the necessary $13 million on hand
I call bullshit, trust-fund scumbag.
August 23rd, 2008 at 4:56 am
This post reminded me the US govt has been here before, thirty years ago with Chrysler. The Treasury Dept. found a good way to deal with the ownership issue — see 1985 New Yorker abstract below (http://www.newyorker.com/archive/1985/01/07/1985_01_07_044_TNY_CARDS_000342367)
AbstractAnnals of Finance
THE KICKER
by John Brooks
January 7, 1985 Text Size:
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John Brooks, Annals of Finance, “THE KICKER,” The New Yorker, January 7, 1985, p. 44
Keywords
Chrysler Corp.; Finance; U.S. Government; Altman, Roger C.; Lynch, Luke, Jr.; Mundheim, Robert H.; Carswell, Robert ANNALS OF FINANCE about the government guaranteeing loans to the Chrysler Corporation to save them from bankruptcy. On Sept. 15, 1979, Lee Iacocca, the executive who had joined Chrysler the previous year, asked for guarantees of a billion two hundred million. On Nov. 1st, the Administation proposed that the government, by an act of Congress, guarantee loans of up to a billion and a half. Since late summer of 1979 a group at the Treasury Department had been mulling over the question of guarantees and begun to prepare a draft of legislation to submit to Congress. Support for government bailouts comes from those who are reluctant to see productive institutions and the jobs they provide vanish from the economic scene. Mentions some past bailouts. In addition to the usual compensation the Treasury men were considering a less orthodox form of compensation for the government. This was known as the “equity kicker.” The classic form of this is the stock warrant, which is an option to buy a certain quantity of the corporation’s stock at a stated price within a stated time. The pre-set price is always higher than the current market price. If the market price rises warrant holders can profit handsomely. Iacocca was less than enchanted by the government getting a free ride in this form. But as his company was in desperate straits he could not quibble. The equity kicker was eventually included in the loan guarantees. In 1982 Chrysler turned the corner and became profitable. In Feb., 1983, the Treasury announced they were paying off the loans more than seven years ahead of the 1990 deadline. Tells how they got back their warrants by having Salomon Bros. bid for them at auction.
August 23rd, 2008 at 11:34 am
You should talk to that congressman from new york that has like 5 rent-controlled apartments. I bet he could get you a deal somewhere.
August 23rd, 2008 at 12:45 pm
I hope someone is keeping a running tally of the amount of taxpayer money the Administration is spending to buy the election. Bet it’s a lot.
August 23rd, 2008 at 10:45 pm
This plan allows the government to help the company survive, in order to save all those jobs, but ultimately bounding their risk and leaving the turnaround job in private hands.
You’ve got to be kidding. What’s another 5-6 Billion after 50 Billion?
So who benefits? The shareholders. The CEO, who, I’m sure, has lots of stock options if not shares of GM. If the thing takes off, they make a fortune and the government gets its 50
B back and a few measly percent for the risk taken. The shareholders’ risk is only 10% of that.
The existing bondholders. Let’s face it, GM bonds are junk which is why they have to pay high interest rates. The value of the existing bonds, which no doubt is currently below par, should rise in value, for a nice little profit (or at least getting more of your money back).
I also wonder about ’saving’ all those jobs. GM has been shedding workers for years, which is one source of its problems.
It’s just the usual privatize profits/ socialize losses dance. Eek, government can’t own companies, that’s socialism! (They can just bail them out with taxpayer money).
August 24th, 2008 at 3:25 am
Run it into bankruptcy court, wipe out the shareholders (any shareholder who isn’t diversified in the rest of the market is a fool) and let the judge and US trustee sort it out.
Neither health care nor pensions should be corporate responsibilities anyway. Uncle Sam should nationalize employee/retireee halth care, 401(k) and defined benefit pensions and just fold it all into the federal employee system.
It’d protect worker benefits, make corporations more cost-efficient (even if Uncle Sam raised corporate taxes to pay for it) and save taxpayers from funding over-ended shareholder bailouts. It’d also kick the shit out of Wall Street, so it will never happen.
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