Budgetary Costs
CBO report makes the point that the budgetary cost of spending $X from the TARP fund on its original finance-related targets is less than the budgetary cost of spending $X on car companies, but the magnitude is unclear:
Consistent with the budgetary treatment of financial assets purchased under the TARP, the federal budget would record the cost of such loans using procedures similar to those specified in the Federal Credit Reform Act, with an adjustment to account for market risk. On that basis, CBO estimates that the expected cost of the proposed loans would be roughly 70 percent of the aggregate face value—or about $17.5 billion. That estimate takes into account the current financial condition of firms that would qualify for loans—as demonstrated, for example, by current market interest rates on outstanding
debt—and reflects historical data on defaults and subsequent amounts recovered. Under the legislation, the loans would have a maturity of 10 years
or longer, as determined by the Secretary of the Treasury, and would carry an interest rate of 5 percent for the first five years after disbursement and
9 percent for remaining years.In view of the recent deterioration in the financial condition of the automobile industry, CBO expects that the net budget cost of loans to auto manufacturers
and suppliers would probably be higher than the cost of alternative uses of the TARP funds, which would likely involve firms whose credit risks are lower
than those of the automobile industry. As a result, CBO anticipates that requiring the Secretary to devote $25 billion of TARP authority to the
proposed loans for the automobile industry would likely result in a net increase in the federal deficit compared to current law. Because of continuing uncertainty surrounding the implementation of the TARP under current law, however, CBO cannot provide a specific estimate at this time of this legislation’s incremental impact on the federal budget.
Something to think about. The credit crunch is tending to obscure the issue of the extent to which the Detroit firms would or would not be creditworthy even absent a crunch. The CBO is saying here that their less creditworthy than the financial sector.
41 Responses to “Budgetary Costs”
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November 19th, 2008 at 2:16 pm
‘They’re’.
November 19th, 2008 at 3:01 pm
D.C. whores spend $billions bailing corrupt pigs like Wall Street banksters, AIG, Fannie, Freddie, etc. but won’t bail out automakers. Sure, automakers screwed up, but their screw ups didn’t phuck over the whole economy. Wall Street and the other pigs are the ones who should be left to rot.
November 19th, 2008 at 3:04 pm
Shorter Matt “Herbert” Yglesias:
Michigan’s unemployment is at 9% and headed high? “Screw-em. Let it hit 15%, then wages will fall enough to make them competitive.”
The Big 3 have $500 billion in debt and bonds? “Let ‘em default. I don’t know anyone to whom GM owes money.”
2 million people lose their jobs? “Who cares, I got mine.”
“Liquidate labor, liquidate capital, purge the rottenness out of our economy!”
November 19th, 2008 at 3:06 pm
DTM is right, Matt is misinterpreting the CBO’s statement to support his per-chosen position. Though to be fair, it’s hard to square Matt’s own positions in any case. He claims the big three are healthy enough to survive chapter eleven in the current credit and economic environment, but then says they aren’t credit worthy enough to bail out.
I assume Matt believes, like most analysts that Chapter 11 is highly likely to lead to liquidation, but lacks the intellectual honesty to say so.
Why oh why can’t we have better blogger?
November 19th, 2008 at 3:13 pm
The big 3 should fire all the UAW workers and replace them with illegal immigrants. Then Matt would beat the drums for an automaker bailout
November 19th, 2008 at 3:15 pm
And the financial firms have higher credit ratings because (1) they have already gotten bailouts (2) they government has committed to given them almost unlimited funds.
GM would be a great credit risk if it had access to the discount window.
Oh and the firms providing credit ratings have received gigantic amounts of money in consulting contracts from the financial companies.
November 19th, 2008 at 3:21 pm
Citigroup down to $6 a share today, Matt.
November 19th, 2008 at 3:28 pm
GM likely to survive, bonds a “buy”-JPMorgan
Mon. November 17, 2008; P
“In spite of this bad news, JPMorgan analysts rate GM’s bonds a “buy.”
“We believe GM has several sources of liquidity it can access to bridge the company to 2010 when it realizes considerable cost cuts,” analysts Eric Selle and Atiba Edwards said in a report. ”
“GM’s benchmark 8.375 percent bond due 2033 has dropped to 25.75 cents on the dollar, from 36.5 cents at the end of October, according to MarketAxess. The bonds had traded at more than 80 cents on the dollar at the beginning of the year and currently yield 32.5 percent. ”
“”We view the upside (driven by stabilization of U.S. sales volumes and liquidity enhancement measures) on the bonds as much higher and more likely than the downside of a potential bankruptcy,” JPMorgan said.
“GM’s recent product successes (award-winning styling, performance and quality) and its considerable international profitability give us confidence they can become profitable in North America selling cars,” they added.
The analysts added that they have factored in economic weakness for the next 2-1/2 years. ”
“The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree healthcare expense, and a substantial downsizing of capacity and headcount,” analyst Kip Penniman said in a report.
“Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in an even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees,” he added.
November 19th, 2008 at 3:43 pm
DTM- When this first came up one could easily believe that Matt didn’t realize how unlikely a carmaker would be to survive bankruptcy in the current environment. But, he’s obviously read enough to from respected sources by now to realize that’s not the case, his own outfit in on the record for a government support restructure.
In this post he even takes to arguing, obliquely, that they’re too weak to bailout. But he’s never revisited his original Chapter 11 position, that just smells of intellectual dishonesty. If his anti-car biases and fear of “Zombie Socialist” corporations is so great to risk the liquidation of two million US jobs in the middle of a tremendous recession he should just say so. At least Shelby is willing to.
November 19th, 2008 at 3:43 pm
DTM, Bob, et.al.: GM, Ford were at the low end of below-investment-grade “junk bond” credit ratings for several years already prior to 2008. Tarp recipients nearly all have high investment grade ratings.
November 19th, 2008 at 4:00 pm
Pennaguy- The latter probably says more about the Ratings Agencies than anything.
November 19th, 2008 at 4:04 pm
AJ:
“Tarp recipients nearly all have high investment grade ratings.”
Well that may be literally true, but CDS on some of the bigger TARPers indicate 40% chance of bankruptcy.
November 19th, 2008 at 4:18 pm
I should have added FWIW to that comment.
But I would add that the systemic financial system risk of a debt default by the auto guys (if it happens) should be less than for a big bank given that they have been widely viewed as high risk for a long time.
November 19th, 2008 at 4:25 pm
The scatterbrained nature of Yglesias’ hatred for the automaker’s comes full circle.
First they can survive chapter 11 and now they are too broke to fix – suggesting they are a clear chapter 7 case.
I’m not sure the author is being intentionally dishonest, as much as I think he is willfully blinded by his ideological pretensions.
But, this post takes the cake. It’s would even be funny if the policy world and its attendant institutions were not full of such disingenous types throughout.
November 19th, 2008 at 4:32 pm
pennaguy:
Why is a complete financial meltdown worse than a complete manufacturing meltdown?
Or to be more precise, why is it more than 20 times worse given the difference between the $50B the big 3 wants and the $1 trillion than has been handled to financial entities?
November 19th, 2008 at 4:42 pm
Hi Bob. I take it the idea is that if the financial cos. melt down there is no credit for anyone, spreading the damage. To oversimplify: we’ve had tons of manufacturing jobs and whole manufacturing industries disappear from the US over the decades. Locally tragic, but this never took the whole economy down.
November 19th, 2008 at 4:50 pm
Pennaguy,
Might I add, quickly, that we never lost entire industries amid the current economic “fundamentals.”
It seems that adding 3 million job losses to this economy, compounded by the lost tax base, is really a bit much for our economy and state and local budgets to handle.
It would force significantly more after collapse spending than the suggested 25B.
November 19th, 2008 at 4:57 pm
jeff – no argument here – we’re in new territory.
November 19th, 2008 at 5:13 pm
Can anyone point out where Matthew Yglesias said he hates the auto companies, autoworkers, or UAW?
November 19th, 2008 at 5:24 pm
Ramb:
No, he just wants the companies to go bankrupt, the employees to lose their jobs, default on their mortgages, etc, and the UAW to have no members.
That’s not hate, just tough love.
It is also VERY IMPORTANT for our economy that elderly UAW retirees lose their health benefits. They never deserved them anyway. Overpaid blue collar slobs no doubt.
November 19th, 2008 at 6:34 pm
I’d love to have that credit risk spelled out, in particular how the CBO is viewing the housing market. Because I’d bet that the figures they are using are extremely optimistic. But what the hell – I do know that if the big three are allowed to go through the cracks, the housing market, already shit, will shift into another dimension of shit. And if the CBO thinks that the financial sector, on its fed crutches, is going to take that and more, than the CBO is as nutty as, well, the Fed was in June, or May, or April, assuring us that the credit crisis was past.
It is sorta weird, what has happened to MY. First, he goes on a junket to Switzerland for some anti-regulatory talk, and plays the irony get out of jail free card by making snarky remarks about promoting rolodexes – oh, if only David Broder had known about the irony card, he could have gotten out of having to pay back the fees to the Real Estate association he talked to. In the meantime, he doesn’t bother to mention that if there is one country that is going through a financial sector crisis, it is Switzerland, home of the incredibly shrinking UBS bank. Then, he begins to create wildly nutty propaganda about the unworthiness of the auto companies. They need tough love – unlike, apparently, the financial services sector. Then, he goes to a dinner and hears, as though for the first time, the brilliant argument of Megan McCardle that regulation can’t be air tight – an idea so stunning that it he has to blog it right away, like a child who has just learned that there is no Santa Claus.
Was his copy of reason magazine laced with some acid that he absorbed through his fingertips? I’m expecting him to blog about the wisdom to be found in Ayn Rand any day now.
November 20th, 2008 at 1:18 am
Another day, another post whining about saving auto companies.
November 20th, 2008 at 8:54 am
#25: Ah, another person looking forward to us being reduced to a third-world economy.
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