All Things in Moderation

Morning Report 10/25/12

13 Responses

1. 

   jnc4p, on October 25, 2012 at 8:41 am said:

   EJ Dionne’s most recent piece merits a mention here due to his tedious repetition of a false talking point about Romney & the auto bailout that has taken hold of the left due to it’s convenience as a sound bite :

   “The biggest sign that tea party thinking is dead is Romney’s straight-out deception about his past position on the rescue of the auto industry.

   The bailout was the least popular policy Obama pursued — and, I’d argue, one of the most successful. It was Exhibit A for tea partyers who accused our moderately progressive president of being a socialist. In late 2008, one prominent Republican claimed that if the bailout the Detroit-based automakers sought went through, “you can kiss the American automotive industry good-bye.” The car companies, he said, would “seal their fate with a bailout check.” This would be the same Mitt Romney who tried to pretend on Monday that he never said what he said or thought what he thought. If the bailout is now good politics, and it is, then free-market fundamentalism has collapsed in a heap.”

   http://www.washingtonpost.com/opinions/ej-dionne-the-tea-partys-drubbing-in-2012/2012/10/24/185416ea-1e0e-11e2-9cd5-b55c38388962_story.html

   His description of Romney’s position is the “straight-out deception” here. Romney was referring to the original request by the automakers for a blank check bailout in 2008 with no strings attached.

   http://money.cnn.com/2008/11/19/news/companies/auto_hearing/

   http://money.cnn.com/2008/11/17/news/companies/gm_showdown/index.htm

   The Bush administration did end up providing a bridging loan through TARP in December 2008 of $17 billion, but with no requirements for restructuring via bankruptcy or otherwise, it failed to fix the problems, just as Romney predicted it would.

   Romney’s actual position was for a bankruptcy restructuring backstopped by financial assistance by the federal government, which is ultimately what the Obama administration ended up doing after exhausting all other alternatives. The primary difference between what Obama actually did and a theoretical Romney administration is the treatment of the secured creditors vis-a-vis the unions.

   The details are provided by none other than Steve Rattner, Obama’s “Car Czar”.

   http://money.cnn.com/2009/10/21/autos/auto_bailout_rattner.fortune/

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   • 

     ashot, on October 25, 2012 at 9:13 am said:

     jnc- I’m glad you posted this comment because the Detroit News endorsed Romney today. However, in their endorsement, the Detroit News acknowledges that Obama got the auto bailout right and Romney got it wrong, at least partly wrong. They disagree with your claim that Obama did what Romney said. They seem to think Romney’s suggestions would not have worked:

     We have said in past editorials that while Romney rightly advocated for structured bankruptcies in his infamous “Let Detroit Go Bankrupt” New York Times op-ed, he was wrong in suggesting the automakers could have found operating capital in the private markets. In that article, Romney suggested government-backed loans to keep the companies afloat post bankruptcy. But what GM and Chrysler needed were bridge loans to get them through the process, and the private credit markets were unwilling to provide them. Obama put a rescue team to work and they were true to the task.

     I had mostly accepted your position that Obama had done what Romney proposed. I’m interested in your response to the position of the Detroit News’ editorial board.

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2. 

   Mike, on October 25, 2012 at 9:08 am said:

   AAPL reporting after the close today — will they miss? Looks like the market thinks so.

   But they got some good news today:

   The International Trade Commission has ruled that Samsung has infringed on four Apple patents dealing with multitouch, audio and display technologies.

   If administrative law judge Thomas Pender’s Wednesday ruling is upheld, the U.S. may ban those products from import. The judge’s decision is subject to review by the full ITC commission.

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3. 

   Mike, on October 25, 2012 at 10:21 am said:

   jnc:
   Thanks for the Rattner link. That was long but interesting.

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4. 

   jnc4p, on October 25, 2012 at 10:50 am said:

   A few points:

   1. The bridge loans that allowed the automakers to survive until bankruptcy were provided by the George W. Bush administration through TARP for a total of $17.4 billion to get them through March, 2009. There was a huge fight at the time about whether or not this was a legitimate use of the TARP funds, given that they weren’t being used to purchase “Troubled Assets” or even assist the financial system, but the broad discretion in the law ultimately allowed it’s use as a giant roving bailout slush fund. As Steve Rattner noted, GM by itself managed to burn through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 with their existing cost structure and management team. Just giving them more bridge loans wasn’t going to be the answer.

   2. Romney’s proposal for government backing of private loans is similar to what enabled JP Morgan Chase to purchase Bear Sterns. The argument that “the private credit markets were unwilling to provide them” presumes no government backstop. If the Federal government was willing to assume all losses over a certain point as was done with Wall Street merger deals, I’m confident that private money would have become available, probably with Warren Buffett or someone similar doing the deal.

   Now, there’s a very good reason to argue that President Obama’s direct investment was a superior solution in that a federal backstop for a private lender is a classic example of “Private Profits, Socialized Losses”, but that’s not the same thing as saying that Romney would let the automakers be liquidated. In fact, this was a key distinction between Romney and McCain in 2008 with McCain taking the harder line.

   Steve Rattner’s piece should be reread along with the contemporary accounts that I linked to from 2008. The key point from the time period was this:

   “Even before we met the two management teams, it was clear to us from the “viability plans” that the companies had submitted on Feb. 17 that GM and Chrysler were in a state of denial.

   Both companies needed gigantic reductions in their costs and liabilities. They had way too many plants and workers for expected car volumes. And their labor costs were out of line with those of their most direct competitors, the Japanese “transplants” manufacturing in the South. The administration was united: No more money except in the context of a shared sacrifice and a truly viable restructuring.”

   http://money.cnn.com/2009/10/21/autos/auto_bailout_rattner.fortune/

   That’s what Romney was arguing for and what Obama ultimately did, after exhausting all non-bankruptcy alternatives (remember “People won’t by a car from a company in bankruptcy”). The key differences in their approaches would have been the “Private Profits, Socialized Losses” vs direct government ownership that I mentioned before and the distribution of losses between creditors and the unions. The Obama administration favored the unions, and a Romney administration most likely would have favored the creditors, and also been more in line with existing bankruptcy precedents.

   However, this point by Rattner is key with regards to the judgement calls that the administration made in the bankruptcy restructuring:

   “Every stakeholder did better under our plan than they would have in the alternative: a liquidation, in which the lenders would have gotten far less than the $2 billion they wound up with.

   We reminded the critics that we pursued our bankruptcies under existing law through the traditional court process (all the way to the Supreme Court in the case of Chrysler). Finally, we noted the golden rule of Wall Street: He who has the gold makes the rules.”

   As I said, it boiled down to a judgement call and at the end of the day the creditors got their day in court (despite the administration’s initial attempt at a “voluntary” restructuring) before a federal bankruptcy judge.

   See this also:

   “Among Mr. Romney’s grievances — and to be fair, those of other opponents of the auto rescue — is that the auto task force trampled on bankruptcy precedents and even the law to effect President Obama’s plan of “shared sacrifice” by all stakeholders.

   What he conveniently ignores is that the president’s plan was litigated throughout the federal court system — all the way to the Supreme Court, in the case of Chrysler — without so much as a nod to the opponents from a single judge.

   In retrospect, I recognize the emotions surrounding the decision to give members of the United Auto Workers company stock in exchange for resolving their health care claims. But the courts were emphatic that what we did was legal, because we remained true to a core principle of bankruptcy reorganization: every stakeholder received more from our plan than if the companies had been left to go bankrupt on their own.”

   http://www.nytimes.com/2012/02/24/opinion/delusions-about-the-detroit-bailout.html?_r=2&ref=opinion

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   • 

     ashot, on October 25, 2012 at 11:10 am said:

     jnc- Thanks. That was easy to follow and made sense. Very much appreciated.

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5. 

   jnc4p, on October 25, 2012 at 11:03 am said:

   This is worth noting in the Detroit News editorial:

   “Romney understands the industry, and will shield it from regulators who never tire of churning out new layers of mandates. It is important to remember that the automobile industry is never truly “saved;” there are always new challenges. Romney will be an advocate for Detroit, and if he can make the overall economy stronger, Michigan and the automakers will benefit greatly.”

   http://www.detroitnews.com/article/20121025/OPINION01/210250332/1008/opinion01/Editorial-Mitt-Romney-President

   The line about “the automobile industry is never truly “saved”” is key. How many times should they be bailed out and at what frequency and cost?

   The best argument in favor of the bailouts from a free market perspective was made by Bob Lutz on Real Time with Bill Maher.

   http://www.hbo.com/real-time-with-bill-maher/episodes/0/239-episode/synopsis/quotes.html#/real-time-with-bill-maher/episodes/0/239-episode/index.html

   Specifically he made the point that a big reason why the American automobile manufacturers were noncompetitive to begin with was that the various government mandates forced them to build cars that they weren’t very good at building (namely small, fuel efficient cars) and that people didn’t want to buy at the expense of cars that they were good at building, namely trucks and SUV’s. If they didn’t have any mandates, then they would have been profitable.

   Now obviously this argument is self serving and may not be entirely accurate, but it does bring to light certain fundamental issues that are constantly in tension:

   1. The desire to have a thriving auto sector with manufacturing in America. If this desire was paramount, there would be virtually no regulations on the types of cars that the American car manufacturers could build and they could optimize for maximum profitability and market share.

   2. The desire to have fuel efficient cars to “reduce dependency on foreign oil” and to combat climate change. If this desire was paramount, then the focus would be on getting the most fuel efficient cars possible, even if they were made by foreign manufacturers and if the American car makers weren’t able to fulfill this need then they would go out of business.

   3. The desire not to have the government subsidize and bail out private, for profit industries with tax payer money. At the moment, this is what gives when the tension between #1 & #2 results in the periodic financial collapse of the American auto industry.

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6. 

   Brent Nyitray, on October 25, 2012 at 12:02 pm said:

   Rattner just makes the blanket statement that private capital was not available. Did anyone even try and arrange DIP financing?

   My sense is that capital was available, maybe not at the price the government was willing to offer capital at, but DIP loans are very low-risk lines of credit. If LBOs were still being funded then (and they were) you could get a DIP.

   But obama was more interested in pushing GM to stop producing big gas guzzling trucks that “nobody wants” and to get them to focus on smaller, greener vehicles. Since SUV’s were where GM made its money, it wasn’t going to do that on its own. I also think he had ideological differences with bankruptcy precedent and didn’t like the way unions had been treated, so he chose to intervene with the priority of creditors.

   Regardless of whether GM could or couldn’t arrange for DIP financing, he had no justification for meddling in the process.

   Lest we think the story is over, don’t forget one thing: The credit markets will remember. These companies will not be able to issue senior secured debt at competitive levels since there is always the risk of your security being revoked for political convenience. This guarantees a higher cost of capital for GM than its competitors and that will be a drag on its performance going forward.

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7. 

   Kevin S. Willis, on October 25, 2012 at 1:00 pm said:

   Mike:

   The International Trade Commission has ruled that Samsung has infringed on four Apple patents dealing with multitouch, audio and display technologies.
   If administrative law judge Thomas Pender’s Wednesday ruling is upheld, the U.S. may ban those products from import. The judge’s decision is subject to review by the full ITC commission.

   So . . . property rights being upheld, or just a stealth government-sanctioned quasi-monopoly? Such bans will do some serious damage to competitive technologies.

   Apple should be glad they are finding favor with Big Brother. 😉

   That being said, I’m stoked for the iPad Mini, especially when they drop the price (which they will, probably at their next product announcement—by spring, I bet) to $249 for the starting machine. They are creaming the market for Christmas; can’t say I blame them. They know early adopters will pay full price for the privilege.

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8. 

   jnc4p, on October 25, 2012 at 1:32 pm said:

   “Brent Nyitray, on October 25, 2012 at 12:02 pm said:

   …

   I also think he had ideological differences with bankruptcy precedent and didn’t like the way unions had been treated, so he chose to intervene with the priority of creditors.”

   The other argument is that cooperation from the unions was more important to the viability of the companies going forward than some of the other creditors, therefore it made sense to try and work something out with them.

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9. 

   jnc4p, on October 25, 2012 at 1:35 pm said:

   “Brent Nyitray, on October 25, 2012 at 12:02 pm said:

   Rattner just makes the blanket statement that private capital was not available. Did anyone even try and arrange DIP financing? “

   I think that specifying the time frames and individual companies in question is critical to answering this. You need to distinguish between fall and winter of 2008 when Bush did the bridge loan and June of 2009 when the actual bankruptcy filing occurred, and also between Chrysler and GM.

   My own impression is that a federal backstop of some sort would have been required in 2008, especially for Chrysler.

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10. 

    jnc4p, on October 25, 2012 at 2:27 pm said:

    The latest Rolling Stone interview with President Obama is up:

    http://www.rollingstone.com/politics/news/obama-and-the-road-ahead-the-rolling-stone-interview-20121025

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11. 

    Brent Nyitray, on October 25, 2012 at 2:42 pm said:

    Apple misses. Q1 guidance is terrible.

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