Jim Kwak at Baseline Scenario tries his hand at
being a war corespondent from Wall Street, where the news that
Chrysler's deal has collapsed and bankruptcy is imminent is just one small part of a much larger battle.
I’ve been writing a lot about the game of chicken recently, most often in connection with the GM and Chrysler bailouts. On the Chrysler front, the game is in its last hours. Even after a consortium of large banks agreed to the proposed debt-for-equity swap, some smaller hedge funds are holding out for more money, and even the extra $250 million that Treasury agreed to kick in seems unlikely to keep Chrysler out of bankruptcy. The problem is that bankruptcy is the only weapon Chrysler and Treasury have in this fight, and it’s a strategic nuclear weapon. Bankruptcy is the only threat that can get the bondholders to agree to a swap; but because a bankruptcy carries some risk of destroying Chrysler (because control will lie in the hands of a bankruptcy judge - not Chrysler, Treasury, the UAW, or Fiat), and taking hundreds of thousands of jobs with it, everyone knows that Treasury would prefer not to use it. The bondholders are betting that they can use Treasury’s fear of a bankruptcy to extract better terms at the last minute. (And it’s even possible that the large banks agreed to the swap knowing they could count on the smaller, less politically exposed hedge funds to veto it.) But Treasury may still press the button, because it needs to make a statement in advance of the bigger GM confrontation scheduled for a month from now.
The Obama administration is in fact now saying this morning that
Chrysler will be nuked from orbit. The plan is to join it with Fiat without liquidating it, but still the expectation is that thousands and thousands of Chrysler jobs will have to be shed.
The question is why are we blasting Chrysler's jobs to hell, but refusing to hold insolvent banks to the same kind of deal? In fact, the banks are refusing to accept anything less than the trillions in free money they are getting now and have no intention of doing anything else.
Why are the banks turning their banks on this government largesse? I think there are two reasons.
First, taking capital under the CAP or selling assets into the PPIP involves some hardship, despite the taxpayer subsidies involved. Raising capital dilutes existing shareholders, and selling assets (at prices where someone will buy them) will require writedowns from their current, unrealistic book values. Treasury really wants the banks to participate, because it will increase confidence in the banks, and that’s why Treasury is offering to share the pain, via underpriced capital and low-risk loans.
But even though Treasury is so generously offering to share the pain, what’s the incentive for the banks to suffer any pain at all? We know the government won’t use the strategic nuclear weapon and let them go bankrupt or pull their banking licenses (which amount to the same thing). And Tim Geithner’s request for a battlefield nuclear weapon - resolution authority for systemically important financial institutions, including bank holding companies - seems to be going nowhere in Congress. This is not surprising, since the banks have already demonstrated that they can count on most or all Republicans and at least a few Democrats in the Senate. With the administration’s hands tied and the banks’ political power intact, the banks are in the same position they always were: if things go well, they will make money; if things go badly, the government will always bail them out later, on terms they are willing to accept.
On the one hand, the banks are complaining about unprecedented government interference and pressure, and to some extent that is happening. But on the other hand, the banks are ultimately calling the shots, because they know Tim Geithner can’t use his only real weapon.
Second, the incentives of managers and shareholders are not aligned. A major factor in the banks’ reluctance to participate in their own rescue seems to be fear of government interference, which is code for executive compensation restrictions.
Executives worry that whatever assurances the White House gives them, an angry Congress might impose new rules on banks that participate, particularly on pay. . . . “We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that,” [Jamie Dimon] said earlier this month in a conference about earnings.
Now, while I think some of the compensation caps discussed in Congress (but not passed by the Senate, as far as I know) were silly, I haven’t heard a lot of shareholders complaining about them; it’s the managers who don’t want them. So the situation is very simple. Participating in PPIP, for example, might be a net positive for shareholders, because even though it forces short-term writedowns, it also reduces the risk of larger writedowns in the future. But if managers think that it will lead to compensation limits, then it is a net negative for managers. I think our readers can fill in the rest of this thought.
In other words, the banksters continue to run the bank bailouts to the tune of trillions of dollars. And Obama and Geithner are going along, because failure to do so means the collpase of the global economy. It's extortion, and the one thing that could end the cycle -- Plan N -- has been killed in Congress by the bank lobbyists.
So we'll continue to be shaken down for big bucks until the free money we print to pay off the extortion breaks the back of the creditor nations that fund our economy. That will eventually happen, but not before the banksters walk off with our economy to another "less restrictive" country.
The banksters have won the war...and the American people have all but lost.
[UPDATE] Glenn Greenwald has more on the bankster lobbyists controlling Congress.
[UPDATE 2] D-day has Obama on Chrysler:
While many stakeholders made sacrifices and worked constructively, I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees, its families and communities. I stand with Chrysler's management, its dealers and suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don't stand with those who held out when everybody else is making sacrifices.
Really. Well then. You should have a little talk with guys like Dick Durbin and Evan Bayh there, because they
do most certainly stand with the banksters.