Well Reasoned Article about Regulation and Free Markets

[BigPapaVol]

Not entirely true. Most of the Tier 1 companies(where the cars are actually built) aren't unionized. The fallout from allowing GM to go bankrupt would have been disasterous for many small communities across the US

To some degree true too, as my last post acknowledged. Still, it was about union political pull in this administration.
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[rjd970]

Size isn't the issue to me, but it is somewhat about how many lives the company's demise would torpedo.
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Right. Again, its a different set of rules. Let's not pretend its capitalism anymore than it is capitalism that GM is still around.

 

[droski]

The fallout from allowing GM to go bankrupt would have been disasterous for many small communities across the US

garbage. the fallout from united airlines going bankrupt wasn't disasterous. a reorganization doesn't mean you cease to exist. lenders would have been chomping at the bit to lend to a broken union GM.

Because like GM, they are still around. I know, I know...don't torpedo the economy. But the hypocrisy is still there.

gm would undoubably still be around if they want bankrupt. AIG and citi would just have been bought by jp morgan or wells fargo. i'm failing to see the difference.

 

[paul1454]

I still see it as different rules. Are you not saying the markets weren't smart enough to decide the fate of huge financial firms, but it was smart enough to decide the fate of companies like GM? Why not let the market work in both cases?

I would say that part of the reason is that the government had facilitated these risky practices in big business. Ever since the government started its informal "too big to fail" policy with Penn Central and Lockheed in the early 70s, these large companies were able to take increased amounts of risk because they knew the government would not let them fail.

 

[rjd970]

garbage. the fallout from united airlines going bankrupt wasn't disasterous. a reorganization doesn't mean you cease to exist. lenders would have been chomping at the bit to lend to a broken union GM.



gm would undoubably still be around if they want bankrupt. AIG and citi would just have been bought by jp morgan or wells fargo. i'm failing to see the difference.

How is united airlines the same as GM with its multi-tiered suppliers? Last time I checked airlines provide a service, Boeing and Airbus actually make the airplanes.

And I am failing to see how it is not hypocritical to talk about capitalism when big financial institutions don't have to follow those rules, or GM, or anybody...for justification you say.

 

[BigPapaVol]

Right. Again, its a different set of rules. Let's not pretend its capitalism anymore than it is capitalism that GM is still around.

I'm calling it judgment. Pure capitalism works no more than pure socialism, as the financial system is complex, fluid and complicated.
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[droski]

How is united airlines the same as GM with its multi-tiered suppliers? Last time I checked airlines provide a service, Boeing and Airbus actually make the airplanes.

And I am failing to see how it is not hypocritical to talk about capitalism when big financial institutions don't have to follow those rules, or GM, or anybody...for justification you say.

united did not cease to exist. just as gm woudl not have. therefore their supliers would have been fine.

 

[BigPapaVol]

united did not cease to exist. just as gm woudl not have. therefore their supliers would have been fine.

And this is why it's a union argument. The gov't saved the unions, and then some.
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[rjd970]

I would say that part of the reason is that the government had facilitated these risky practices in big business. Ever since the government started its informal "too big to fail" policy with Penn Central and Lockheed in the early 70s, these large companies were able to take increased amounts of risk because they knew the government would not let them fail.

I feel my point is being missed. State whatever reasoning you like, the simple fact remains "too big to fail" isn't the capitalism everybody on here seems to think solves everything.

And the problem I see with the bolded is the ability to take that increased risk breeds hypocrisy...it allows them to argue that when it pays off the governemnt over taxes them, when it doesn't, the government owes them a bailout.

 

[rjd970]

united did not cease to exist. just as gm woudl not have. therefore their supliers would have been fine.

But the argument is allowing gm to fail would have been far reaching to its 1st, 2nd, and 3rd tier suppliers across the country. Don't get me wrong, I don't agree with the gm bailout, but it is a different animal than airlines.

EDIT:

But I don't agree with that argument, at its core it was about union pandering. It doesn't change the fact that it had absolutely nothing to do with capitalism.

 

[droski]

But the argument is allowing gm to fail would have been far reaching to its 1st, 2nd, and 3rd tier suppliers across the country. Don't get me wrong, I don't agree with the gm bailout, but it is a different animal than airlines.

EDIT:

But I don't agree with that argument, at its core it was about union pandering. It doesn't change the fact that it had absolutely nothing to do with capitalism.

the argument given by the dems and the unions is that this was far reaching because GM would cease to exist as a company (i.e. no one would be there to buy the products from the supliers), which is ridiculous. is this less painful for the supliers, certainly, but i don't see a systematic risk here.

and let's not forget that not only did obama bail out gm, but he violated US bankruptcy law by screwing the bondholders and making the unions whole. no way would a republican bailout allow no union concessions combined with union ownership of gm and the lenders getting screwed. hell i don't even think clinton woudl have gone that far.

 

[paul1454]

I feel my point is being missed. State whatever reasoning you like, the simple fact remains "too big to fail" isn't the capitalism everybody on here seems to think solves everything.

And the problem I see with the bolded is the ability to take that increased risk breeds hypocrisy...it allows them to argue that when it pays off the governemnt over taxes them, when it doesn't, the government owes them a bailout.

I'm with you 100%. I'm not saying that too big to fail is the way markets should work. Certainly, the failure of Penn Railroad would have had a significant impact on the economy, but we likely could have weathered the storm without too much trouble. My only point is that past policies have created a system that increases the impact on our economy of the failure of large companies by increasing both the prevalence of extremely large businesses as well as increased risk-taking by their managers. The effect on risk-taking is fairly straight-forward. But, in addition to encouraging risk-taking in management, these companies are typically seen as less risky, which studies have shown they end up having access to more credit at lower cost. Thus, they are able to grow to levels they likely wouldn't without the government's too big to fail policy. Essentially, what this informal policy has created as very risky companies that have better access to the capital need to get even bigger. With bigger companies comes more impact on the economy when they fail. With increased risk comes increases in the prevalence of failure. At this point, some of these companies are so large our market might not be able to handle their collapse (a good example is AIG).

The best thing that could be done to reverse this trend is simply to let these companies go into bankruptcy.

 

[rjd970]

the argument given by the dems and the unions is that this was far reaching because GM would cease to exist as a company (i.e. no one would be there to buy the products from the supliers), which is ridiculous. is this less painful for the supliers, certainly, but i don't see a systematic risk here.

and let's not forget that not only did obama bail out gm, but he violated US bankruptcy law by screwing the bondholders and making the unions whole. no way would a republican bailout allow no union concessions combined with union ownership of gm and the lenders getting screwed.

I agree completely with this.

And I agree with the different nature of GM vs. AIG bailout. One makes more sense than the other.

But that doesn't change my point that neither is the capitalism that many on here espouse. Pretending otherwise is futile.

Let me ask this, do you think big financial firms are over taxed when they are making $ billions?

Do you think they deserve a bailout when they lose $ billions?

 

[droski]

I'm with you 100%. I'm not saying that too big to fail is the way markets should work. Certainly, the failure of Penn Railroad would have had a significant impact on the economy, but we likely could have weathered the storm without too much trouble. My only point is that past policies have created a system that increases the impact on our economy of the failure of large companies by increasing both the prevalence of extremely large businesses as well as increased risk-taking by their managers. The effect on risk-taking is fairly straight-forward. But, in addition to encouraging risk-taking in management, these companies are typically seen as less risky, which studies have shown they end up having access to more credit at lower cost. Thus, they are able to grow to levels they likely wouldn't without the government's too big to fail policy. Essentially, what this informal policy has created as very risky companies that have better access to the capital need to get even bigger. With bigger companies comes more impact on the economy when they fail. With increased risk comes increases in the prevalence of failure. At this point, some of these companies are so large our market might not be able to handle their collapse (a good example is AIG).

The best thing that could be done to reverse this trend is simply to let these companies go into bankruptcy.

i see an argument here that we should break up the banks, but i'm not sure i see an argument that letting them go into bankruptcy would stop them from getting too large.

 

[droski]

Let me ask this, do you think big financial firms are over taxed when they are making $ billions?

Do you think they deserve a bailout when they lose $ billions?

there is no doubt in my mind that the banks have paid far more in taxes than they got from the tarp (even if you ignore the fact the banks have paid it back with interest).

 

[rjd970]

there is no doubt in my mind that the banks have paid far more in taxes than they got from the tarp (even if you ignore the fact the banks have paid it back with interest).

Would you say the same for GM?

 

[droski]

probably not. they weren't that profitable of late.

 

[rjd970]

probably not. they weren't that profitable of late.

I don't know what timeframe you are assuming. Over it's entire life, GM...just like the banks...have been a net contributor.

 

[paul1454]

i see an argument here that we should break up the banks, but i'm not sure i see an argument that letting them go into bankruptcy would stop them from getting too large.

Suppose I lend you money to do something incredibly risky that will make money for a while and then will either be OK or collapse. As a lender, this is really stupid because I don’t share in the upside. I have a fixed upside–the interest I earn, and I risk being wiped out. So I normally wouldn’t do that. But if the guy in the corner, Uncle Sam, indirectly indicates to me that he’ll cover my losses by an informal too big to fail policy, then I lend you the money, knowing that I can’t lose. If the investment collapses and you go bankrupt, you shrug and count the money you’ve been paying yourself in salary. I shrug because the government pays me the money you owed me. The taxpayer is left holding the bag. I was effectively using their money when I made the loan.

It is the creditors who get bailed out. That’s what matters. Bear Stearns and AIG didn’t get bailed out. Their creditors did. The only creditors that didn’t get bailed out were Lehman. (As far as I can tell, their creditors were mostly Asian banks, not enough political pull here ). So, essentially our past "too big to fail" doctrine allows big institutions to just get bigger - not the direction we want to be going.

Bankrutpcy is a different animal. Creditors are left holding the bag. By letting these companies run their normal course upon failure, the "easy money" problem can be minimized. However, reversing this course by beginning to let these institutions fail may not be possible anymore. I just don't know.

 

[droski]

I don't know what timeframe you are assuming. Over it's entire life, GM...just like the banks...have been a net contributor.

if you adjust it for inflation yes. otherwise, probably not.

 

[rjd970]

Suppose I lend you money to do something incredibly risky that will make money for a while and then will either be OK or collapse. As a lender, this is really stupid because I don’t share in the upside. I have a fixed upside–the interest I earn, and I risk being wiped out. So I normally wouldn’t do that. But if the guy in the corner, Uncle Sam, indirectly indicates to me that he’ll cover my losses by an informal too big to fail policy, then I lend you the money, knowing that I can’t lose. If the investment collapses and you go bankrupt, you shrug and count the money you’ve been paying yourself in salary. I shrug because the government pays me the money you owed me. The taxpayer is left holding the bag. It was the taxpayer. I was effectively using their money when I made the loan.

It is the creditors who get bailed out. That’s what matters. Bear Stearns and AIG didn’t get bailed out. Their creditors did. The only creditors that didn’t get bailed out were Lehman. (As far as I can tell, their creditors were mostly Asian banks, not enough political pull here ). So, essentially our past "too big to fail" doctrine allows big institutions to just get bigger - not the direction we want to be going.

Bankrutpcy is a different animal. Creditors are left holding the bag. By letting these companies run their normal course upon failure, the "easy money" problem can be minimized. However, reversing this course by beginning to let these institutions fail may not be possible anymore. I just don't know.

You're far more knowledgeable than me in these matters, but this post makes intuitive sense to me.

 

[droski]

Suppose I lend you money to do something incredibly risky that will make money for a while and then will either be OK or collapse. As a lender, this is really stupid because I don’t share in the upside. I have a fixed upside–the interest I earn, and I risk being wiped out. So I normally wouldn’t do that. But if the guy in the corner, Uncle Sam, indirectly indicates to me that he’ll cover my losses by an informal too big to fail policy, then I lend you the money, knowing that I can’t lose. If the investment collapses and you go bankrupt, you shrug and count the money you’ve been paying yourself in salary. I shrug because the government pays me the money you owed me. The taxpayer is left holding the bag. It was the taxpayer. I was effectively using their money when I made the loan.

It is the creditors who get bailed out. That’s what matters. Bear Stearns and AIG didn’t get bailed out. Their creditors did. The only creditors that didn’t get bailed out were Lehman. (As far as I can tell, their creditors were mostly Asian banks, not enough political pull here ). So, essentially our past "too big to fail" doctrine allows big institutions to just get bigger - not the direction we want to be going.

Bankrutpcy is a different animal. Creditors are left holding the bag. By letting these companies run their normal course upon failure, the "easy money" problem can be minimized. However, reversing this course by beginning to let these institutions fail may not be possible anymore. I just don't know.

but the creditors own the company in a reorganization (unless obama screws you). but i agree with you that too big to fail makes their cost of borrowing lower, but i'm not sure that low lending rates is what led to the risks the banks took.

 

[paul1454]

but the creditors own the company in a reorganization (unless obama screws you). but i agree with you that too big to fail makes their cost of borrowing lower, but i'm not sure that low lending rates is what led to the risks the banks took.

No one owns an interest in the busuiness upon filing. Only if you are a secured creditor are you entitled to anything (the value of your security interest). Unsecured creditor get pennies on the dollar, if anything. But even secured creditors get screwed. As soon as bankruptcy is filed, they are no longer entitled to interest on their loans (unless oversecured - but how many lenders are oversecured?). In addition, no prepetition creditors are entitled to any payment until a plan is confirmed (which takes an average of over 600 days between petition and confirmation). That is a long time to be waiting for the payment of only a small fraction of your claim. In addition, only about 17% of bankruptcies ever even get a plan confirmed. Most simply are liquidated under 363 or converted to Chapter 7 for liquidation (most really get screwed in liquidation).

 

[droski]

it depends on the assets. even unsecured creditors have been made whole in situations where the assets were substantial (calpine is a recent example). you are correct that no one owns the company before it gets out of a reorganization, but the creditors unquestionably have the primary claim.

either way. as i said before, i'm not sure how this encourages risk taking.

 

[BigPapaVol]

No one owns an interest in the busuiness upon filing. Only if you are a secured creditor are you entitled to anything (the value of your security interest). Unsecured creditor get pennies on the dollar, if anything. But even secured creditors get screwed. As soon as bankruptcy is filed, they are no longer entitled to interest on their loans (unless oversecured - but how many lenders are oversecured?). In addition, no prepetition creditors are entitled to any payment until a plan is confirmed (which takes an average of over 600 days between petition and confirmation). That is a long time to be waiting for the payment of only a small fraction of your claim. In addition, only about 17% of bankruptcies ever even get a plan confirmed. Most simply are liquidated under 363 or converted to Chapter 7 for liquidation (most really get screwed in liquidation).

so? How does that tend to work out for equity holders and unionized employees? Best I recall, they don't end up with much and the employees certainly don't benefit at the expense of bondholders or equity owners.