Bailouts drive Chapter 11 out of fashion

When Robert Reich published Supercapitalism: The Transformation of Business, Democracy, and Everyday Life in 2007, the U.S. economy was growing, the financial sector was intact, and the housing bubble had just begun to leak. Although that now seems like decades ago, the former Secretary of Labor’s core argument still has a decidedly clear ring of truth; indeed, perhaps now more than ever. Reich is currently professor of public policy at the University of California at Berkeley’s Goldman School of Public Policy.

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Now I read a fantastic interview S+B's Ed Baker had with Reich... Excerpts -

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"Why should Wall Street executives, shareholders, and creditors come out any better from this taxpayer-supported bailout than they would under a typical Chapter 11 reorganization, where they would get relief from a portion of their debts and bad loans, but not all of them, and they would have to restructure compensation, management, and governance procedures? Despite the bailout — and the relatively easy course that Wall Street has enjoyed — Main Street is still suffering: People are losing their homes at a faster rate than they did before. Small businesses can’t get loans, creditworthy car buyers and others are seeing credit lines shrivel and disappear. So from the standpoint of average Americans, the bailout has had no positive effect whatsoever.

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Frankly, I don’t quite understand why Lehman didn’t go into Chapter 11. Now, maybe it was too small, or it wasn’t prepared to go into Chapter 11. But in general I don’t see why Wall Street firms are in any greater danger of Chapter 7 liquidation when they can’t pay their bills than any company in the real economy. Even Citigroup: Presumably it is worth more alive than dead. Its creditors would much rather that it stay afloat to pay off its loans than disappear completely. And it has a lot of assets — not necessarily physical assets, but a very strong customer base and a lot of talent. No one would support that it would cease to exist if it chose Chapter 11.

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S+B: So you see the contours of the bailout as little more than a successful marketing effort?

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REICH: It’s a giant public relations campaign. But I’m not sure that anyone consciously regards it as such. The Treasury Department traditionally has been Wall Street’s embassy in Washington. Treasury secretaries traditionally are closely allied with Wall Street. I’m sure Hank Paulson views Citibank or Morgan Stanley or his old hunting ground, Goldman Sachs, as profoundly different from a manufacturing company or another major services company. The funny thing is, I think that Paulson would be aghast to think of what he did as industrial policy. But of course that’s exactly what he did.

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[On reviving Big Three from Detroit] - Today, the management of the Big Three seems to believe that if they can only get through the recession, they’ll be fine. They view their challenge as primarily cyclical. They may be right technically, but they’re wrong over the long haul. Their challenge is structural. They’ve been losing market share for years, they’ve been producing cars that the public doesn’t want. Few young car buyers would ever think to buy an American car anymore. The Big Three have to come up with an entirely different vision of their industry and of their operations, and I hope that that is part of any bailout.

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S+B: Why has it taken Detroit so long to get this message, when it’s so obvious to so many people?

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REICH: The culture at the Big Three is very insular, for one thing. The invasion of Japanese carmakers into the U.S. to make vehicles shook up Detroit, and in response, the Big Three have made substantial improvements in quality. But management and labor are still living in a different age. They haven’t been shaken up nearly enough. Labor understands the situation probably better than management. The new UAW contract recognizes the need for substantial changes. Young workers will be coming into the Big Three with wage and benefit packages not all that different from what American workers are getting from the Japanese automakers. But there’s still a long way to go on the management side.

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Superb insights. Hope Obama and Tim Geithner read this before they push more bills to the Congress :-)

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Mess up bigtime and you are safe everywhere

The famed American justice system is often compared by other nationals, notably Indian NRIs settled in the US to condemn the slowness of proceedings and the abysmally low rate of convictions back home. The surging nationalistic pride is swallowed by the natives (that despite recognizing the bother of having to control a population of a billion plus people by any Government) read them and even feel it is something that deserved to be condemned, while pining for some early turnaround in the Indian way of meting out justice.

But then they get to read about the travails of Mr.Bernard Madoff that made-off with his $50 billion ponzi scheme. Mr. Madoff was charged last month with securities fraud but has remained free since posting bail. Excerpts from NYT report.

"The judge’s ruling allows Mr. Madoff to remain in his Manhattan apartment, wearing an electronic monitoring device and being watched around the clock by a security team paid for by his wife.

Prosecutors had asked the court to revoke Mr. Madoff’s $10 million bail, secured by various family homes held in his wife’s name, after he violated a court-ordered asset freeze by mailing about $1 million in expensive watches and jewelry to family and friends on Christmas Eve.

In addition to the jewelry that was sent out, prosecutors said, Mr. Madoff had plans to transfer $200 million to $300 million of investors’ money to family members and friends. When authorities searched Mr. Madoff’s office desk, they found $173 million in signed checks ready to be sent."

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I am sure it would make NRIs feel a lot lighter.

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Is Team Obama ok...?

Team Obama – does it exude confidence?

Not unless they convince they’ve learnt from their mistakes, calls out NYT editorial

“Both men, [Timothy Geithner, Mr. Obama’s choice for Treasury secretary, and Lawrence Summers, his choice for director of the National Economic Council] however, have played central roles in policies that helped provoke today’s financial crisis. Mr. Geithner, currently the president of the Federal Reserve Bank in New York, also has helped shape the Bush administration’s erratic and often inscrutable responses to the current financial meltdown, up to and including this past weekend’s multibillion-dollar bailout of Citigroup.”

Obama had better be right. If he gets it wrong, it’s ruin!

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