Monday, May 4, 2009

Banks, Automakers and Newspapers - Why this bailout is getting out of hand

It's no secret that this current economic crisis started with the failure of sub-prime mortgages and the popping of the real estate bubble. When looking at how to fix the problem, the Troubled Asset Relief Program (TARP) was pushed forward to make sure that something was done to fix the problem as soon as possible.

The target was originally banks and their toxic loans (now reframed as "legacy assets"). While I (like everyone else) am dismayed at the bailout of banks and AIG, the government allowing Bear Stearns and Lehman Brothers to collapse sent a message sent a message that it wouldn't come to the rescue. Eventually, all the banks started having problems and the entire industry was in upheaval. However, despite these problems, it was essentially agreed that people still "needed banks" to operate in the economy. In this case, I think a bailout of the remaining banks became essential as the entire system was in danger.

How does this compare to auto makers and newspapers?

Can manufacturers across the board are suffering (like any other industry in this economy). Specifically, GM and Chrysler are suffering to the point where they are on the point of bankruptcy. When they first went to look for a bailout, everyone was shocked. Car companies had no claim on TARP assets. However, someone brilliant at GM asked for TARP money for the finance arm (GMAC companies like a real estate financier) and was able to pick up funds. This opened the flood gates for other failing car companies to lobby for bailouts as well. However, I propose that this is an entirely different class of bailout that the financial bailout.

While bailing out the people who got us into this mess leaves a bitter taste in the voting populations mouths, I think that bailing out a failing auto company is even worse. The reason I make this case is because there are other car companies that (although suffering) will lose production capacity but still operate profitably. The one good thing about bankruptcy is it does what it's supposed to, thin out weak companies in an industry of over production.

I believe that the only reasonable point which can be made in defense of this bailout is the assumption that companies like GM and Chrysler will actually recover disproportionately after the economy recovers (that is to say, people want their cars, but just can't afford them right now), but I don't think this is the case either. GM and Chrysler's problems have been long coming and only now in crisis mode are they looking to make changes (looking at change management this is far too little too late). All government bailouts are doing is delaying the inevitable. As I mentioned previously, if I were a GM or Chrysler employee, I would get ready to move out as this is just a band aid measure to slow the decay.

The one interesting point to come out of this? UAW owns 55% of Chrysler, making it the first automotive co-operative. We'll see how that works out now that the union represents both sides of the table.

As for newspapers? They are facing a systematic decline in that they are becoming less relevant to their customers and as a result their customers are abandoning them. What purpose would a government bailout do for newspapers? They are extremely out of touch with new mediums of information exchange (demanding that Google pay them to index their pages and also demanding a higher page rank because information is taken from them? Absurd.)

In this case, the entire industry is in decline, but again, it's not entirely the recessions fault. Newspapers are already precipitously in decline. It's across the board and the decline is one way.

In summary, I believe that there are three unique types of bailouts occuring and we need to look at each type:
  1. Industries that are failing but essential - Finance
  2. Industries that are weakening with some companies in bankruptcy - Automotive
  3. Industries that are failing by being irrelevent - Newspapers
As much as I dislike the idea of bailouts in general, I think that the only one that should be bailed out is the first. Bailing out companies in the next two categories over extends the role of government by helping companies that are on their way out.

No comments: