Why Bankruptcy For Autos But Not Banks?

The news this morning would be amusing if it weren’t so sad.

The Obama administration is undergoing a battle between its own good instincts with those of its Treasury Secretary.

Away from Treasury, on the side of intelligence,  new policies, a clean break from the Paulson/Bush plans — I believe during the campaign, it was called CHANGE — and inevitability, are prepackaged bankruptcies, clean balance sheets, and a fresh start. This is reflected in the Fed exploration of $40 billion in bankruptcy funding for GM.

On the side of more of the same, bad decision making, regulatory capture, worshiping sacred cows, and a hard-to-understand goal of saving the banks rather than the financial system, is the utterly absurd proposal to somehow spend 10X the market cap of Citigroup for a 40% stake in the apparently insolvent firm.

This is an accounting maneuver, a convertible preferred that greatly dilutes the common shares, and adds no new capital. Put on paper, it allows the leverage to look less egregious.

One can imagine an incredulous junior Treasury staffer — one who hasn’t been captured by the big banks, and is capable of basic arithmetic — saying the following:

“Explain this to me again: We put in many times the value of this company — we have already given them $45 billion dollars, and guaranteed almost $300 billion dollars worth of bad paper — and we get less than 50%? WTF? How the hell does THAT work? “

Its apparent that this sleight of hand doesn’t work to just about everyone except Tim Geithner (and a few others).

At the same time, an industry that had nothing to do with the current crisis is on the fast track to a healthy pre-packaged bankruptcy.

Moral Hazard aside, the different approaches reflect the relative importance of different sectors. Banks must be saved at all costs, but GM and Chrysler must go the bankruptcy route. The only explanation in treating the two industries so radically differently is an overt hostility to Unions on the part of many.

My views are that they ALL need to go to a prepackaged bankruptcy — banks, autos, etc.

Here’s some excerpts:

The NYT:

Citigroup approached the regulators with a plan that would allow them to convert a large amount of the government’s $45 billion of preferred shares, which is treated as debt, into common stock, this person said. The government owns a stake of roughly 8 percent, but that could grow to as much as 40 percent.

Converting the preferred shares while also issuing more common shares would bring Citigroup closer to the mix of equity that the government is likely to demand when it introduces the stress test. But that would severely dilute the value of shares held by existing Citigroup stockholders

WSJ:

Outside advisers to the U.S. Treasury have started lining up the largest bankruptcy loan ever, talking with banks and other lenders about at least $40 billion in financing for General Motors Corp. and Chrysler LLC, in case the two auto makers need it, said several people familiar with the matter.

While acknowledging the grimness of the task, administration officials involved in the auto talks said they are trying to find a way to restructure the two companies without resorting to bankruptcy proceedings. They stressed the latest efforts were “due diligence” on the part of the government advisers, and that bankruptcy financing may not be necessary.

Still, people involved in talks with senior Obama administration officials said that the administration believes that the option of Chapter 11 filings by the two auto makers needs to be seriously considered.

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Previously:
Why Are Banks So Different From Autos? (December 9th, 2008)
http://www.ritholtz.com/blog/2008/12/why-are-banks-so-different-from-autos/

Favoring Nationalization Are . . . (February 20th, 2009)
http://www.ritholtz.com/blog/2009/02/favoring-nationalization-are/

Sources:
Citi presses US to take 40% stake
Francesco Guerrera and Krishna Guha
FT, February 23 2009 00:40 | Last updated: February 23 2009 11:05
http://www.ft.com/cms/s/0/806418a0-0140-11de-8f6e-000077b07658.html

Bankruptcy Funding Solicited for Car Makers
JEFFREY MCCRACKEN and JOHN D. STOLL
WSJ, FEBRUARY 23, 2009, 1:16 A.M.
http://online.wsj.com/article/SB123535613910745405.html

As Doubts Grow, U.S. Will Judge Banks’ Stability
EDMUND L. ANDREWS
NYT, February 22, 2009
http://www.nytimes.com/2009/02/23/business/23bank.html

Obama Bank Nationalization Is Focus of Speculation
Linda Shen
Bloomberg, February 23, 2009 04:05 EST
http://www.bloomberg.com/apps/news?pid=20601087&sid=anGxzRYhVF_Y&