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ROUBINI: THE DETROIT PROBLEM AND A BAILOUT PROPOSAL
Corporate Euthanasia
Market Comment, December 5th,
2008
A CHEAP SOLUTION TO AN EXPENSIVE PROBLEM
Nouriel Roubini, a
professor of economics at the NYU Stern School of Business who has been
uncannily prescient about the current global financial crisis, is
advocating a bailout proposal that calls for the three U.S. automakers
to file prepackaged bankruptcies (what
we would characterize as “corporate euthanasia”).
Let me make our position perfectly clear at the outset:
bankruptcy is not always the best way to solve a financial crisis.
Perhaps my views on bankruptcy are colored by an experience I had many
years ago when I worked with a firm that had filed for Chapter 11. One
day, shortly after the company exited bankruptcy, the president took my
arm and whispered that “my work is finished here; I have finally
restored our company to financial health.” This was one of the
infrequent times I held my tongue.
Now the notion that Congress should follow the bankruptcy
suggestion as a solution to the auto industry’s problems just seems
wrong, a “cheap” solution to a very complicated state of affairs.
One of our biggest
problems with the bankruptcy option is that management (there is a
strong likelihood they would be replaced) workouts would be impeded by a
battery of backseat drivers, i.e. lawyers, accountants and creditors
with divergent goals
(…my reaction to this comment was that a
chimpanzee could file for bankruptcy, since the skill set needed to dump
the problems into the judicial system requires a single digit I.Q.)
A PROPOSED SOLUTION
(… best read while in a sedated frame of mind)
Roubini’s prepackaged
bankruptcy
suggests the following terms:
§
Replacement of current management
§
Concessions from both the UAW and automakers
§
A wipeout
of existing equity and debt-holders
§
Temporary
nationalization of the auto industry
§
The
appointment of a
"car czar"
THE TRUE MORAL HAZARD
This proposal by its
very nature poses a moral hazard in several respects, not the least of
which is having the federal government in the position of encouraging
bankruptcy
(…what an ideal example for the Government
to endorse.)
Insofar as canceling all existing equity, there does not appear to be
much left to wipe out. With the industry’s bleak prospects the markets
have already seen to that. General Motors had $57- billion negative
stockholders’ equity at the end of June (52-week trading range
$29.44-$1.70) and Ford a negative $2-billion at the end of September
(52-week range $8.79-$1.01). Who a few years ago would have imagined
these giant capitalist icons almost reduced to penny-stock status?
WIPE OUT ALL DEBT &
EQUITY
(This is
a stroke of genius!)
Absolved of all
debt—what a fine course of action for the U.S. Congress to be in the
position of advocating and surely an inspirational message for the
masses and their billions of debt. (…perhaps
the general public should walk away from their outstanding debt
obligations and follow Congress’s suggestion to the auto industry?)
For the record, GM carried $193
billion of total debt on its balance sheet as of June 30, 2008 and Ford $244 billion at the end
of September 2008, for a combined total of $437 billion for just these
two automakers. Chrysler is a special situation and, for now, will be
omitted from the calculation.
SOMEONE ALWAYS HAS TO BE
BEHEADED
Replacement of existing
management would seem to be a requirement if the Big Three are ever to
win a Congressional bailout. If only it were that easy to unseat our
perk-loving, grandstanding politicians
(…and
what if the public took such a very hard stance toward politicians given
their stellar performance record?)
OUR VERY OWN CZAR
(…eat your heart out Russia)
Naming of a “car czar”
to oversee the “moral hazard” – America seems to have an affinity with
czars
(…a bit bewildering since the term has an unnerving resonance to the
Czars of Russia.) The true moral hazard is a government which
would consider, not to mention, doing this.
PERHAPS CHAVEZ IS
AVAILABLE FOR ADVICE
Nationalize the auto industry?
(… Please, did someone forget to take their
medication.) Where
should we seek advice? How about
Venezuela’s Hugo Chavez, a man who has much recent experience in this
area? If the automakers feel that bankruptcy is their best option they
certainly will not require any advice or financial aid from the
government or a czar. I have
every confidence that there is an abundance of lawyers and employed and
unemployed bankers to advise Detroit.
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