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November 14, 2008
Bailout/Bubble Nation Until The End
Treasury Secretary Paulson is changing his bailout playbook, calls for more transparency from the Treasury and Fed are being ignored, and more bailouts are almost definitely around the corner. Should current trends persist it is not difficult to envision Paulson - a la Jack Nicholson in a ‘Few Good Men’ - losing it while being pestered about what exactly he is doing/planning to do with bailout funds:
“I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom I provide, then questions the manner in which I provide it! I'd rather you just said thank you and went on your way.”
Sadly, many people in America are content to say thank you and go on their way. Moreover, many have been deluded into thinking that selective bailouts are something more than a ‘Necessary Evil’. Consider the following headline from Scripps, which reads ‘Save Detroit and restore our pride’. Is it just me or isn’t continually borrowing unthinkable amounts of money to keep an unsustainable way of life going a little bit longer something definitely not to be proud of?
As of September 30, 2008 GM had a negative $59.9 billion net equity position and negative $19 billion in working capital. In other words, according to its balance sheet (not to mention common sense) GM is already an insolvent company in that if all of its assets were sold off they would not come even close to covering liabilities. Moreover, using the working capital figure simple math says GM needs $20+ billion (after discounting inventories) to simply get its head above water (JP Morgan says $15 billion to keep afloat in 2009). In short, why not let a money losing enterprise like GM - one that could end up being a drain on the taxpayer for years to come - simply vanish?
Along with the ‘too proud to fail’ angle there is another more tangible consideration, which is that the Big 3 Detroit automobile companies are estimated to hold influence over approximately 3 million total jobs. Fuzzy math or not, the logic goes that if throw these three debt ravaged, money losing firms $50 billion or so you keep millions employed. How can any newly elected President say no to such a proposition?
I can think of one way the answer becomes no: the U.S. government encounters difficulties getting the $50 billion. Until that day the bailouts ride, and false pride abounds.
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