Thursday, May 21, 2009

More bailouts

The Federal Government is set to offer more TARP money to GMAC. According to this article in the WSJ:

The GMAC injection is designed to firm up the auto-financing company's battered balance sheet and allow it to continue making loans for car purchases at GM and Chrysler LLC. The Treasury already put $5 billion into GMAC in December.

The GMAC funding is an illustration of how rapidly the government effort to rescue the U.S. auto industry is escalating in cost and scope. What began as an emergency batch of loans to GM, Chrysler and GMAC in December -- totaling just over $20 billion -- now looks likely to balloon well beyond $50 billion and could approach $100 billion by the end of the year.

So we are increasing subsidies to the automakers at the same time that higher CAFE standards make them less competitive. At the same time, the head of the UAW believes that the equity of GM and Chrysler is worthless, and he should know since he has the discretion to make it so. See this article (hat tip to Falkenblog):
UAW president Ron Gettelfinger said the union hopes to sell its stake in both companies quickly because he is more interested in raising cash to cover retiree health care costs than having an ownership stake in GM (GM, Fortune 500) and Chrysler.

"Let somebody else take the stock. Give us the money," Gettelfinger said at a recent press conference. "We are trading debt for equity, and what is the value of the equity? Let's be honest, it's zero today."

What scares me the most is that while rationality says ignore sunk costs, politically sunk costs matter. I doubt we are close to the end of these subsidies.

Meanwhile, the big banks want to give back their TARP money. Of course, one reason for this is just to avoid government interference in their operations. A second reason is to signal their strength. The fear is that they may need the money again in the future. Essentially, the government would like them to keep the TARP money so the likelihood of a future bailout is reduced, but the government cannot refrain from using its leverage to make them miserable, so they don't want to keep the funds.

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