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Some Bailouts Are Big Gifts. Some Bailouts Are Bad Loans.

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financialindustry1Maybe it’s the rise of the Internet that did it, but there are an awful lot of lemmings in the fourth estate these days. Once the zeitgeist gets hold of a word it’s everywhere fast. That’s especially true of catch-all terms that lose their meaning the moment anyone begins to dig even a tiny bit deeper into a story.

Take the term “Bailout”.

In economic terms it means ‘assistance to a financial or other institution in distress’. But assistance can mean anything from a loan that nobody else will give with very stringent terms to a total and utter gift.

There have been a ton of bailouts in the last few months. We don’t have to list them all, we’re just going to focus on two ‘institutions’, Citigroup and the Big Three Auto manufacturers.

Let’s look at what these two have in common. Both of them are vast with global reach and influence.  Both of them made awful business decisions in the short, medium and long term that led them to the brink of collapse.

Now let’s look at what people perceive they have in common, namely that both are “too big to fail”, another term of limited meaning. Citigroup is too big to fail because of the depth of its interconnected interests throughout the financial world. The Auto Industry is too big to fail because whole regions of the country depend on it for their economic welfare.

Finally let’s examine where they are different. Citigroup is a financial institution that buys and sells assets with client and depositor funds. It employs in the region 300,000 people worldwide. The Auto industry makes cars and trucks, is the backbone of US manufacturing and directly and indirectly employs around three million Americans.

It’s a tribute to how well the Finance, Insurance, Real Estate or FIRE sector has sold itself over the last twenty years of the Reagan Revolution that a bloated, shapeless and rudderless behemoth of a bank should be regarded so highly, while the jewel of America’s industrial crown should be treated as if it’s already on the scrapheap.

That contrast is perfectly reflected in the way that the United States Congress and the Administration has handled the ‘bailouts’ to Citigroup and the Auto Industry.

Citigroup received the largest bailout in history without getting grilled by Congress, or having to show any contrition whatsoever because the $700 billion TARP program had already been signed into law. It has received a total of $45 billion in TARP funds, and the Government will cover 90% of the losses from its gigantic, unknowable mound of toxic mortgage debt in its $335 billion dollar loan portfolio, after the company absorbs the first $29 billion. This is the key to the bailout. Without the Government guarantee, confidence in Citi would have disintegrated in a matter of days after the rot set in about a month ago. In short it would have been finished, and we’d have been in a second credit freeze that would have made us wish that more than anything we could have the first one back. And in return for totally saving Citigroup from total collapse, the Government get a $27 billion sliver in preferred stock or warrants, the bosses lose their bonuses or parachutes, and the Feds get an office in Citigroup’s HQ to watch over operations. Not a bad deal.

Total potential bailout: Around $300 billion.

The Auto Industry got an incredibly rough ride in Congress, where they essentially grovelled for some change, not once but twice. They were castigated and humiliated in a series of hearings that took their cue squarely from the Spanish Inquisition. In return for Government funds, the Industry has to completely change its business model, completely overhaul its working practices and product ranges, and take orders from a “Car Czar” who would have tremendous power over Auto Industry decision making, including sign-off rights on any expenditure over $25 million, or in other words, anything remotely important. Auto Industry executives also take a huge hit (including a no-fly zone for their private planes), and the Government also get massive equity stakes in GM and Chrysler, because their market cap is so pitiful. (Ford decided to go it alone and not take Government money).

Total potential Bailout: $15 billion.

Now, I’ve never been much of a whiz at math, but by my reckoning the entire Auto Industry potentially gets 5% of what Citigroup is potentially getting. If Citigroup had received $15 billion instead of $300 billion it would now be owned by some unknown businessman from Dubai, who’d have bought it at the financial equivalent of a garage sale as a present for one of his wives. But the Auto Industry has to make do, its unions have to basically stick a fingers in every member’s eye, and the people of Michigan, Ohio, Kentucky and Wisconsin have to be extremely grateful for not very much.

Now it’s important to mention that if Citi and the Auto Industry had to live without bailouts the world would not cave in on itself. Bailouts aren’t about protecting ‘the little people’ who actually work for these companies, they’re about protecting management and shareholders. Bankruptcy wipes out both.

But putting aside whether or not a ‘bailout’ in either case was justifiable or advisable, the difference in the way Citi and the Auto Industry have been treated is staggering both in magnitude and detail . Their experiences are so utterly different, and yet are both referred to as having been “bailed out”. The press hardly blinked when Citigroup got its massive infusion of cash and confidence. The biggest and most egregious of Paulson’s handouts to his golfing buddies was all over so fast. At the same time, every detail of the Auto Industry bailout has been dissected to the point of absurdity, down to the make of hybrids that the bedraggled CEO’s sat in for the drive from Detroit to DC for their Congressional do-overs the other day.

This seems like a massive and illogical case of double standards at play, and ‘bailout fatigue’ doesn’t really describe it. TARP was set up at a time when everyone was truly panicking, and panic is not exactly a reliable driver of good policy. It was also limited to the financial sector because the panic was in the financial sector. In one fell swoop, America dumped nearly a trillion dollars into bailing stuff out. So now they’re getting snippy about a mere $15 billion for the car companies. The ROI on the financial bailout is hard to measure but if the Auto Industry were to disappear, the states of the upper Mid West would go from being the ‘rust-belt’ states to the ‘no-belt’ states. They’d be lucky to find a piece of string to hold up their pants. Millions of people would lose their jobs, livelihoods, and futures. If Citi were to go down, the Financial succubus would survive as it always does by hungrily digging into the entrails of one of its erstwhile gods; shareholders, executives, bank tellers, and office cleaners be damned.

Both Citi and the Auto Industry are going to have been “bailed out”. One of the bailouts is a huge gift, the other is a loan-shark’s dream.  When the same word is used to describe polar opposites, it’s a word without meaning.

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