Kristof on the Auto Bailout

Sun, 14 Dec 2008 15:49:26 +0000

In his column today, Nicholas Kristof makes the pragmatic case for a bailout for the Big 3 auto makers. It's hard to make the argument against pragmatism, so let me just insist in this post that those who are being pragmatic drive the hardest possible bargain. Kristof sets up his column as replies to those who are against bailing them out. Consider this reply:

A bailout is hopeless: This is a bridge loan to nowhere.

Yes, the Obama administration will have to come back in January with a full rescue package. The package should focus on saving jobs, not stockholders or bondholders. Shareholders should lose most of their investments, bondholders should get a haircut, managers and board members should be ousted, autoworkers should have their pay and benefits trimmed to market levels, and taxpayers should get an equity stake that they could profit from.

That's not nearly good enough. Here's why:

  1. Shareholders should not lose "most" of their investments. They should lose "all" of their investments. Shareholders are the residual claimants on a firm. The residual is zero.
  2. Managers and board members should be ousted. This is just part of #1 -- the equity holders who hired or elected them are no longer stakeholders of the firm.
  3. Bondholders should not get "a" haircut. They, along with all workers, retirees, vendors, and other creditors who have claims on the firms, should become the new equity holders. The most urgent need now is to calculate the relative value of those claims to figure out how much of the new equity each claimant should get. The size of their haircut should be determined by the value of assets relative to liabilities, not Congress or some car czar.
  4. Autoworkers should not "have their pay and benefits trimmed to market levels." The "market" includes companies that are and have been well managed. A company that is not and has not been well managed cannot afford to pay the same level of compensation that a company that is and has been well managed can pay. The pay and benefits of autoworkers should fall to whatever level can be supported by the business enterprise. The autoworkers can decide whether they want to accept that level of compensation or work at their next best option.
  5. Taxpayers should not get "an equity stake that they could profit from." Why do taxpayers, who are putting up cash, have to accept a residual claim on the firm after everyone else has been paid off? Taxpayers already have a claim like this on the firms, via the corporate income tax. For the cash they are putting in, taxpayers should insist on a more senior position in the firm, being paid off first, not last, in the event that the new firms are as unable to generate profits as the old firms.

Being pragmatic is one thing. Being a patsy is quite another.