No Bailout for Automakers? Remember Fallout from Lehman Collapse

A refusal to extend $25 billion in bridge loans to Ford, Chrysler, and GM could have catastrophic consequences for the economy similar to those experienced after the failure of Lehman Brothers. In mid-September of this year, you’ll remember, Treasury refused to loan Lehman any capital or to offer a line of credit to any purchaser of Lehman as the Federal Reserve had offered to J.P. Morgan Chase in its purchase of Bear Stearns in March. When Treasury walked away from offering support, first Bank of America and then Barclays walked away. Lehman was doomed. And so, it seems, was the economy. Credit markets tightened; commercial paper contracted; banks refused to loan to other banks, not trusting that they’d be paid back; Bank of America bought Merrill Lynch; Treasury bailed out AIG; and Congress finally agreed to provide another $700 billion to rescue the financial system. Lehman’s failure triggered a crisis in the financial system worldwide. All of this is laid out in The Financial Times in an excellent article entitled “The Lehman legacy: Catalyst of the crisis.”

The U.S. Department of the Treasury

In hindsight, Treasury Secretary Henry Paulson should have offered guarantees similar to those that enabled the purchase of Bear Stearns. If he had done so, perhaps the present liquidity crisis could have been avoided or, at the least, been put off another few weeks or months. Except for giving more time to fix the mess, it’s questionable what putting the disaster off another few weeks would have accomplished. But where are we now? Sinking into a liquidity trap with the possibility of a deflation spiral on the horizon. And if you’re bailing out Bear Stearns and AIG and then pumping capital into a long list of banks from the $700 billion, wouldn’t guaranteeing the capital that Bank of America or Barclay’s would have used to purchase Lehman have been worth it?

Now Secretary Paulson seems squeamish about aiding Detroit, pleading that the $700 billion approved by Congress did not authorize him to rescue the three automakers. The Secretary, however, also isn’t using the money to buy banks’ toxic assets, which was the whole basis of his proposal to Congress to thaw credit markets. Once again, the Secretary hesitates in rewarding companies who’ve miscalculated markets, certainly an understandable apprehension in a free market economy. Moral hazard is not an empty concept.

The problem, however, is that failing to rescue such firms may put the whole system at risk as appears to have happened with the failure of Lehman. Systemic risks may not only inhabit financial firms. In fact, the subsequent credit freeze and lack of confidence has directly affected automakers, foreign and domestic. The purchase of autos requires credit, and banks simply aren’t lending on terms that most people can afford. It’s hard to blame the banks; they don’t have the confidence as yet that they’ll be paid back. But what will happen to confidence if Detroit is allowed to fail?

Be wary of those like Mitt Romney, who advocate the Russian Roulette of Chapter 11 bankruptcy for the three firms. No one likes the fact that the three are being saved from their own faulty decisions of the past, but to allow one or more of them to go under presents a systemic risk that the country may never recover from. The spiral of deflation that could result would be an absolute catastrophe. If you think we’re in a crisis of confidence now, wait until these three go under. You’ll see a lack of confidence in American leadership and institutions that will have worldwide ramifications.

Image of Treasury building courtesy of drstout’s photostream at Flickr and used under license of Creative Commons.

Peter Schiff — Getting It Right?

Peter Schiff, supporter of Ron Paul and, along with a few others, predictor of the current economic malaise, certainly shows up Arthur Laffer, Ben Stein, Caputo, et al., in this video.

Ref.: Andrew Sullivan, “The Daily Dish”

Be careful, however, in glorifying him too much, as this second video shows:

See what I mean?

How Wall Street and Government Calculate

The NYT blog Laugh Lines includes a short skit from an Abbot and Costello routine that may show us the seeds of the present financial disaster:

Let’s see, Costello’s math must have been used by Bear Stearns, Lehman Bros., Merrill Lynch, AIG, Fannie Mae, and Freddie Mac, and who knows who else, right?

Rooney Being Used?

Is Andy Rooney being used by CBS News higher-ups? When he purposely left out Dan Rather’s name in a list of esteemed TV journalists in his commentary on 60 Minutes Sunday, Nov. 16, was he speaking for himself or his bosses? In a paean to newspapers entitled “Andy’s Homage to Newsprint,” Rooney lists a few TV journalists deserving of praise for their work in TV newsrooms, although what they do, according to Rooney, can’t compare to what print journalists do (no disagreement there). Here’s the relevant paragraph from his commentary:

Television news is on the screen one minute and gone the next. We’re lucky that television journalism has been as good and reliable as it is because of operatives like Ed Murrow, Walter Cronkite, Tom Brokaw, Tim Russert, Bob Schieffer, Peter Jennings and countless others [emphasis mine], but it is not the same as print journalism.

Glaringly absent from this esteemed list of TV journalists, of course, is Dan Rather’s name, the former anchor of the CBS Evening News. Rather, you’ll remember, resigned his position as anchor of the program in 2005 after a September, 2004, report on a weeknight 60 Minutes broadcast questioning President Bush’s National Guard Service during the Vietnam War. The report was found to have lacked proper procedure by a panel investigating the incident. After his resignation as anchor, Rather still retained a position as reporter at CBS News but later claimed that CBS failed to live up to its agreement with him by relegating him to a marginal position on 60 Minutes. He later resigned from CBS News and subsequently sued the network.

Rooney, of course, had previously expressed his displeasure of Rather in a USA Today story in January of 2005 and in an MSNBC report in November of 2006. But the timing of his commentary yesterday coincides with a New York Times report Monday (published online on Nov. 16) that suggests that Rather may have a case against his former bosses. The Times states:

Among the materials that money has shaken free for Mr. Rather are internal CBS memorandums turned over to his lawyers, showing that network executives used Republican operatives to vet the names of potential members of a panel that had been billed as independent and charged with investigating the “60 Minutes” segment.

These network executives finally decided on a two-member panel to investigate how the story got on the air: Dick Thornburgh, a former Republican U.S. Attorney General under both Reagan and Bush senior, and Louis D. Boccardi, the former head of the Associated Press. But subpoenaed notes from a vice president of CBS News, Linda Mason, seemed to disqualify the former Republican senator from New Hampshire, Warren Rudman, because he wouldn’t “mollify the right.” Thornburgh may have been approved after further “testing” by CBS as shown in Mason’s notes, which stated, “T comes back with high marks from G.O.P.”

Another memorandum turned over to Rather’s lawyers showed that CBS News executives had given preliminary consideration to conservative commentators like Rush Limbaugh, Matt Drudge, Ann Coulter, Pat Buchanan, and Roger Ailes as potential members of the panel. Those people weren’t chosen, but the fact that they even made it to a preliminary list shows that CBS News thought it necessary to seek approval from the G.O.P. for at least one member of the panel.

Rather may have engaged in some sloppy journalism, although that has yet to be definitively established; but Rooney especially, it seems, has gone to extra lengths to show his displeasure. Is he aware of how his complaints about Rather and others at CBS News dovetail nicely with Republican complaints about the so-called liberal bias in the media? Did CBS News err in its reporting of President Bush’s military record, or did it cave to White House pressure and fire solid journalists and force the resignation of another long-serving newsman? Is Andy Rooney speaking for himself or doing his bosses’ bidding? Has Andy Rooney been used?