Obama: Banks Should Pay For The Auto Bailout

Edward Niedermeyer
by Edward Niedermeyer

At the height of “bailout fever,” after TARP had been instituted but before the automakers had been completely bailed out, one argument that we heard a lot of from Detroit’s defenders was “how can you begrudge the manufacturing base a few billion when speculators at the banks are receiving far more support?” At the time, the argument seemed to me like a convenient way to shift attention away from Detroit’s failures and undercut the argument that consumers, not a credit crunch, were responsible for killing off GM and Chrysler… but at least then it still had some validity. Fast forward to today, and history has stripped it of all relevance, as it turns out the banks will likely be picking up the automakers’ bailout tab.

The Detroit News‘s David Shepardson reports that the Obama Administration has resurrected its “Financial Crisis Responsibility Fee” as part of its new deficit-reduction package, which, in the words of Treasury Secretary Tim Geithner,

is designed to make sure that if there are any losses from the emergency actions we took to put out the financial fires of ’08 and ’09, that we recover those losses in the form of a fee on the institutions that benefited most directly from those programs… If Congress did not legislate a fee like this, then if we ultimately realize losses on the emergency programs, then those would add to the deficit. So by proposing this fee, we try to make sure that doesn’t happen.

Sounds good, right? Well, here’s the problem with expecting payback for bailouts: the firms that “benefit most directly” from them are least likely to be able to pay them back. As a result, the big bad banks that have not only paid back most of their loans but also lent Chrysler the cash to pay back its TARP loans are the ones in line for a soaking. The automakers, which received less up front but are paying back a lower percentage of their loans, are in line for a free pass. Think of this as a handy reminder of all that “moral hazard” stuff people were talking about a few years ago.

The Freep explains the details

The fee would be restricted to firms with more than $50 billion in assets, according the Obama administration plan – and is estimated to raise $30 billion over 10 years.

By “firms with more than $50b in assets,” the Freep means the biggest banks. With the exception of AIG, Ally Financial (formerly GMAC, GM’s once-captive finance arm), and the Fannie/Freddie twins, this refers to banks that were the quickest to recover post-bailout, and have repaid most or all of their TARP loans. And the last time the Obama Administration proposed this Fee, the heads of those banks were not amused. In early 2010, the WSJ reported that

[J.P. Morgan Chase CEO James Dimon] said it felt like the banks which have already paid back taxpayers, were being asked to subsidize the bailout of General Motors and Chrysler.

At the time, I wrote

The real irony is that the bank bailout allegedly took place because nobody understood the real nature of the crisis, shrouded as it was in the opacity of financial industry jargon. Now that the moment of crisis is over, the banks are back to making money, while the automakers are still dreaming of that first post-bankruptcy profit. Which one turned out to be the more difficult, complex industry?

But now that Detroit is making big profits, what’s the excuse? By my count, Chrysler still owes the American people around $5.3 b that it shows no interest in ever repaying. At current stock prices, the taxpayers are likely to lose around $15b on the GM bailout. And GM is already making so much money it has to shell out nearly a quarter-billion dollars to the union that helped drag it from industry-dominator to federal charity case. But rather than putting GM and Chrysler on a payment plan until they square up with the American people, we’re going to shake down the banks for their share? Is this making sense to anyone?

Edward Niedermeyer
Edward Niedermeyer

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  • Jimboy Jimboy on Sep 20, 2011

    While I do agree that the automakers could pay back more, I still find your numbers optimistic, to say the least. Why should Chrysler be held responsible for loans to it's suppliers? I questioned you before on this and you failed to answer then, so in my books it is well below $4B, and there is still some money to come through the IPO when it happens. Since you have been CONSISTENTLY wrong about Chrysler's prospects for the last 2 years, why don't you just wait and see what really happens instead of trying to stir a pot that boiled a long time ago? Even according to your weird little chart, Chrysler has done far better than some others in repaying the LOANS @20%, not found money, as you seem to imply.

  • Conslaw Conslaw on Sep 20, 2011

    We are not out of the woods yet. The reason the banks paid back the money is because they get lots of direct and indirect subsidies from the Federal Reserve and from the mere holding of bank charters which allow them to borrow at the discount window and lend out the same money several times over. That's actually how the money supply is supposed to grow. The banks aren't lending, so the money supply isn't growing. Several banks including Bank of America have been dodging any real accounting of their problem mortgage loans. Robosigning is a symptom of a disease, and that disease is that the banks don't even know what they are holding. The attorneys general settlement appears to be stalled because people are starting to realize that the AGs have been trying to come to a settlement before they really did an investigation, and that won't work because it doesn't resolve the issues regarding the validity of the mortgages. Without knowing the validity of the mortgages, you can't know the value of the mortgage securities. Without knowing the value of the securities, you don't know if your 401k really has enough money for you to retire. The relatively tiny bailouts of Chrysler and General Motors, though not paid back by the car companies, can be justified because they have already paid for themselves in avoided extended unemployment payments and other transfer payments. If you want to really point a finger of blame, look at Fannie Mae and Freddie Mac. They had plenty of warning signs of predatory lending, and always looked the other way. They could have spotchecked loans to make sure that these trillions of dollars of investments were properly documented and secured. Look at the green lines for the money disbursed, and they're still at the window begging for more money. To make things worse, the regulator of Fannie and Freddie that was effectively imposed on them after the meltdown is a roadblock to a potentially huge mortgage refinancing strategy aimed at refinancing all of the government secured loans whether over secured or not. The money saved would add liquidity to the market and could actually decrease government payouts on defaulted mortgages because lower monthly payments would result in fewer defaults.

  • ToolGuy The other day I attempted to check the engine oil in one of my old embarrassing vehicles and I guess the red shop towel I used wasn't genuine Snap-on (lots of counterfeits floating around) plus my driveway isn't completely level and long story short, the engine seized 3 minutes later.No more used cars for me, and nothing but dealer service from here on in (the journalists were right).
  • Doughboy Wow, Merc knocks it out of the park with their naming convention… again. /s
  • Doughboy I’ve seen car bras before, but never car beards. ZZ Top would be proud.
  • Bkojote Allright, actual person who knows trucks here, the article gets it a bit wrong.First off, the Maverick is not at all comparable to a Tacoma just because they're both Hybrids. Or lemme be blunt, the butch-est non-hybrid Maverick Tremor is suitable for 2/10 difficulty trails, a Trailhunter is for about 5/10 or maybe 6/10, just about the upper end of any stock vehicle you're buying from the factory. Aside from a Sasquatch Bronco or Rubicon Jeep Wrangler you're looking at something you're towing back if you want more capability (or perhaps something you /wish/ you were towing back.)Now, where the real world difference should play out is on the trail, where a lot of low speed crawling usually saps efficiency, especially when loaded to the gills. Real world MPG from a 4Runner is about 12-13mpg, So if this loaded-with-overlander-catalog Trailhunter is still pulling in the 20's - or even 18-19, that's a massive improvement.
  • Lou_BC "That’s expensive for a midsize pickup" All of the "offroad" midsize trucks fall in that 65k USD range. The ZR2 is probably the cheapest ( without Bison option).