The GM Treatment: A Model For Other Bailouts

5 lessons from the auto bailout about how to handle troubled banks

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Have you ever seen Citigroup’s viability plan? Does Bank of America have a deadline for proving it can get back on its feet? Did AIG have to meet a litany of government demands in exchange for taxpayer bailout money? The answer to all these questions, obviously, is no.

But ask the same questions of General Motors and Chrysler and the answer is a definitive yes.

Before getting their first round of bailout loans last December, the CEOs of both companies testified before Congress four times to explain why they needed the money, and what they’d do with it. When they came back a month later asking for more, the feds demanded detailed plans, with operational deadlines, showing how they intend to become profitable and pay back the taxpayer loans. When those plans failed the sniff test, the government published a ruthless tear-down highlighting all the flaws, fired GM's CEO, and set both companies on a path toward possible bankruptcy.

[See what’s next for GM and Chrsyler.]

Seem a little inconsistent?

It does in Detroit, where auto industry supporters say the Detroit carmakers deserve the same gentle treatment that Wall Street banks have gotten. But it's the other way around: The government should be taking the same tough approach toward banks and financial firms that it has toward Detroit. Here's how:

Rake the books. Obama’s automotive task force thoroughly analyzed the GM and Chrysler business plans – and publicly excoriated each company for misleading assumptions and weak strategy. It found that GM, for example, is basing its turnaround strategy on overoptimistic assumptions about future market share, sales, the prices it will be able to charge, and other key metrics.

[See 6 upsides to a GM bankruptcy.]

If there’s an automotive task force that can do this, where’s the banking task force that ought to be able to evaluate Citigroup’s claims of a return to profitability this year, or Bank of America’s insistence that it can absorb Merrill Lynch without any further bailout money? Presumably that function resides in agencies that already regulate the banks, like the Federal Reserve and the FDIC. But they’ve shared precious little with the public.

Publish the facts. The banks and their federal creditors have essentially conducted their bailout business in secret, because of fear that too much negative info about the condition of the banks could lead depositors and counterparties to pull their business. It’s time to get over that. The government deserves some credit for calming the panic that gripped the markets last fall, and the odds of some kind of ruinous bank run are declining. By now, the government must know a great deal about the condition of the biggest, most troubled banks. If they can tell us in detail what’s wrong with GM and Chrysler, then they can give us a clue about Citi and the rest. AIG has finally provided some detail what it’s doing with $180 billion in taxpayer money, but there’s been little assessment of the firm’s efforts from the government itself. Public disclosure about the condition of these companies doesn’t need to include reams of proprietary data. But taxpayers deserve a meaningful accounting of where this money is going.

[See 7 surprises buried beneath the AIG bonuses.]

Assign deadlines. Other mysteries of the banking bailout: How long is it going to last? And how can we tell if it’s working? Granted, some of this depends on when the economy turns around, which is hard to predict. But if the government can give GM and Chrysler deadlines for proving their viability and showing how they’ll repay taxpayer loans, certainly they could put Citi, Bank of America, and the other bailout babies on some kind of repayment schedule. The automakers, for instance, need to show realistic cash-flow projections out to 2014 or later. The real numbers could change along with circumstances, but at least it’s a marker in the sand. Let’s make the banks do the same.

Require progress reports. The CEOs of the biggest bailout recipients have appeared just once before Congress since most of them accepted bailout money last fall. And that was AFTER they got the money, not before. The CEOs of GM and Chrysler had to testify before hostile questioners four times BEFORE they got any money. What gives? Congress earned kudos for channeling populist rage over the AIG bonuses, but it has done little to elicit ongoing updates from banking chiefs about what they’re doing with billions in bailout money. How about Congress requires quarterly testimony from the guys running the top 20 bailout recipients? Better yet, make it monthly. Maybe the discomfort will compel them to pay back the money sooner.

[See more companies at risk of failing.]

Show some backbone. Firing Rick Wagoner, GM’s CEO, may not have been completely necessary, but it sure sent the message that Obama is serious. Wagoner signed off on the dubious viability plan, after all, and by rejecting the plan, the government also rejected the man with the plan. That doesn’t mean the government needs the scalp of a bank CEO to show it’s serious about whipping the banks into shape – but showing more toughness would help counter the growing impression that Washington is coddling the banks. So far, the feds have lent money to the banks at a much lower rate than private investors like Warren Buffett, they’ve ponied up every time the banks came asking for more, and they’ve sent the message that the banks don’t need to worry about failing. GM and Chrysler, meanwhile, could be in bankruptcy by summer. Banks might be special, but they’re not that special. It’s time they knew that.

TAGS:
General Motors
Chrysler
Citigroup
Bank of America
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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