Marketplace Scratch Pad

Morning Reading

Scott Jagow Jun 1, 2009

After 101 years in business, GM filed for bankruptcy this morning, saying it will close or idle 12 plants. GM’s stock is so worthless (50 cents) that the company was removed from the Dow Jones Industrial Average. So was Citigroup. They’ve been replaced by Travelers and Cisco Systems. Some reading that grabbed my attention:

Marketplace commentator Robert Reich has an excellent column in the Financial Times about GM. Reich asks, “why would US taxpayers want to own today’s GM?” He says the goal of this $60 billion investment is quite unclear:

It cannot be to preserve GM jobs, because the US Treasury has signalled GM must slim to get the cash. It plans to shut half-a-dozen factories and sack at least 20,000 more workers. It has already culled its dealership network.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganisation under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given carmakers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

Meanwhile, economist Paul Krugman is dredging up the “bash Reaganomics” argument again. I would say give it a rest, but one point in particular is interesting:

Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.

Which lenders and borrowers were all too happy to embrace. There’s a lot of complicity there, even if you believe that particular policy decision was a bad one.

Fast-forwarding to the present, Forbes’ Michael Maiello argues the Treasury should not sell its TARP stock warrants back to the banks. Number one, taxpayers aren’t getting a good price. And two, we need the leverage of that stock:

This is our chance to regulate Wall Street–and we should take it. Let’s regulate these executives so much that they’ll need permission from the FDIC to pop the collars on their pink polo shirts while they hang out at the country club.

If we don’t re-regulate Wall Street now–while we have leverage–we never will. Momentum matters and the public attention won’t be on Wall Street forever.

I also like this paragraph:

Consumers and small businesses, the people who paid to bail out the banks, need and deserve better treatment from their lenders. Our bankers should at least admit it’s unseemly for them to take free capital from the government and nearly free money from the Fed while raising interest rates on their customers.

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