The Automakers and the Banks: Double Standard?

by James Surowiecki
New Yorker blog

In the wake of the Obama Administration’s decision to take a hard line on bailout funding for G.M. and Chrysler, there’s been a lot of talk about why there seems to be a double standard at work in the way the Administration is dealing with the automakers and the way it’s dealing with the banks. This may well be a premature conclusion: it’s not obvious that the Administration won’t adopt a tough line with at least some banks after the stress tests are completed next month. But to the extent that there does seem to be a difference between the Administration’s strategy for dealing with the two industries, there is an obvious explanation: it’s relatively easy to see how the banks can return to profitability, while it’s much harder to see how the automakers can become profitable again, at least in the absence of the kind of radical restructuring you’d get through bankruptcy or some kind of deal with the bondholders.

The money the government has been giving the automakers has been going not to shore up their capital base, but literally to pay their bills. In the absence of government aid, the automakers would have had to shut down their factories because of their inability to pay suppliers and workers. That’s not true of even the most troubled big banks, which are having no problem meeting their debt payments or paying their bills: the government’s aid has gone instead to replenish their capital and allow them to stay in regulatory compliance. That doesn’t mean the government’s aid was not essential, but it was different: the money the government gave G.M. has already gone out the door, while in the case of the banks it’s still, for the most part, sitting on their balance sheets (which is where it’s supposed to be).

More important, it’s not obvious that that was going to change any time soon. G.M. and Chrysler have been losing money for years, and market share for literally decades. While they were successful in the nineteen-nineties, thanks to the S.U.V. and truck boom, it’s been a long time since they were able to make money consistently on cars. So one could imagine a scenario in which these companies required regular infusions of government money just to stay afloat. It’s that scenario, I assume, that Obama’s hardline approach is intended to avert.

(More here.)