The Detroit face-off

By Felix Salmon
April 17, 2009

Bankers are never particularly popular at the best of time. Pyschologically speaking, if I borrow $100 from the bank, that $100 is now mine. Yet if I lend $100 to the bank — if I put $100 on deposit at the bank — then psychologically that money is mine as well. Logically, the money can’t belong to both depositors and borrowers at once. And the result is that people hate banks for both charging them fees on their own deposits and also being unreasonable when it comes to loans.

Banks are used to dealing with such emotions when it comes to their small clients. But now they’re facing a tougher issue — how to deal with the biggest client of all, the government. One way, it seems, is to go crying to the press:

At a meeting with executives from four of the nation’s largest banks earlier this month, the chief of the government’s auto task force, Steven Rattner, delivered a message that shocked some in the room.

To save Chrysler, he told them, the four banks and several other financial firms would have to surrender their claims to most of the $7 billion the automaker owed them. And what would the banks get in return for this sacrifice? Nothing.

“People’s jaws just dropped,” said a person familiar with the discussions.

Lemme guess, that person familiar with the discussions was a banker, right?

The fact is that the bankers don’t have much of a leg to stand on here. The government is asking them to take about 15 cents on the dollar — which aligns almost exactly with the market price of Chrysler’s debt. The bankers, meanwhile, are holding out for more — as much as 50 cents on the dollar — based on pointless hypotheticals about how much money they might end up getting repaid in a liquidation.

The WaPo story continues:

The banks — J.P. Morgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — have all since balked at the government’s proposal. This week, they are drafting a counteroffer.

But those four banks are themselves recipients of billions of dollars in government largesse. Collectively, they have received $90 billion from the rescue program for the country’s banks. Now, their critics say, the firms have an obligation to cooperate as the government seeks to save Chrysler.

“These are banks that have received substantial investments from the government,” said Rep. Gary Peters (D-Mich.), whose district includes Chrysler headquarters. “We hope they will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs. People are angry that again it seems like the banks are standing in the way.”

While this might be the right poetic response to the banks, there are more mundane and less philosophical reasons why their plaints should be brushed off. Firstly, Chrysler is not going to be liquidated: that is not, and never was, an option — especially in the present economic environment, when the market for Detroit’s hypothetical cast-offs is, let’s say, highly illiquid.

And secondly, the only reason why the banks’ loans are worth anything at all is that the government has already poured billions of dollars of TARP money into Chrysler. If the banks continue to insist on talking about hypothetical liquidations, they should be asked how much money is likely to remain for them if the government is first in line for repayment.

Up until now, big and powerful creditors have done very well out of Detroit: just look at the way that the government blinked first when it asked GM’s bondholders to take a large haircut before any TARP money would arrive. They said no, and the TARP money arrived anyway. This time, it’s the government which will (please) stand firm. Washington holds all the cards, and the banks are ultimately going to have to do what they’re told. If the government blinks again, the probability that it will ever be able to seriously regulate these banks drops to zero.


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Title 11 of the U.S. Code and much additional debtor/creditor law has spelled out who is due what when not everyone can be paid what they were promised. If this has to run through a bankruptcy to get the assets of Chrysler sold to Fiat, do that. Don’t go about trying to cobble together ad hoc plans when a perfectly serviceable plan is on the shelf. (We’ve had way too much ad hoc in the past year.)

And of course those rules spell out that if unsecured creditors — e.g. bond holders — are receiving 15 cents on the dollar, then secured creditors — e.g. these banks — should be coming out whole. They are not suddenly at par with unsecured creditors, and they shouldn’t have the market price of more junior debt used to crammed down the notional size of their claim.

Thanks for this Felix. If I understand you correctly, the gap b/t the govt offer and what the banks want is roughly $2.45 billion. Meanwhile, another story in the Post notes that despite pledges to return the TARP funds, banks — including these four — have accepted $1.56 trillion, of which only 200 billion is TARP money.

I noted the discrepancy in my own blog — o-not-pass-go-do-not-collect-156-trillio n-dollars/

To call this scandalous is an insult to scandal.

So, at a meeting, we have a Chrysler rep and Geithner on one side of a table. They tell the Citi rep to accept the losses for the good of the country.

Then, Geithner walks around the table and sits with the Citi rep, who says that they need the money and can’t afford to take a hit for the team, and Geithner points out that Citi is part of the team. We’re giving money to Citi, on the one hand, and telling them to accept losses, on the other hand. Makes sense to me. What shareholder doesn’t want their company to lose money, after all?

This is insanity. I don’t blame GS and JPM for wanting to return their TARP money as soon as possible. If the government is going to strong-arm them and move goalposts throughout the exercise to suit their needs, then good riddance. This is nothing short of corporatism. What is this country turning into?

Posted by JG | Report as abusive

This is just one indication among many of the fundamental incoherence of the Obama team’s strategy.

What exactly are the banks supposed to do with the TARP money, anyway? Keep it on the balance sheet to build up capital reserves and look sound? Or lend it out, thereby emphatically NOT building up reserves and taking further risks?

Peters says, “We hope they [the bankers] will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs.”

Well, that’s the problem. First, what was given them was in the crudest individualistic sense precisely “for their benefit.” The bankers kept their jobs, and thanks to Chris Dodd kept their bonuses.

Second, what was given them was also supposed to be for their benefit in a less crude, institutional sense. Those balance sheets. Making the toxic assets (um, legacy assets? or whatever the latest buzzword is?) less toxic.

Separate measures, the “stimulus” stuff, is supposed to be doing the separate job of “getting the economy moving again.” Or is it? This administration has no clue. [I was no fan of the last one, by the way, and don't regret the change -- but I have to call things as I see them.]

The interaction of PPIP with the mark-to-market changes gives us another form of the same logical incoherence.

Under a good deal of pressure from the administration and its friends on Capitol Hill, the FASB gave in on mark-to-market, allowing for certain assets to be kept on the bank’s books at higher nominal value than previously. Not unsurprisingly, this has reduced the incentives of the same banks to sell those assets to the public-private hedge funds the administration is trying to create.

Hold them or fold them? You can demand of a card player that he do one or the other. But you can’t coherently demand that he do both at the same time.

Chrysler won’t be liquidated? I’m not so sure. But a higher probability is they will end up as the no-name contract OEM for other brands, with perhaps a residual amount of their own vehicles to pretend that it’s still part of the Big Three. The outsiders probably won’t be Fiat, which was a daft idea anyway, but other Euro and Asian companies.

Posted by Observer | Report as abusive

Slip of the keys there — I meant that Chrysler is likely to be a contract -supplier- to OEMs. This is a not uncommon thing in Europe where a bunch of no-name companies make cars for the big brands.

Posted by Observer | Report as abusive