GM And The Game Of Chicken With Elites

The auto industry is coming up repeatedly today, in the context of how the UAW was forced to cancel their contractual obligations and take wage concessions while the AIG bonus babies were not. But what about the actual state of the auto industry, which despite those concessions, remains precarious? Last week GM stated it didn't need any federal money in March because their cost-cutting efforts were going well. But that's based on winding down elements of the business, not selling cars, and eventually all the cost-cutting in the world cannot save GM. The task force assigned to look into the situation is talking about structured bankruptcy:

Treasury officials and management experts hired by the Obama administration quietly began combing through General Motors’ latest downsizing plan in Detroit last week, in a last-minute effort to assess whether more government aid could make the company viable, or whether the better choice was a managed bankruptcy [...]

While administration officials say that no final decisions have been made, they appear to be giving more consideration than they were two months ago to a quick, managed bankruptcy. Mr. Obama has said he wants avoid that option, because it could further unnerve investors and radiate out through the company’s network of suppliers and dealers.

But the threat of a bankruptcy filing may be the only way to force concessions from bondholders, who hold $27 billion of the company’s unsecured debt. So far, the bondholders have shown little willingness to negotiate over a G.M. proposal that would give them a fraction of the face value of the bonds — as little as 16 cents on the dollar for some bonds in a deal that could leave them holding what may turn out to be worthless equity in G.M. The president’s task force has added a bankruptcy lawyer, Matthew A. Feldman of Willkie Farr and Gallagher, to its team, though officials said that the timing was somewhat coincidental because they had been seeking Mr. Feldman’s help for some time.

The face-off with the bondholders has quickly become a high-stakes game of chicken. The bondholders appear to be betting that Mr. Obama is not willing to take the political risk of letting the company that once defined the American car industry go bankrupt, a step that could render their bonds worthless.

This is starting to sound a lot like the AIG hijacking. The stakeholders, be they bondholders or corporate executive, expect the Obama Administration to play ball and allow them to stay in power, despite the cost to the taxpayer. The unions have given concessions over and over again without one hair being plucked from a bondholder's head. Ultimately, all of the decisions in the greater economy are coming down to this. Will anyone break the backs of the elites?

PAUL SOLMAN: Of all the cultures you’ve studied that have tried to deal with severe economic dislocations, what’s the marker of resiliency?

JARED DIAMOND: It seems to me that one of the predictors of a happy versus an unhappy outcome has to do with the role of the elite or the decision-makers or the politicians or the rich people within the society.

If the society is structured so that the decision-makers themselves suffer from the consequences of their decisions, then they’re motivated to make decisions that are good for the whole society, whereas if the decision-makers can make decisions that insulate themselves from the rest of society, then they’re likely to make decisions that are bad for the rest of society.

PAUL SOLMAN: Case in point, says Diamond, the place they call the city of New Orleans.

JARED DIAMOND: One could ask, why is it that, for 10 years, people around New Orleans dithered and they wouldn’t adopt these plans for a few hundred million dollars to build the dikes? And part of the reason is that there’s geographic segregation in New Orleans, where the rich people live on the higher ground and knew perfectly well that they were less exposed to problems from flooding.

PAUL SOLMAN: Compare that to the Netherlands, he says, where the system of dikes is considered one of the seven wonders of the modern world.

JARED DIAMOND: There aren’t any mansions on top of the dikes. Everybody is living down below in the polders. And they know — the politicians and rich people know that, if the dikes failed, they would drown. [...]

PAUL SOLMAN: But to the extent that this economic dislocation affects the wealthy, that’s good?

JARED DIAMOND: I think I would like to see the rich suffer even more and — and the politicians suffer even more.

PAUL SOLMAN: Because it would be good for us?

JARED DIAMOND: Yes, because they would then be motivated to solve all of our problems, and they wouldn’t have the sense that, “It’ll be OK for us.”

With respect to the auto industry, we're talking about a negotiation tactic. Bob Nardelli at Chrysler is showing where he lines up by saying his company would not survive a bankruptcy. But really, this can be assumed about the entire economy. Either we tell the banksters they can float on their own or we bail them out. Either we fire AIG's entire Financial Products division or they get paid. The counter-attack that the elites make is that the economy will blow up if they aren't taken care of. Notice the passive construction ("the economy will blow up") instead of an active one ("We will blow up the economy"). That this is their fallback position says a lot about the pathology of the opposition. And yet, as Mr. Diamond says, only by offering the motivation to problem-solves will the elites actually bother to do so. That's why nationalization is the capitalist option.