Bailouts: The Ultimate Double Standard
by Robert Kuttner



Imagine if the automakers had been offered the same kind of government assistance as the banks. Detroit's Big Three would each get new government capital totaling many tens of billions to replace their lost equity, as well as government guarantees running into the hundreds of billions. And government, oddly, would ask almost nothing in return. There would be no "car czar" to supervise Detroit's management, no wage and benefit cuts for employees, no review of product lines, and no government-mandated restructuring plan. A pretty sweet deal.

But that's basically what the banks got. You might think that the banks had some friends in high places -- friends like Treasury Secretary Hank Paulson, former CEO of Goldman Sachs where Robert Rubin once was co-chairman; or Tim Geithner, president of the New York Federal Reserve Bank and treasury-secretary designate, a protégé of the same Robert Rubin who now is a senior executive of Citigroup.

The contrast between the proposed auto bailout and the bank bailout gives new meaning to the term "double standard." And the case of Citigroup is a very instructive place to begin.

Citigroup, once a trillion dollar behemoth, is one of America's largest three banks (the other two are JP Morgan Chase and Bank of America), and by any normal measure Citigroup is insolvent. Without the extraordinary infusions of government funds that Citigroup has received, it would be out of business.

Under the $750 billion bank bailout legislated by Congress at Paulson's urgent request, the initial idea was to buy up toxic securities clogging the balance sheets of banks, Paulson resisted the idea of giving the Treasury authority to aid the banks directly. In fact, the Democrats added this provision to the emergency law over Paulson's objection. Paulson, however, soon found that his half-baked plan to take securities off the banks' hands was unworkable. So he quickly reverted to the direct aid that he had opposed.

Citigroup got an initial $20 billion; then when its collapse seemed imminent it got another $25 billion in late November. Its stock price, which had been hammered, briefly doubled. The idea behind the bailout was to enable banks to resume normal lending, but so far the main beneficiaries have been bank stockholders and executives. In addition, Citigroup got another $306 billion in guarantees of those toxic securities. If they turn out to be worthless, the taxpayer pays.

What did the taxpayer get in return? Precious little. Citigroup has temporarily suspended paying dividends, and its executive compensation plan must be reviewed and approved by the Treasury. But there is no across-the-board pay cutting, no talk of top management giving up perks or working for a dollar a year, no government seats on Citigroup's board. And the Treasury is startlingly incurious about how Citigroup is running its business. There is to be no comprehensive review or restructuring along the lines of what is in store for automakers.

Citigroup will probably be back for more aid. But few commentators have been asking the question that is so widely posed when it comes to the auto industry: What if Citigroup went bust?

It would be a calamity if Citigroup just collapsed, the way the smaller Lehman Brothers did in September, triggering the stock market crash. But if the government were to conclude that Citigroup was insolvent rather than just throwing money at it, and sold off its healthy pieces to other banks while disposing of its devalued securities, the real world consequences would be fairly minor. Mainly, Citigroup's shareholders would be wiped out, but they have already lost most of their investment.

Indeed, one could make a good case that the effects of the auto industry collapsing would be far more serious than the orderly liquidation of Citigroup. In the case of Citigroup, other banks would simply pick up the business. But the auto industry is one of the two linchpins of American manufacturing, the other being aerospace. The spillover consequences to the economies of several states would be immense.

So why is the government indiscriminately throwing money at Citigroup while it is putting the auto industry through the wringer for a far smaller sum? The answer is that Wall Street enjoys far more political influence than any manufacturing industry. And as a consequence of that outsized influence, politicians, especially the crew currently running the Treasury (who come from Wall Street and will return to it), are largely passive when comes to insisting on changes in bank's business as usual. By contrast, most politicians will not give aid to automakers without a good hard look under the hood.

This saga suggests two policy conclusions. First, there needs to a single standard for all industries getting government aid, with plenty of accountability. Deciding just to let these wounded industries collapse may seem smart on the Wall Street Journal editorial page (which has now been proven utterly wrong in its extreme faith in markets) but it would be a disaster for the real economy. However with taxpayer aid must come greater accountability.

And that leads to the second conclusion. It's time for some serious public institution building. The Treasury has neither the will nor the competence to closely monitor and restructure Citigroup and other large banks now getting emergency aid because of the misfeasance of their executives. Not does the government have the capacity to help Detroit restructure the auto industry (An ad hoc "car czar" just won't do it, any more than Hank Paulson's ad hoc bank ubailouts have done it.)

We need something like the Reconstruction Finance Corporation of the 1930s, which did not just put money into failing corporations and banks, but actively managed turnarounds. And this, gentle reader, takes us into the long-forbidden territory of industrial policy -- a concept that both Republicans and Democrats, for thirty years, have been dismissing as a sin against free markets. How could the government possibly know enough to "pick winners"? That was the job of the free market, so the argument went.

Thanks to the general hostility to industrial policy, we have lost one industry after another and sent others offshore. And we are losing competitive races in industries like renewable energy where American technology was once the pioneer. Many of America's success stories, like aerospace and biotech and the internet, have in fact been the result of unacknowledged industrial policies; spinoffs of defense spending or biomedical research. These government policies did not pick winners; they created winners. But that result had to be incidental, because it was ideologically forbidden for industrial success to be the goal.

Lately the free market has been picking losers, big time. Worse, it has been creating losers, often out of once-sound enterprises. And the much maligned government has been picking winners. Actually it has been picking survivors in a helter-skelter process of triage, ever since Paulson and Fed Chairman Ben Bernanke began their spree of emergency interventions in the summer of 2007.

Bear Stearns going down the tubes? Yes, let that one live, but with a shotgun merger. Here's $29 billion. Lehman Brothers? Absolutely not, time to draw the line. Oops, better save A.I.G. before it takes the whole economy down Here's another $85 billion. Better make that $135 billion. Citigroup? Whatever it takes.

The problem is not that government, in an emergency, is picking winners. With the economy tottering on the edge of a depression, there's no good alternative. The problem is that Paulson and company, who do not really believe in government, have been doing a lousy job at it.

The new Obama administration has to create a lot of government capacity and competence if it is to save the private sector from its self-inflicted wounds. And it needs a single standard.



© 2008 The American Prospect
Robert Kuttner is co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. He was a longtime columnist for Business Week, and continues to write columns in the Boston Globe. He is the author of Obama's Challenge and other books.

http://www.commondreams.org/view/2008/12/16-8

The politicians didnt mind giving all that money to Wall Street but they can't do the same thing to help out the working man.

Its so bizzare I am suprised people are not pissed off. Its like the american people have become content to low paying jobs. No one demands that the fat cats who created this mess take pay cuts or give up benefits. What has become of we americans that we are content with hand to mouth employment. Do you not wish your kids to go to collage? do you not wish to retire with dignity with some type of health care. WTF is wrong with this country ? have we all become sheep ?

Why not force the banks to loan them the money. They got all that money and lending is still tight. Its is a double standard but thats what America has become. Its a knife in the back to all blue collar workers!!!

If only we would work for a bowl of rice then we could compete.

No chop sticks, you have to use your fingers. That would be considered a unnecessary benefit Its is so wrong people need to speak up. Its just not the big 3 but hundreds of smaller factories the industry created to cut costs in the early 80s. The union has done nothing but make concessions for 20 yrs!!!

and the fat cats got richer and richer

prove it. Seriously. I would love to see a single concession by the UAW that did not result in another gain.



Wall street bailout was a load of ****. it was rushed and poorly executed. and honestly, not necessary because either way, we have the same issues due to it's poor dictation and execution.

the auto bailout, however, is even more unnecessary. all it will do is perpetuate greed, poor management, and corruption in the UAW. Ford will hold their own. Chrysler's owner is ungodly rich and needs no bailout.

bailing out the auto industry will simply delay recovery. if the industry takes a major hit in one area, others move in to fill the gap and make more money. that's how capitalism works. by perpetuating a failing business, you do not allow this movement to happen and everyone stagnates. this is exactly why it took WWII to pull us out of the great depression.

I am greatfull you are not a politician

I've come to the conclusion you cannot ever dispute any of my points and instead turn to insults in your ignorance.

I am sorry if you took it wrong, even bush admits they must be bailed out to help save this god awful economy created by an un restrained free market

I beleive if you know me I spoke out against the wall street bail out. I was totally against it. The banks have the money to lend the auto industry but wont. WHY????? They got bailed out! Why dont they loan the money to the big 3???? If that is not a double standard what is? I fear what all this paper is going to do. A recession is a good thing. Prices drop!! Yes business fail and so do governments!!!!! But hey who am I??? I just one of the suckers paying for it!!

so... because the man you deem the idiot of all idiots says it needs to be done, it needs to be done? nope. not buying it. Bush it trying to make sure the last thing he does in office is not having the auto industry fall on his watch. not his fault in anyway, but he will be blamed for it regardless.

and out of curiosity, why would I make a bad politician? serious answer, not some blanket statement.

Even the worst politican (Bush) admits they cannot fail and you the novice say they should. simple. For thefirst time in 8 years Bush is right about something, I will give him credit for that

simple economic analysis. it doesn't take a PhD to see it. then again, you've more than established you have no idea how a capitalist system works.

and in case you haven't noticed, politicians do nothing but help themselves. bush is only going along with it because he's trying to save his own reputation.

It seems to me it isnt working all that well. Its past my bedtime have a good night

I guess this is the unions fault too?

NISSAN said it will cut another 500 jobs in Japan and reducing production as the global economic crisis saps demand for cars.

Japan's third largest automaker said it would reduce output by 78,000 cars from January to March by cutting shifts or operating days at plants.

The 500 workers are all on temporary contracts. With the cuts, Nissan will no longer have any contract workers at its factories in Japan, a company spokeswoman said.

Nissan said it had decided to "manage inventory levels and ensure a balanced production supply in response to continued declines in global vehicle sales.''

Nissan, whose net profit slumped by more than 40 percent in the first half, said in October it was slashing 3500 jobs worldwide.

It had already in recent months said it would cut production by 137,000 vehicles, mostly luxury cars and sports utility vehicles that had been meant for export to the United States, which has seen demand plummet.

Ironically the democrats who have been given total support by the UAW were the ones who voted for the banking bailout, but against the auto bailout.

I strongly opposed the banking bailout, but our current plan of using TARP money for automakers is actually an improvement since aid to automakers is less wasteful than aid to banks.

is this what you think? here are the facts
The 52-35 roll call by which opponents on Thursday prevented the Senate from considering a $14 billion emergency bailout passed by the House for U.S. automakers.

On this vote, a "yes" vote was a vote to formally consider the House bill and a "no" vote was a vote to stop its progress. Supporters of the bailout needed 60 votes to advance it.

Voting "yes" were 40 Democrats, 10 Republicans and 2 independents.

Voting "no" were 4 Democrats and 31 Republicans.
http://www.startribune.com/politics/national/congress/36029284.html?elr=KArks8c7PaP3E77K_3c::D3aDhUec7PaP3E77K_0c::D3aDhUiacyKUnciaec8O7EyU

The roof...the roof...the roof is on FIRE.

F*ck it. Let it all burn burn burn. No bailouts for anybody.

Its what they deserve...hell, its what we deserve too for sitting passively by like fatted cows and letting it get this bad, all the while our brains are turned into tapioca by the media and their corporately sponsored spin telling us "its all good baby, dont worry, just keep buying stuff".

We dont need no water let the muthaf*cker burn...

Its also what's needed for a REAL paradigm shift. The "system" has been failing most of us for ages and now its real cost is coming due.

I don't NEED a friggin gas-chugging Hummer, or digital cable bringing me the latest in mind-numbing advertising for MORE worthless crap I don't need. And I certainly don't NEED a sooper-dooper high speed digital anything.

Its all just more crap that's used to suck more dollars out of everyone's pocket, so that CEO's can drop deuces in their 24k gold toilets in the 9th guest bathroom of their 4th mansion.
In 3rd world countries, the media calls those kinds of people Despots, Tyrants, and evil Dictators. Here in "Amurrica" we call those evil f*cks "successful businessmen".

The real "axis of evil" is the consumerism/credit/debt system forced down our throats through "clever" advertising and the very American disease of over-consumption. This slow economic slide into the abyss has been coming for a long time.

Burn muthaf*cker...burn...

I only hope we learn from it and f*cking regulate the crap out of the assh0le industries responsible. But of course, I doubt that responsible oversight will happen.

Because the real problem, as illustrated by the OP article, is that the elitist scum responsible have no fear of reciprocity because they're protected from on high by our own taxpayer-funded POLITICIANS that they bought and paid for with our OWN consumer dollars.

It all needs to burn, and burn to the ground unless we can find a way to get some...wait for it...ACCOUNTABILITY AND RESPONSIBILITY (shocking concept isn't it?) from the pricks (our lovely Gov'mnt) in charge whom are supposed to be BY THE PEOPLE AND FOR THE PEOPLE.

Heh...that'll be the fcuking day... so as far as I'm concerned...burn baby burn.
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