This week I want to discuss the additional government loans being proposed for the automobile giants GM and Chrysler, and expand my belief that the US and other governments’ must take ownership of their banks’ ‘bad assets’.
As regards the loans for Chrysler and GM, the very same issues were debated 30 years ago prior to the US Congress approving the first such government loan for Chrysler. The US was then, as now, in the midst of a severe economic downturn, and the bankruptcy of what was then America’s 10th largest manufacturer was considered unthinkable to many US citizens. So what was the end result of that government loan?
First, Chrysler proceeded to develop and produce its first front-wheel-drive small cars, which in turn helped it double its car range’s corporate average miles-per-gallon. Then Chrysler paid off the US taxpayer guaranteed loans in 1983, resulting in a net profit for taxpayers of over $350m. Excuse me, but I happen to think a $350m profit on a four-year, $1.5bn loan sounds pretty good.
Having said that, I’m not so sure US taxpayers should also do so in the case of Chrysler this time. Unlike GM, Chrysler is no longer a publicly held stock company like it was back in 1979. Cerebus Capital, a huge private equity fund owned by a large group of well heeled private investors, bought Chrysler from DaimlerChrysler 18 months ago, to get its hands on its lucrative auto finance subsidiary. Even back in 2006 and 2007 when Cerebus made the acquisition, Cerebus CEO John Snow and his wealthy investors knew there were risks associated with such acquisitions. As such, I don’t think it’s fair to provide more government loans to help Cerebus unless its investors decide to put more of their own money into Chrysler as well.
The US government also has recent experience in dealing with the toxic assets of America’s financial institutions. The Resolution Trust Corporation (RTC) was a US government-owned asset management company created by Congress in 1989 to deal with the savings and loan crisis of the 1980s. So what kind of job did it do?
Congress initially gave the RTC $50bn to clean up the S&L mess, but the RTC wound up needing three additional infusions of taxpayer funds over six years because the situation proved much worse than expected. In the end, according to one study, taxpayers took a $124bn loss on the RTC’s total assets of $394bn. It doesn’t bode well for the present.
But just as there was a silver lining to those US government loans to Chrysler back in 1980, I also think it’s possible that taxpayers in the US and other nations could actually end up seeing a profit. For instance, Governments could get warrants when they acquire such assets that would convert to bank stock when the government sells them, and hire private equity managers to ensure that the assets are sold only when the time is right. I think these kinds of arrangements will allow governments to extract some gains for taxpayers once the recession ends, so that taxpayers will actually see some profit from the financial bailout.
Charles Laffiteau is a lifelong US Republican from Dallas, Texas who is currently pursuing a PhD research programme in Environmental Studies at Dublin City University
