Bankruptcy

Citi and GM

By Adam Levitin

If I were a line-worker at GM, I?d be pretty pissed right now. My boss flew into DC on a private plane and came away with bupkes. Citi, on the other hand, just got a fourth big bailout. (Bailout 1: Bear Stearns; Bailout 2: AIG; Bailout 3: TARP preferred share investment; Bailout 4: the Citi-specific bailout. The first two bailouts propped up Citi and other financial institutions by protecting their counterparties.)

What?s most troubling about the GM non-bailout and the Citi bailout is the disparity in the moral hazard angle. It seems to me that from a moral hazard perspective (and I recognize that is not the end all and be all here), we have our bailouts exactly backwards.

GM?s fundamental problems are not the creation of current management. These are problems that go back decades and were inherited by current management. GM?s fundamental problem is not whether it was pushing fuel-efficient vehicles are not. GM?s core problem is that it was and is paying its blue collar workers above-market wages (including benefits).

Citi?s problems, on the other hand, are very much the making of many current Citi managers. Many of the same folks who made bad bets on the market and gambled on unknown and untested speculative products are still working at Citi. Bailing out Citi, but not GM thus strikes exactly the inverse moral hazard chord. We are letting people off the hook for their own irresponsible behavior while refusing to help those who inherited deep-seeded problems of others? making that arguably helped the economy overall (see below). That's perverse.

To be clear: I don?t like the idea of just throwing money at GM. Federal funding without a viable business plan is a waste of taxpayer dollars. But when we think about GM's past management mistakes, it's worth framing the counterfactual: GM's in trouble because it paid above-market wages to blue collar workers. But would we rather than GM have not paid above-market wages to blue collar employees?

I think it's hard to answer this with an unqualified affirmative. The rest of us might have been able to purchase marginally cheaper cars from GM, but that's not a huge boon, because we were already able to purchase cheaper cars from other auto makers. Sure, GM might have forced inefficiently high wages at competitors, but the cost savings here strike me as small. Moreover, by paying blue collar employees above market, GM contributed substantially to the economy. These employees went to spent the money on consumer goods. And the money GM paid for health care meant that there were fewer demands on public health care resources. It is hard to argue conclusively that GM should have been squeezing blue collar employees or that the country would be better off if GM had done so. For better or for worse, GM's problems are part of a story of democratized prosperity in the post-WWII years, and the bill for that party is catching up with us now. The whole country benefitted from democratized prosperity in a way we didn't from a brief exploding mortgage boom. And that's why I'm so bothered that the taxpayers are being asked to pay for the later, but not the former. We've gone through the bailout looking glass.

Full post as published by Credit Slips on November 24, 2008 (boomark / email).