Academic

Auto Bailout Agonistes

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

For the state of play, one turns to Politico these days:

• The latest word is that the czar will have the power to impose his own plan if he takes the companies to bankruptcy - which really would be socialism: "Come March 31, any of Detroit?s Big Three who fail to comply will have their loans called in by the auto czar and lose any chance of more federal aid. Moreover, the czar will have a third hammer: the power to impose his or her own restructuring plan under a Chapter 11 bankruptcy proceeding."
• Since the TARP will not be used, the funding is coming from already appropriated money from Energy: "The $15 billion in loans would be financed by shifting money from an Energy Department program to speed the production of energy-efficient cars. This decision has angered environmentalists, and, over White House objections, Speaker Nancy Pelosi (D-Calif.) has persisted in her demands that Detroit ? in turn ? drop its litigation seeking to block California?s tougher tailpipe emissions standards."
• The Fed won't use its discount window to bail out the auto companies because of its convenient, and rather cooked up, legal obligation to get sufficient collateral for the low interest money: "But the tone and substance of the chairman?s letter, dated Dec. 5, threw cold water on any such thinking. ?It is unclear whether the auto manufacturers have unencumbered assets of sufficient amount and quality? even to meet the standards needed for the Fed to provide emergency credit in such ?unusual and exigent circumstances,? Bernanke wrote."

As for legal commentary, there' s lots of good stuff out there, including a post from Eric Posner (he takes issue with the "tough oversight" language in my earlier post, and he's right - it isn't so tough, but the czar does have almost total discretion to kill the companies that take loans and fail to restructure to his satisfaction ... whether he could use that power as a political matter is another question), one from my erstwhile co-author Steven Davidoff, and Randy Picker (a nice, and generalizable point about the senior position the US has taken in all of these bailouts - how is that possible without violating the covenants of the other senior debtholders?).

Full post as published by Conglomerate on December 10, 2008 (boomark / email).