How Will Chrysler Bankruptcy Affect Insolvent Banks?

The Chrysler bankruptcy is a fascinating development in the great financial crisis of 2008-09. It may be a enormously significant milestone in the evolution of the banking crisis and the response from the Obama administration.

Or, it may be that autos and banks are perceived so differently in D.C. that not much can be read into it.

Let’s explore possible reasons potentially supporting the former rather than the latter.

When team Obama hit Washington on January 20 2009, the crisis was in full throat. Markets were plummeting, credit was frozen, and panic was widespread. I give the benefit of the doubt to a new administration to simply withstand the initial waves of fear, stop the freefall, and achieve some stabilization.

Sure, the usual crowd (including my buddy Larry Kudlow) blamed the inherited mess on Obama, as did the speak-first-think-later pundits like James Cramer. I noted at the time the blame was misplaced. I doubt any credit for the rally will be forthcoming; consistency is not the strength of partisans or carnival barkers.

Most DC watchers were disappointed when the Obama team continued the Bush policies of massive monetary giveaways to insolvent firms, run by incompetent management. And the appointment of Larry Summers and Tim Geithner, two people involved in either contributing to the credit crisis or helping to make it worse was not encouraging. The Bush Paulson Bailout policy of shoveling unconscionable amounts of money at these firms were continued by the new Obama economic team.

During W’s reign of error, I was a consistent basher of his ruinous decision-making; I have since been named one of the 14 most most strident critics of Obama’s economic policies. This isn’t partisanship, its legitimate policy criticism.

There is some hope for a break formt he past: Rumors that Rahm Emmanuel and David Axelrod wanted to allow an FDIC recievership/liquidation/nationalization and were overruled by Summers and Geithner were enormously disappointing to many economic observers. Some people think that you are supposed to follow the rule of law and allow the FDIC to do its job. Last I checked, the size of the insolvent bank was irrelevant to whether the bankruptcy and liquidation laws were applicable.

Despite all of those disappointments, the Chrysler bankruptcy is encouraging. Why? Consider the circumstances. Here we are 100+ days later, and some stabilization has occurred. The economic data is still “not good,” but it has become “less bad.” The market has rallied from 6,500 to 8,000, and the sentiment levels have dramatically improved.

This is an environment that should encourage the emergency footing of the economic team to stand down. One would also imagine that David Axelrod and Rahm “never let a good crisis go to waste” Emmanuel will want to push forward on some of the Obama agenda, rather than merely continue the Bush policies.

If there is a time to do so, it would be now.

The bank stress tests will be out in days, and the need for private capital will be a turning point. Rumors that Citibank needs $10B and Bank of America needs $60B are circulating.  The public has been infuriated at all the monies going to the banks, but they still mostly blame W.  If the post panic Obama admin wants to make a break from those policies, forcing the banks to raise private capital or go into FDIC liquidation is the way to do that.

Or,they can continue the Bush policies — a surefire way to “own” the mess they inherited.

Are banks really so different than automakers? So far, the answer has been yes. The policy response has been to pour trillions of dollars into the companies that caused the problem. Perhaps we have finally reached the point where these horrifically expensive, wasteful policies will come to an end.

That would be change we can believe in . . . .

Originally published at The Big Picture blog and reproduced here with the author’s permission.

3 Responses to "How Will Chrysler Bankruptcy Affect Insolvent Banks?"

  1. Guest   May 4, 2009 at 7:50 pm

    To me it appears that Obama has taken the worse of the Bush policys and have gone full speed ahead with them. I do not quite understand how Bankruptcy is good now but was bad in Dec. 08. I thought it would of been the proper thing back than, long over due.

  2. Guest   May 5, 2009 at 9:15 am

    Summers and Geithner may be invested in Bush policies but I can’t believe Obama is. There must be something else. Maybe he’s afraid of the international consequences of massive bank failures and nationalizations. Andy Xie is already writing about the impending collapse of the dollar. Perhaps some convincing analysis connects the two.

  3. Irini Fountoulaki   May 5, 2009 at 10:39 am

    Obama knows nothing of economics or business. He is, however, a master politician. During the elections, he played a magnificent supporting TARP and appearing Presidential surrounded by Summers and Rubin, yet giving the impression that he was against these policies.Not surprisingly as President, he continued them. There are many signs that this ‘spending the way out of the crisis via debt inflation’ is not sustainable and financial resources even in the US are finite.Obama was initially furious about the Chrysler bankruptcy and the government is trying legally to subterfuge the process and turn it into a reorganization. Creditors and the US government are at loggerheads right now.I remain totally confounded how Obama supporters see in Obama whatever they want. It is Obama’s political genius, but no man is infallible and can defy gravity for ever.It will be extremely interesting to see how Obama manages this situation. It will a critical test for him. Let see how he matures in the Presidency!