Tuesday, March 31, 2009

Double Standard for Auto Industry

I'm going to field this question as I walk out the door because I don't think it's too difficult. Many are wondering why the Obama administration is taking such a hard line with the auto manufacturers while being so tolerant to the banks. Here are five reasons, in no particular order.

1. Banks pose greater systemic risks than the auto manufacturers. Although the effects of auto manufacturers going bankrupt would be immense, it would be worse to let the banks fail.
2. Banks are operationally solvent. Meaning, they have enough money to pay their bills and have only taken money from the Government to comply with regulation. Auto manufacturers can't even pay their bills, which is mostly due to their high labor costs.
3. Auto makers have been losing market share for the last ten years or so. Up until last year, banks have made money every year.
4. The White House is teaming with former Wall Street executives, which may account for why they understand the wall street funk.
5. The automobile industry has a lot more long-term uncertainty surrounding their business model (i.e. cars that run on alternative fuels, etc.). On the other hand, the low interest rate environment has actually helped banks this year as the spread between what they pay the depositors and what they lend is relatively wide. The majority of banks will be profitable this year (by profitable, I mean in a healthy way).


brandonm said...

But the scary thing is that the adminisration is now hinting that weak banks may receive the same treeatment GM did. Look out CEOs, Big Brother looms!

I still don't feel smart enough to say who's right and who's wrong in this mess...

Jenga said...

I think that objectivity is good. However, I would be surprised if the administration actually makes good on that claim.