David R. Henderson  

J.P. Morgan v. Obama

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It isn't that common any more to find evidence of one of the bailed-out banks making a good decision with its money in the face of government pressure. But the weekend Wall Street Journal reported on such a case. J.P. Morgan and a few other banks that lent $6.8 billion to Chrysler are resisting President Obama's pressure to ignore their self-interest. As Journal reporters John D. Stoll, Jeffrrey McCracken, and Kate Linebaugh put it:

As holders of secured debt, they have the right to take control of Chrysler plants, brands and other assets, which were pledged as collateral for the loans, if the company files for bankruptcy protection.

The Obama administration has different plans. It wants Morgan and other banks to swap $5 billion of that debt for stock. But the banks think they can do better in a liquidation of Chrysler. The Journal reporters write:

If Chrysler were to liquidate, billions of dollars in assets would be broken up and sold, with the first-lien lenders getting first dibs. J.P Morgan and other lenders are convinced they would have higher recoveries in a liquidation, compared to what the administration is asking them to accept now, said several people familiar with their thinking.

There are at least two ironies here. First, a huge majority of commentators has been criticizing banks for the last year or so for placing bad bets. Now we have evidence that banks are trying to make a good decision and they are getting heat from the government. Will the critics of banks, many of whom were justified in their criticisms, now step forward and defend both the right of banks to make such decisions and the wisdom of such decisions?

The second irony is that so many people have blamed deregulation for the financial problems we are in. Yet one of the few deregulations that actually happened was partial repeal of Glass-Steagall so that banks could own shares in companies. (I think this was a good deregulation, although I worried at the time that deposit insurance would create moral hazard.) It is this deregulation that the Obama administration, which is touting the benefits of massive new regulation, is depending on. Without it being legal for banks to own stock (something allowed under the late 1990s deregulation), the action that the Obama administration proposes would be illegal.

Of course, you could argue that because the banks took the bailout money, they should just do what the government wants. But then that would give the lie to the argument that the purpose of the bailout was to get the banks back on their feet so they could make good decisions and would strengthen the argument that the real purpose of the bailout was to give the government more power so that it could politicize financial markets.


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COMMENTS (4 to date)
Boonton writes:

To what degree does JP Morgans estimates depend on GM NOT going bankrupt? Would they still be able to recover more in liquidation if the market was flooded with a fireside sale of GM's brands, factories and assets?

beezer writes:

"Of course, you could argue that because the banks took the bailout money, they should just do what the government wants. But then that would give the lie to the argument that the purpose of the bailout was to get the banks back on their feet so they could make good decisions and would strengthen the argument that the real purpose of the bailout was to give the government more power so that it could politicize financial markets."

I don't think anyone in the Obama admin wants to run a bank, an insurance company or a car company. I sure know Bernanke doesn't.

They got dealt a real lousy hand, top to bottom.

They're basically trying to avoid making everything even worse.

Gamut writes:

bezeer,

I think the question is not whether they want to run these things, but whether they think they can make better decisions than the people presently at the helm -- or, worse, whether they think that they can coordinate the actions of all of these diverse entities toward and end that winds up benefiting each individual member more equitably.

All signs point to this fanatical belief, and it's scary to that despite loads of experience with complexity few of them seem to have matured enough to acknowledge their own limits.

andrew writes:

What a good point about Glass-Steagall. Also, if the managers of Chrysler made poor decisions, there definitely needs to be an overhaul. What better way than taking the assets out from under them? Certainly patronizing them with more equity is not the solution. And besides, with bankruptcy, we wouldn't have to worry about CEO bonuses.

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