Chapter 17: Executive Summary – Where Should the Bailout Stop?

From the book “Restoring Financial Stability: How to Repair a Failed System”. Section VI: The Bailout

Background The massive US Government bailout originally intended for the financial industry has now spread to the non-financial sector, and the government is considering bailing out car manufacturers. This is partly the fault of the financial bailout itself, which was poorly designed and too generous to the financial industry. Unfortunately, history and political economy have taught us that ad-hoc government interventions to bail out industries are a recipe for long run economic stagnation. This does not mean, however, that the government should stay on the sidelines. We propose a set of principles for efficient interventions, and we show how these principles apply in the case of General Motors.

Where should the bailout stop? And what to do about GM

The massive US Government bailout originally intended for the financial industry has now spread to the non-financial sector, and the government is considering bailing out car manufacturers. This is partly the fault of the financial bailout itself, which was badly designed and too generous to the financial industry. Unfortunately, history and political economy have taught […]

Why GM Should File For Bankruptcy with a DIP-Twist Help From Its Friend: The US Government

All this talk about a government rescue of GM and other automakers, involving this struggling and probably insolvent giant, is misguided, likely a waste of taxpayers’ money and a potential further diminution in the credit worthiness of the US government.  It is time now to focus seriously on the gut wrenching question as to whether this American icon should file for bankruptcy as soon as possible or continue to attempt to survive outside the protective confines of the Bankruptcy Courts.  With GM’s financial profile, based on my Z-Score bankruptcy prediction model, now is clearly deep into the distressed firm zone, and with the global economy facing a severe and likely prolonged economic recession, the correct choice is to file for bankruptcy and seek an immediate significant liquidity boost from the post-bankruptcy debtor-in-possession (DIP) financing mechanism.  This traditional option for failing firms will require a unique twist – assistance of the US government as a meaningful player, but at little risk and attractive returns to the US taxpayer.

A Statement by The Financial Economists Roundtable drafted by a committee, chaired by Edward Kane and Richard Herring including Edward Altman and Charles Goodhart

image002_512_24.gif

During the last few decades, securitization has become a primary channel for enlarging financial markets and transferring credit risk from lenders to investors.  Outstanding issues of privately securitized assets peaked worldwide at just under $12 trillion in 2008.[1]