A plea (on the auto industry bailout)

The Republican senators in the Senate last night blocked the auto bailout under the following pretext: the demands for steep cuts in pay and benefits for the automobile workers were not met. Yes, following textbook style Republican governing, they have again asked the workers to make sacrifices whilst making no attempt to hold the management responsible. They have managed to turn this into a ‘the result of workers getting undue benefits is killing the US auto industry’.
At this point the auto bailout looks like a non starter in the Senate. The White House should act now and act decisively. The government must use the funds from the TARP bill to bailout the auto companies. No, I do not think the management at Ford, GM and Chrysler deserve the bailout, but I think the workers deserve it. There are a million or more that will be affected if this does not happen. Three months back Sec. Paulson managed to convince a doubting Congress to fork over $700 billion to save companies on Wall Street. Companies that make money off other peoples money. Companies that have no real infrastructure save people sitting at terminals and betting on outcomes that they scarcely understand. Companies that do not produce or manufacture tangible products save for pieces of paper whose values depend on other pieces of paper… ad infinitum. Detroit made decisions, pursued bad choices and was led by bad managers. As part of the bailout, the government should go ahead and change the management, restructure management benefits and legislate the closure of brands that make no sense. The government should not punish workers that have done nothing other than follow the bidding of managers who were short sighted. Moreover, from a pragmatic viewpoint, the fallout from a million people losing their jobs as a result of these companies going under could have severe repercussions not just for the economy, but socially and morally as well.


Another major argument laid out by the Republicans in fighting the bailout is a story claiming that an average autoworker rakes in $73 dollars an hour. That is a pile of garbage. A breakdown of how the $73 is divvied up here: (The representative image above has been ripped from the article).

The calculations show, accurately enough, that for every hour a unionized worker puts in, one of the Big Three really does spend about $73 on compensation. So the number isn’t made up. But it is the combination of three very different categories.

• The first category is simply cash payments, which is what many people imagine when they hear the word “compensation.” It includes wages, overtime and vacation pay, and comes to about $40 an hour.
• The second category is fringe benefits, like health insurance and pensions. These benefits have real value, even if they don’t show up on a weekly paycheck. At the Big Three, the benefits amount to $15 an hour or so

Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour.

• The third category is the cost of benefits for retirees. These are essentially fixed costs that have no relation to how many vehicles the companies make. But they are a real cost, so the companies add them into the mix — dividing those costs by the total hours of the current work force, to get a figure of $15 or so...

Please do not fall for the $73/hr number!! It is actually closer to $50.

On what we could learn from the Chinese regarding bailouts

Today was yet another great day for bailouts. Firstly, there was yet another bailout of the beleaguered insurance giant AIG, then there was news that the Treasury Department on the sly decided to give American banks a tax windfall of $140 billion and thirdly, there was news of a half a trillion dollar Chinese bailout. OK, now why am I mixing the Chinese bailout with similar measures taking place here? Well, it is indeed interesting to see how these monies are being put to use. To get a quick idea on the differences between the plans hatched by the Treasury as opposed to the Chinese in bailing out, it is instructive to see the details. Or, maybe it is even time to learn from the Chinese.

On what the Chinese would do with their bailout:

At a time when major infrastructure projects are being put off around the world, China said it would spend an estimated $586 billion over the next two years — roughly 7 percent of its gross domestic product each year — to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.

On the sly tax windfall to US banks:

Late September, the Treasury Department issued a five-sentence notice that attracted almost no public attention. Administration officials had just given American banks a windfall of as much as $140 billion. The change to Section 382 of the tax code came after a two-decade effort by the Republican administration to eliminate or overhaul the law. Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

On bailing out AIG again and yet again:

The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough. As part of the new revision announced today, the Federal Reserve said it would reduce that credit line to $60 billion. When the reorganized deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise.

So just to get this clear:

• China spends its bailout money on actual projects like infrastructure additions that benefit its citizens and in turn keep the economy humming and productive.
• In the United States, the Treasury decides to award tax write-offs to banks that shelter their profits from taxation by acquiring shell companies whose real value indicates losses on their books, but then manage to offset imaginary losses with actual capital gains to avoid any payment of taxes.

Flawed on many levels

Below are four news snippets that have hidden issues associated with the $700,000,000,000.00 bailout in the papers today: The first smacks of 'inbred nepotism', the second an instance of 'the fox guarding the henhouse', the third reeks of 'siphoning public cash to the CEOs' whilst the fourth talks about 'a clear conflict of interest'.

• The Treasury Department said that it would soon post help-wanted ads on its Web site for asset managers to run the bailout program and that because of the urgency, the hiring may be “through other than full and open competition.”
• Former Goldman Sachs employee, Neel Kashkari has been appointed the bailout czar and will lead the bailout. By the way, a useful way to pronounce this Indian last name is ‘Cash Carry’ per Michelle. Fitting indeed.
• Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities. The move would put more taxpayer dollars at risk. Buying commercial paper could open the Fed to difficult conflicts of interest, because it would be juggling the goals of protecting its investment portfolio with its traditional goals of promoting stable prices and low unemployment.
• Administration officials plan to outsource almost the entire bailout effort, which will largely rely on “reverse auctions” in which the government accepts bids from financial institutions that want to sell their troubled assets. The Treasury is accepting bids only from experienced investment managers, almost all of which are likely to be either sellers or buyers of mortgage-backed securities.

Is it any wonder that the economy is in shambles? Meanwhile, the presidential candidates seem to be busy launching personal attacks at each other. Nero fiddles while... The bailout looks more and more like a big 'up yours' neon sign out of D.C.

Photos of Kwang-Young Chun's mulberry paper on small polystyrene form sculptures at the Robert Miller Gallery (exhibition on from Sept 4 - Oct 11)