Published on Tuesday, December 16, 2008 by The American Prospect
Bailouts: The Ultimate Double Standard
by Robert Kuttner
Imagine if the automakers had been offered the same kind of government
assistance as the banks. Detroit's Big Three would each get new
government capital totaling many tens of billions to replace their lost
equity, as well as government guarantees running into the hundreds of
billions. And government, oddly, would ask almost nothing in return.
There would be no car czar to supervise Detroit's management, no wage
and benefit cuts for employees, no review of product lines, and no
government-mandated restructuring plan. A pretty sweet deal.
But that's basically what the banks got. You might think that the banks
had some friends in high places -- friends like Treasury Secretary Hank
Paulson, former CEO of Goldman Sachs where Robert Rubin once was
co-chairman; or Tim Geithner, president of the New York Federal Reserve
Bank and treasury-secretary designate, a protégé of the same Robert
Rubin who now is a senior executive of Citigroup.
The contrast between the proposed auto bailout and the bank bailout
gives new meaning to the term double standard. And the case of
Citigroup is a very instructive place to begin.
Citigroup, once a trillion dollar behemoth, is one of America's largest
three banks (the other two are JP Morgan Chase and Bank of America), and
by any normal measure Citigroup is insolvent. Without the extraordinary
infusions of government funds that Citigroup has received, it would be
out of business.
Under the $750 billion bank bailout legislated by Congress at Paulson's
urgent request, the initial idea was to buy up toxic securities clogging
the balance sheets of banks, Paulson resisted the idea of giving the
Treasury authority to aid the banks directly. In fact, the Democrats
added this provision to the emergency law over Paulson's objection.
Paulson, however, soon found that his half-baked plan to take securities
off the banks' hands was unworkable. So he quickly reverted to the
direct aid that he had opposed.
Citigroup got an initial $20 billion; then when its collapse seemed
imminent it got another $25 billion in late November. Its stock price,
which had been hammered, briefly doubled. The idea behind the bailout
was to enable banks to resume normal lending, but so far the main
beneficiaries have been bank stockholders and executives. In addition,
Citigroup got another $306 billion in guarantees of those toxic
securities. If they turn out to be worthless, the taxpayer pays.
What did the taxpayer get in return? Precious little. Citigroup has
temporarily suspended paying dividends, and its executive compensation
plan must be reviewed and approved by the Treasury. But there is no
across-the-board pay cutting, no talk of top management giving up perks
or working for a dollar a year, no government seats on Citigroup's
board. And the Treasury is startlingly incurious about how Citigroup is
running its business. There is to be no comprehensive review or
restructuring along the lines of what is in store for automakers.
Citigroup will probably be back for more aid. But few commentators have
been asking the question that is so widely posed when it comes to the
auto industry: What if Citigroup went bust?
It would be a calamity if Citigroup just collapsed, the way the smaller
Lehman Brothers did in September, triggering the stock market crash. But
if the government were to conclude that Citigroup was insolvent rather
than just throwing money at it, and sold off its healthy pieces to other
banks while disposing of its devalued securities, the real world
consequences would be fairly minor. Mainly, Citigroup's shareholders
would be wiped out, but they have already lost most of their
investment.
Indeed, one could make a good case that the effects of the auto
industry collapsing would be far more serious than the orderly
liquidation of Citigroup. In the case of Citigroup, other banks would
simply pick up the business. But the auto industry is one of the two
linchpins of American manufacturing, the other being aerospace. The
spillover consequences to the economies of several states would be
immense.
So why is the government indiscriminately throwing money at Citigroup
while it is putting the auto industry through the wringer for a far
smaller sum? The answer is that Wall Street enjoys far more political
influence than any manufacturing industry. And as a consequence of that
outsized influence, politicians, especially the crew currently running
the Treasury (who come from Wall Street and will return to it), are
largely passive when comes to insisting on changes in bank's business as
usual. By contrast, most politicians will not give aid to automakers
without a good hard look under the hood.
This saga suggests two policy conclusions. First, there needs to a
single standard for all industries getting government aid, with plenty
of accountability. Deciding just to let these wounded
