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AUTO-MAKERS' CRISIS: OPINION * USA - Jeremy Siegel's Advice to Big Three: "I think bankruptcy's the best option"
PENN,USA -Knowledge Finance and Investment Research Article -November 26, 2008: -- Before the stock market and the broader economy can return to something that looks like normal, banks must start to lend the billions they are getting from the U.S. Treasury's Troubled Asset Recovery Program... Siegel also discusses the government's rescue of Citigroup and the proposed bailout of the U.S. auto industry...
- Knowledge@Wharton: There's much more disagreement about whether or not the government should act to bail out the automobile industry. That's of great interest to the financial sector, including Citigroup, because they have a lot of exposure there. What's your thinking on the bailout proposal? Is bankruptcy an option?
* Jeremy Siegel (Wharton's Finance Professor): Yeah. I think bankruptcy's the best option. I think there is such mammoth misunderstanding of what bankruptcy at GM and Ford and Chrysler would be. You know, the way the companies talk, the way the unions talk is, they're going to just cease operations, and millions of people are going to be laid off. And then that just trickles through the whole economy. Well, again -- and I have mentioned this before -- look at the airlines. They kept on operating. They renegotiated their labor contracts. They -- you know, re-set all sorts of things. They're flying again. And in fact, some of the analysts say that if gasoline prices and oil prices stay down, they could be quite profitable, moving beyond the recession going forward. Some have even called it promising.... And of course, people say, "Well, you can't do that with GM. Because who would buy the car if they didn't have a warrantee?" Well, GM still has $15 billion, $20 billion dollars. They could put away two or $3 billion in trust with the federal government. This is for all our warrantees. And in fact, if you want some government involvement in it, let the government insure the warrantees. The lemons, if need be. The parts, if need be. That still would be a small fraction of a bailout, without the flexibility that you have with bankruptcy. Because without bankruptcy, they have very limited ability to renegotiate with their unions. And now you have a Democratic Congress, a Democratic President. But the union's sitting there and said, "Hey, they promised us all these health benefits." And that's what's really killing Ford and GM. You know? And which side do you think is going to win on that struggle, over there?...
- Knowledge@Wharton: The auto industry uncertainty is just one of many uncertainties that seem to be tormenting the market these days. Is that the thing that's really missing here, some stability?
* Siegel: The big down-movement the last couple of weeks has been this commercial bank panic. Now it's been shored up a little bit, because basically the government says, "Hey, we're going to stand behind Citigroup, and that probably means we're going to stand behind most of these commercial bank mortgages." The big problem -- really, the big problem is to get the banks to lend. And I don't mean new borrowers. I mean, they must continue the lines of credit to their credit-worthy customers. I've been saying this all along. If I were in the government right today, I would say anybody that took TARP money -- and most of those banks did -- must keep their lines of credit open to their credit-worthy customers. They can't yank them prematurely. They must keep them going for a period of six months. And if they don't like that, then pay the money back to us and you can do whatever you want. But the whole purpose of this was to do lending. And the lending is not taking place...
Labels: automakers' crisis
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