Harold Meyerson's Post column notes one of the more galling policy contrasts going today: The difference between the auto and banking bailouts. As Harold says, the auto bailout "gives the public a stake in the company in return for its loans...scraps the old management and board of directors, and downsizes the company to a point where the government believes it can become profitable again." Conversely, in bailing out Wall Street bailout, "Treasury has not opted for structured bankruptcy, has not converted its loans into shares, has not forced out top executives, has not moved to make banks smaller." Why, Harold asks, is there such a difference? "Could it be that the leaders and folkways of American banking are familiar to the men who run the Treasury, while the leaders and folkways of the American auto industry are not -- meaning that they can assess Detroit more dispassionately than they can Wall Street?"
That could certainly be part of it. And emotionally, I'm sympathetic to that read. But the bigger bit is simply this: Detroit is not too big to fail. And Chrysler certainly was not too big to fail (what happens to GM remains an open question). The auto manufacturers are big enough that we don't want them to fail. But the underlying reality of the negotiations is that we can live without them. They can't live without us. That gave them just enough juice to be saved. But it didn't give them enough to dictate the terms of the rescue.
That's not been true with Wall Street. The bankers know perfectly well that their collapse means our economy's effective end. Worse, their simple resistance means continued economic unrest. You've heard the old line that the market can stay irrational longer than you can stay solvent? Well, banks can hide insolvency longer than politicians can remain popular. And given that the administration does not believe it has the capacity to sweep in and assume control, the banking industry holds a helluva bargaining chip.
The main lesson of all this is that society cannot permit the existence of private institutions that are too large to fail. And that's not only because they might eventually fail and then we are on the hook for their liabilities. It's also because the lesson of the bailouts -- both the auto and banking bailouts -- is that you desperately want to become too big to fail. You get better terms from the government. You're protected from bankruptcy and insolvency. You have tremendous access to the halls of power. You get a seat at the bargaining table rather than before the bankruptcy judge. Reaching "too big to fail" status is like being kinged in checkers. The rules give you special powers and subsidies. Now that those advantages have been exposed, companies will have much more obvious incentives to chase size. Unless, of course, we stop them.
Image used under a CC license from Flynn Wynn..