The Bailout Double Standard

We are told that AIG, Freddie, Fannie, and now Citibank are “too big to fail,” and so the government needs to bail them out or the financial system will implode further. Fine: let’s grit our teeth and do what we have to do. That said, I think the public deserves a more honest discussion about who is to be held accountable for this mess. The talk surrounding the financial bailouts usually focuses exclusively on how to fix the problem going forward. This is perhaps understandable, given that we are still in the thick of it. But there is also a palpable desire to “not dwell on the past.” My suspicion grows when you consider the strong pressure put on the government to give these financial companies bailouts without too many strings attached (i.e.: without limiting dividend payments or executive compensation, and not firing current management). This seems curious to me. I am all for looking forward and focusing on getting out of the mess. But I’d also like to see some accountability—that is, a few heads on pikes.

Now contrast the financial bailout discussion with the auto industry bailout discussion. The financial industry is bailed out first, asked questions later. Meanwhile the executives of the Big Three are raked over the coals in front of Congress, told to write a whole new business plan in 12 days, and then MAYBE they will get the cash, with countless strings attached. I understand that the auto companies have made mistakes in the past. But their current predicament is actually due more to the actions of the people who work in the financial industry than it is due to their own managerial missteps.

When the financial crisis hit, the car companies were in the midst of carrying out a long and arduous re-organization process. The United Autoworkers had made major concessions during the most recent contract negotiations, which were begun mid-contract. In other words, the union agreed to negotiate before they were obligated to because they realized the companies were in jeopardy if the union did not make emergency sacrifices. In addition, all three companies have actually been making pretty decent cars for the past few years. At the beginning of 2008, The Big Three were moving towards North American profitability. And don’t take my word for it; Wall St. thought so, too. General Motors stock was as high as $40 in October of 2007, which was 100% higher than the price of the stock in early 2006. So management must have been doing something right. But then the financial crisis hit and the stock plummeted to its current value of under $5.

But the way the media talks about all the bailouts, you’d think that the car companies are entirely to blame for their current miserable condition, while the banks were struck by some freak “black swan” event that no one saw coming. The reality is, in fact, the opposite. The financial industry was the architect of its own implosion, while the auto industry was struck by the “natural disaster” caused by the financial industry.

This discrepancy in the bailout debates might be due to a white collar vs. blue collar double standard, possibly in combination with a coordinated desire in much of the business community to destroy the autoworkers union once and for all. And it certainly helps the financial community to have lots of friend in high places—Washington’s corridors of power could double as the location of the next Goldman Sachs alumni reunion.

Whatever the explanation, the lack of talk about accountability within the financial industry points towards the shameless arrogance of those responsible for the lost jobs and lost savings of millions of Americans. The NYTimes reported yesterday that top executives of UBS, a large Swiss bank, will voluntarily forgo more than $27 million in compensation after the bank reported massive losses in the most recent quarter. They are giving up the money promised them not because the board of directors or the government has forced them to do so, but because they feel ashamed of their actions. Can you imagine anyone at Citigroup doing the same? Yeah, me neither.

And financial titans are not alone in their arrogance. Larry Summers, a Democrat and now a key financial advisor to Obama, won’t even admit that he made mistakes when he de-regulated the financial industry during the Clinton years. I guess working in government or working in the financial industry means you never have to say you’re sorry. If you build cars, not so much.