Detroit Bailout: No News is Bad News

Shorter WSJ: Will the government use TARP funds to bail out the automakers? Maybe. Will it ask Congress to release the second tranche of TARP funds? Don't know. If it did, would there be ugly scenes in Congress? Don't know. Will the government require the automakers to declare bankruptcy? Don't know. Is there any way to bail in bondholders without forcing the automakers into bankruptcy? Don't know. How much will all this cost? Don't know, could be anywhere between $8 billion and $50 billion.

Shorter shorter WSJ: With banks, you need to get things done over the weekend. With automakers, evidently, not so much.

This all bespeaks a lack of leadership, which is the one thing clearly needed to avoid a worst-case liquidation scenario which is looking increasingly likely.

I don't know if this is still the case, but the WSJ was reporting all last week that one of the big sticking points here is the transition from Bush to Obama. If Treasury's going to ask for the second tranche of TARP funds, it's going to have to lay out a plan which of necessity will mostly be implemented by the Obama administration. But the Obama-Biden transition team seems disinclined to cooperate with Treasury in terms of putting together such a plan, and Treasury doesn't want to try to push something through without clear support from Obama.

Treasury knows that Congressional Republicans will attack it no matter what; it doesn't want Congressional Democrats attacking it too. Even now that the legislative session is over, House and Senate politicians might well be unable to resist returning to Washington for denunciation practice.

On the other hand, Paulson has very little to lose by asking for the second tranche of funds -- he's out of a job come January 20 anyway, and getting the second tranche would make it much easier to find Detroit bailout funds. There's no way that Congress is going to manage to pass a resolution blocking the release of funds, and even if it did, Bush could just veto it. So if the White House wants a big automaker rescue package, it has the ability to put one together in the face of Congressional opposition.

Now seems like an odd time for Treasury to suddenly start worrying about the will of the people, but there are both political and practical reasons not to put together a big bailout too. Politically, it flies in the face of everything the Republican party stands for; practically, it probably won't work anyway. (Few of this administration's major initiatives ever have done.)

The base-case scenario, then, is probably a mini-bailout, using whatever funds are left over in the first tranche of TARP money. That will either get Detroit to January 20 without anybody declaring bankruptcy, or else it will at least will mange to keep any bankruptcy filing in Chapter 11 going-concern territory rather than Chapter 7 liquidation.

And then, come January 20, the whole highly elaborate dance between the automakers and Congress will start up again, only now there will probably be a car czar in the mix as well, who will intone gravely, regularly, and utterly ineffectually about the need to turn around Detroit's declining auto sales figures. For by then it'll probably be too late, if it isn't already.

This will all all make for great satirical fodder. But I'm very pessimistic when it comes to the economics of all this, both in the Rust Belt and for the nation as a whole: I just can't see any kind of happy ending to this story at all.