Paulson Grasps the Automaker Nettle

Last night, I asked Hank Paulson, in a submitted question for his appearance at the 92nd St Y, why he was dilly-dallying over an automaker bailout and whether or not to ask for the second tranche of TARP funds, after having been so decisive all the way up to the election.

I should ask these questions more often: today I get the news that Paulson is not only releasing TARP funds for Detroit, but has kindasorta asked for the rest of his TARP money too. Here's the relevant bit of his statement:

It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect's transition team in the near future.

This is less than crystal-clear, but Damian Paletta says that it "signals a shift from recent statements when he suggested he wouldn't ask for the rest of the money". It seems to me that Paulson is saying that the only way he'll formally ask for the second tranche is if he has the support of Barack Obama's transition team.

I am surprised that George W Bush, MBA, said this:

He said that bankruptcy was not a workable alternative. "Chapter 11 is unlikely to work for the American automakers at this time," Mr. Bush said, noting that consumers would be unlikely to purchase cars from a bankrupt manufacturer.

So much for the pre-pack, but this is going to make things very hard on the automakers' managers, who need to impose a swingeing 67% haircut on their bondholders without having the help of a bankruptcy judge to enforce such a thing. I'll be very interested to see how they try to do that; expect a huge fight, and no guarantee of success. Yes, the bondholders are well aware that if they say no, the only other option is liquidation, and zero payout. But that doesn't mean they'll be remotely complaisant.