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The Detroit quagmire & Treasury's absolute power

Latest news on the Detroit automakers and the proposed "resolution authority" for the Treasury. Let's get right to it...

Starting with the whole automaker bailout/bankruptcy quagmire theme - Deal Journal says, "Mr. Obama, don't let Detroit be your Vietnam":

"Congratulations. It took a couple of months in office, but you finally got something right. GM and Chrysler are bankrupt, after all.

Not that it took any particular genius to see it. But it did take some gumption for you to come out and say it. Now prepare yourself for your next feat, the reinvention of Detroit.

And here are some words of advice: Do not let Detroit destroy your Presidency. It will, if you let it."

Meanwhile, Bloomberg reports President Obama has concluded that bankruptcy is the best option for GM and Chrysler. Here's an intro from that piece:

"President Barack Obama has determined that a prepackaged bankruptcy is the best way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.

Obama also is prepared to let Chrysler LLC go bankrupt and be sold off piecemeal if the third-largest U.S. automaker can’t form an alliance with Fiat SpA, said members of Congress who have been briefed on the subject and two other people familiar with the administration’s deliberations..."

Does anyone know why (aside from obvious political considerations) the US auto makers are still hanging around in this limbo state?

The government has taken billions of dollars in taxpayer funds and allocated it to the dying US automakers, preventing earlier bankruptcy filings or restructurings, even as the companies race to cut costs and stay afloat for the next few months.

Which brings me to our next subject: Deal Journal's evening reading centers on the question of absolute power at the Treasury.

The proposed legislation for "resolution authority" may give Geithner and the Treasury a "nuclear option" to seize any financial company whose failure might pose a systemic risk.

More on this from Real Time Economics:

"The Obama administration last week proposed draft legislation for a “resolution authority” that would effectively permit the government to liquidate or restructure large systemic financial institutions. If passed by Congress, these powers would allow the governments to treat nonbank financial institutions more like regulated deposit-taking banks.

This authority offers a clear path to recapitalize institutions without using taxpayer money and therefore avoiding some dimensions of moral hazard but, if implemented poorly, the existence of this “nuclear option” can cause panic in financial markets and substantially delay recovery..."

The US government is now heavily involved in the domestic auto industry and the non-bank financial industry. Is this a positive or a negative? Your insights and comments are appreciated.

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