Why do the banks think they can push Detroit around?

Wall Street is playing hardball on negotiations to reduce carmaker debt. There's a lesson here that the U.S. government doesn't appear eager to learn.

Published April 22, 2009 7:34PM (EDT)

Here's a proposal: Put Michigan Gov. Jennifer Granholm in charge of the bank bailout. It might be time for J.P. Morgan, Citigroup, Goldman Sachs and Morgan Stanley to get a taste of their own medicine.

"Who knew that bailing out the banks would mean that they could kill the auto industry," Granholm said Wednesday, according to the Detroit Free Press. She was referring to the hardball played by those four banks in ongoing negotiations to keep Chrysler alive. Earlier this week, the banks, in their capacity as the owners of Chrysler bonds, rejected a Treasury proposal that would erase about 85 percent of Chrysler's debt. The banks came back with a counter offer that would only erase about 35 percent of the debt. In return, they want a 40 percent ownership stake in Chrysler and seats on the automaker's board of directors.

So why isn't the U.S. government treating the banks the way the banks treat everybody else? The chutzpah of these banks -- especially Citigroup -- is extraordinary. Citi has received $45 billion in capital injections from the U.S. government. And in return, taxpayers have gotten ...  zip.

The standoff over Chrysler is all the more pertinent after General Motors' announcement that it plans to a blow off a $1 billion debt payment due June 1, because it will have either arranged its own debt-for-equity swap before then, or filed for bankruptcy. Chief financial officer Ray Young sounded remarkably blasé about the company's prospects, reported the Wall Street Journal:

Mr. Young said GM is determined to restructure and get back on its feet soon, and will right the ship "in court or out of court." He said a trip to bankruptcy court is "probable," but indicated the company has the full backing of the U.S. government.

Well, maybe. But does that backing include a willingness to use the leverage that the U.S. government enjoys in virtue of its status as the only entity standing between Wall Street banks and chaotic insolvency? So far, that kind of resolve has yet to be demonstrated. So maybe it's time to let Gov. Granholm crack the whip.

UPDATE: James Kwak at The Baseline Scenario has much, much more on this topic.


By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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