In the past year, taxpayers and government agencies have engineered optimal conditions for bankers to score. To use a metaphor bankers could understand (golf), by supporting markets, taking interest to zero, and providing legions of subsidies, the government has widened the fairways, enlarged the greens, and dug holes the size of bomb craters. Some bankers are playing the redesigned course like Tiger Woods. JPMorgan Chase and Goldman Sachs each earned more than $3 billion in the last quarter. But other huge banks are playing like Ted Knight’s Judge Smails in Caddyshack. Citi scratched out a mere $101 million in earnings and suffered heavy credit losses, while Bank of America lost $1 billion. A similar dynamic is evident in the domestic auto industry. Cash for Clunkers and government support for auto lenders has helped prop up demand. In September, Ford saw sales rise 5 percent from September 2008, and the company gained market share. But sales at General Motors and Chrysler were off 45 percent and 42 percent, respectively, from a year before.
In both banking and autos, the companies that are partially government-owned are flailing while the independent firms are thriving. But the results raise a financial version of the age-old question: Which came first? Are these companies losing market share and facing mounting losses because they have big-government ownership and oversight? Or do they have government oversight and ownership because, for years, they lost market share and racked up losses? For folks who believe that government caused the crisis—i.e., that the Community Reinvestment Act somehow caused Bear Stearns and Lehman Bros. to destroy themselves—it’s the former. For those of us who believe that the crisis was largely the making of wealthy CEOs who had every incentive to see their companies succeed but simply failed (and that their poor choices were abetted by poor regulation), it’s the latter. Put more simply: Government ownership doesn’t cause catastrophic losses; catastrophic losses cause government ownership.
From the beginning of the crisis, there’s been a significant misunderstanding of the events and process through which the government acquired stakes in Citi, Bank of America, Chrysler, and GM. Many people—mostly on the right—speak of a government takeover, as if first the Bush administration and then the Obama administration wanted to assume control of crappy, faltering companies. (Note to the tea-partiers: If Bush/Obama/Paulson/Bernanke really were socialists, they would have seized JPMorgan and Ford, not Citigroup and Chrysler.)
By the time the government got there, they had essentially failed. A year ago, the choice facing the bondholders, shareholders, and executives of GM, Chrysler, Citigroup, and, to a lesser degree, Bank of America, wasn’t between accepting government help or accepting the offer of other suitors; it was between Washington, D.C., and liquidation. Like so many retailers, restaurants, industrial companies, and smaller financial institutions that had proved poor stewards of capital, they found the market was no longer willing to provide them with financing. But because of their size and the inability of the market to process their failure, the government stepped in. Sure, there was brave talk of reviving these once-proud brands and returning them to their rightful place in the pantheon of American corporations. But from the outset I’ve believed that the interventions were simply efforts to delay liquidation rather than to avert it altogether, to provide a breathing space in which managers could find homes for valuable assets (other companies) and find chumps to absorb the losses from bad decisions (you and me!)
By design, these firms have been shrinking and losing market share. In recent months, Citi has sold off energy-trading unit Phibro and stakes in Japanese businesses and credit card portfolios, put the Smith Barney brokerage into a joint venture with Morgan Stanley, and signaled intentions to shrink its branch system. For its part, GM has sold the Hummer brand, put a stake in Opel on the block, reduced employee head count, ended a joint venture with Toyota, and wound down medium-duty truck production. Chrysler, once the third-largest U.S. automaker, has been essentially reduced to a unit of Fiat.
These public-private hybrid companies are withdrawing from certain markets, and choosing not to compete in others, not because government overseers are forcing them to but because the managers who ran the firms when they were purely private beasts screwed things up. They’re exiting unprofitable businesses to stop the bleeding and selling off assets with value in an effort to raise cash—money they need to pay back the taxpayers and to prepare for larger losses. GM’s market share had been falling for years before its bankruptcy. Citi and Bank of America are now being hit with losses suffered on loans made in 2005 and 2006—not on loans made in 2009. Ford and JPMorgan Chase are taking market share because they prepared themselves better for the storm. Before the credit meltdown, Ford engineered a financing deal in which it raised a mountain of cash that has seen it through the lean times. JPMorgan Chase boasted of what CEO Jamie Dimon referred to as a “fortress balance sheet.”
It’s frustrating for taxpayers that the banks and car companies in which they have stakes aren’t performing better. But Washington isn’t to blame for the change in the competitive landscape. The struggling companies we now own are taking losses because, for years, they engaged in the types of business practices that cause businesses in their industries to lose market share and rack up losses—and to seek government help.