Wall Street Can Save U.S. With `Reverse TARP’: William D. Cohan
Anyone on Wall Street who has spent time restructuring the debt of bankrupt companies knows exactly why the politicians in Washington have proved so inept in their attempts to get a comprehensive deal to cut government spending, raise taxes and increase the debt ceiling.
What Congress and the White House have been trying to do -- essentially an out-of-court restructuring among creditors in serious denial -- is generally considered to be one of the most difficult and complex maneuvers in Wall Street sport. It is the equivalent of a 309B from the three-meter board in springboard diving: a reverse four-and-one-half in the pike position, which has a degree of difficulty of 4.8. Even the top restructuring professionals rarely pull it off.
You can’t blame anyone for trying, though. There is a huge allure to getting the creditors of a distressed company to agree to a deal outside of bankruptcy. The bankruptcy process is often very costly (the Lehman Brothers Holdings Inc. bankruptcy, the largest in history, is getting close to costing $1.5 billion) and time-consuming (we are coming up on the third anniversary of the Lehman filing).
Agreement, though, often proves elusive in out-of-court deals because, until they see a bankruptcy-court filing, creditors generally refuse to believe things are as bad as advertised and so rarely will take less than what they are owed just to get a deal done. Compounding matters, an out-of-court restructuring, generally speaking, requires there to be unanimous agreement among all classes of creditors in order to get a deal done. No wonder it happens so infrequently.
The GM Precedent
The biggest open secret on Wall Street for much of the past decade was that General Motors needed to restructure both its colossal debt and its ballooning off-balance-sheet liabilities, including those for retiree health benefits and pension payments. Making that difficult process even more challenging was that GM’s basic business -- making and selling cars -- was falling off the cliff. The GM operating pie was shrinking at the same time its liabilities were increasing exponentially. This was obvious to nearly everyone but the company’s executives, employees and creditors.
No surprise, then, that a restructuring deal could not get done -- at least until the American taxpayers agreed to bail out the company with an infusion of $50 billion. With that pledge, Steve Rattner and Ron Bloom, the “car czars,” were able to dictate terms to the recalcitrant creditors and stakeholders.
But even Rattner and Bloom couldn’t bludgeon the creditors into universal agreement out of bankruptcy, so GM filed what is known as a “prepackaged” bankruptcy -- where less than 100 percent agreement by creditors can get a deal done. This allowed the company to zip through the bankruptcy court in about 45 days, an extraordinary accomplishment that was helped along immeasurably by the power of the U.S. government to determine how the shrinking pie would be carved up.
What Congress and President Barack Obama have been trying to do in recent weeks is like GM trying to restructure its debts and obligations before the government bailout. Only the debt- ceiling task has been even more difficult, because the operating presumption in Washington seems to be that long-term creditors of the U.S. government -- holders of Treasury bonds and bills -- will get paid before the equivalent of the country’s secured creditors, which would seem to be those citizens expecting Social Security, Medicare and Medicaid checks.
China Goes First
Putting long-term debt holders at the top of the priority chain is the exact opposite of what would happen in a corporate restructuring. (The Treasury’s logic seems to be that angering older Americans is more politically palatable than angering the Chinese.)
What’s worse, no one on either side of the aisle is willing to admit that we can no longer afford our obligations and that for all intents and purposes the U.S. government is bankrupt. Something has to give: Either more revenue has to be generated through higher taxes, or spending has to be cut; preferably both, in my opinion, and the sooner the better.
But as any Wall Street restructuring professional could tell you, getting the lines of fear and greed to intersect on such a tight deadline, absent a serious dose of reality, is virtually impossible. No wonder Congress hasn’t been able to do it, and that some half-baked measure will probably win the day before the Aug. 2 deadline.
Of course, there is no bankruptcy court for the U.S. government. There is only Congress and its 535 financial geniuses running around like chickens with their heads cut off.
So, how about this modest proposal: Why doesn’t Wall Street, along with GM and Chrysler and every other industry that only survived 2008 because of taxpayer TARP money, use some of its new-found profits to bail out the government?
The symmetry of that would be elegant, of course. And then Wall Street could appoint some uber-banker like Jimmy Lee of JPMorgan Chase to become the “restructuring czar” and dictate the terms under which the shrinking pie would be carved up. Now there’s a threat that could get Congress to act, even before midnight tomorrow.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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