GMAC Begs for More From Uncle Sam
Wednesday, October 28, 2009SUSIE GHARIB: Call it bailout, the sequel. GMAC is asking the government for a third bailout. This time the auto and mortgage lender needs around $5 billion. That's on top of two others totaling $12.5 billion and a debt offering today of almost $3 billion. Meanwhile, published reports today say General Motors could announce this week plans to tap into its government bailout account. If that happens, we'd get a fresh picture of GM's economic situation. So what does all this mean for American taxpayers? I asked Mark Zandi, chief economist of moodyseconomy.com whether the government should give GMAC more bailout money.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: Yes. I think we as taxpayers have invested an enormous amount into GMAC, GM, Chrysler and we need to protect that investment. If we don't make this further investment, these institutions could fail. These companies could fail and we'd be out of all that money. So I don't think we have much of a choice at this point.
GHARIB: Well Mark, it is a lot of money and what does this mean for taxpayers?
ZANDI: Well, it's obviously very costly. If you total up all of the aid we've been giving to the auto makers, it's $70, $80 billion so far, in addition to this extra aid. That's a lot of money. Now hopefully down the road, vehicle sales will pick up. These companies will be viable and we'll get most of that money back. I don't think we'll get it all back, but hopefully we'll get most of it back.
GHARIB: How important is GMAC for the economy in terms of its systemic risk? How important is it?
ZANDI: Well, it's important. I think it could fail and the economy could digest it without pushing us back into recession. But I think again it would probably make little sense for us as tax payers to allow that to happen because we'd lose all that money we've already invested in GMAC, GM and Chrysler.
GHARIB: So is it just a matter of time that General Motors and Chrysler maybe will be going back to the government asking for more bailout money?
ZANDI: I think that's likely. The problem is vehicle sales are still very weak. We're running at around 10 million unit annualized sales base and just to give you context, in a normal year the auto maker sells 16, 17 million units. So conditions are really still very difficult and until that improves, I think these auto makers are going to need more help.
GHARIB: This whole situation with GMAC has brought up this subject of too big to fail. And as you know, there is some draft legislation in the works with Barney Frank and his committee in Congress. What is your initial take on the proposal and how it would deal with this too big to fail financial firms getting into trouble?
ZANDI: I think the legislation is in the right direction. It acknowledges that we will have institutions that are very large and if they do fail that they will create all kinds of problems for the entire financial system. But it also attempts to make those institutions pay for that, so it is a privilege that these institutions are too big to fail, that taxpayers will come to their rescue at the end of the day, but they have to pay taxpayers back if in fact that eventuality actually does occur.
GHARIB: Now there is -- there are some people, including former Federal Reserve Chairman Paul Volcker who are saying that these giant financial institutions that are too big to fail should be broken up, in fact they are too big to exist. What is your view on that?
ZANDI: I don't agree. I think we need large financial institutions because they need to provide services to large multi-national corporations that are all over the globe doing lots of different things and they need big financial institutions to provide those services. Moreover, we are going to compete with large financial institutions from across the globe. Think about the European banks, the Chinese banks, the South American banks. These are very large institutions and we won't be able to compete against them if we break up our banking institutions.
GHARIB: Mark, while you're with us, I just want to ask you a question about stimulus and the economy. There's a lot of buzz now that it's time for the government to pump in more money, more stimulus money into the economy. Is it necessary? Should the Obama administration do that?
ZANDI: Yeah, I think the economy needs more help. The recession is over. A recovery has begun, but it's very fragile, as all of us know. We're not creating any jobs yet and unemployment is still rising, so I think it's important to extend some of the provisions of the current stimulus that are set to expire by the end of the year, extend them into 2010 to make sure that this recovery evolves into a self-sustaining economic expansion that creates jobs and starts to bring down the unemployment rate.
GHARIB: How much money do you think is needed?
ZANDI: I think if you extended the unemployment insurance benefits for people who are running out of those benefits, make extensions of business tax cuts that are in the current stimulus, total it all up, probably cost about $100 billion.
GHARIB: $100 billion. Do you think the Obama administration and Congress will go for that?
ZANDI: I think they should and they will at the end of the day because nothing will be worse than having unemployed workers running out of their benefits and not being able to find jobs. It's not only going to be very difficult for their families, but it will be very psychologically debilitating to all of the rest of us because we know that could also be us.
GHARIB: All right Mark, a lot of good information today. Thank you so much for your time.
ZANDI: Thank you.
