For those of you who have been following this blog, you know where I stand on the proposed aid package for US automakers (see Preventing Moral Hazard in the Auto Industry for background). I am not opposed to aid for GM and Ford, provided that aid come with strict terms:
- A moratorium on acquisitions (whether with Chrysler, or otherwise)
- A rationalization of operations - a reduction in the number of brands/models coupled with plant closures
- A renegotiation of employment terms with the UAW to make the US automakers more competitive with global competitors
- Strong incentives to build more fuel-efficient automobiles
Although I support some form of aid for GM and Ford, I have been staunchly opposed to providing any aid to Chrysler given its current ownership structure (see A Benevolent Cerberus or Is the End Nigh for Chrysler).
Rather than re-hash my ideas, for this post I thought I’d put forth some recent arguments that have been made on either side of the debate and let you decide.
ARGUMENTS FOR THE BAILOUT:
A short, GM -produced video (being distributed by Weber Shandwick, GM’s PR firm (it arrived in my inbox from them on Sunday).
ARGUMENTS AGAINST THE BAILOUT:
Mike Shedlock (Mish) details his opposition to the bailout in a letter penned to his representatives, and published on his blog (see Second Push to Stop Auto Bailout). Although his comments were specific to GM, you can apply similar reasoning to Chrysler and Ford. Mish writes:
GM CEO Wagoner and other auto executives are now pleading for more cash.
Wagoner stated “We’ve moved aggressively in recent years to position GM for long-term success, and we were well on the road to turning our North American business around before the economic crisis.”
GM continued to build massive numbers of SUVs and trucks long after consumers turned their backs on them.
GM continued to pay a dividend long after it was prudent to do so.
GM had a golden opportunity to sell all of GMAC and failed to do so.
GM got involved in subprime mortgages with Ditech at the worst possible time.
On April 2, 2008 GM sales analyst Mike DiGiovanni, speaking to reporters and analysts on a conference call, said he saw “early signs” that the U.S. market was steadying. That shows you just how far in fantasy land GM is.
GM is a company that makes mistake after mistake after mistake.
GM cannot build cars that people want at a price people can afford. That is the bottom line.
From GM’s latest 10-Q
Short-term borrowings and current portion of long-term debt.
September 2008: $7.21 Billion
September 2007: $5.26 BillionIn one year’s time, short term borrowing and interest on long term debt has gone up by $2 billion per quarter, $8 billion per year!
If Congress loans GM money, interest on its debt will rise yet again.
GM has $36 billion in long term debt and has a negative net worth of $60 billion.
Is $25 Billion The Beginning Or The End?
One look at the above numbers answers the question “Is a $25 billion bailout the end, or just the
Stop The Madness!
Consumers are tapped out. They are not going to buy autos no matter how much money Congress throws at the sector.
World Will Not End If GM Goes Bankrupt
The very best thing that can happen to GM and Ford is they go bankrupt. The sooner the better. Congress will then see that the world will not end. Both companies will reorganize. Both companies will keep making cars.
Bankruptcy is the best option for the Auto industry. If the union disagrees, let it pledge its pension money as collateral, and let Wagoner pledge his personal wealth as collateral for a loan.
SOME MIDDLE-GROUND:
Finally, I suggest reading an interesting, and thought-provoking, alternative proposed by Andrew Ross Sorkin of the New York Times (see US Should Guide GM in a Chapter 11). Andrew writes:
“The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan,” Mr. Cervone [spokesman for GM] said this weekend to The Detroit Free Press.
To him, GM is merely in a temporary bind. If the government — that is, taxpayers — were just willing to spot GM some cash to get it over this little rough patch, everything would be just fine.
Mr. Cervone’s comment reflects what’s wrong with the mind-set in Detroit.
GM is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized.
But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been
Here’s how it could work:
First, let’s recognize that GM doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.
Bankruptcy would give GM enormous leverage with its debt holders — and, perhaps more important, with the UAW, whose gold-plated benefits are one reason GM is no longer competitive. A bankruptcy filing would also give GM the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless GM files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.
So, first, the government would force GM into a prepackaged bankruptcy now — even before policy makers may think it needs to be.
…the government should come in with what’s known as debtor-in-possession financing to help the company through the bankruptcy process. Ideally, the government would be a “seed investor” and others would join it….The goal should not be to keep these companies from filing Chapter 11, but from filing for Chapter 7 — which would mean liquidation.
With the debt market virtually closed, this is the time the government can come in and try to help. But to jump in front of the train now, without the requisite changes made to the industry first — which we all know can’t be done without Chapter 11 — would be foolish.
I agree with many of those who oppose a bailout on the type of restructuring that needs to take place to right the ships of GM, Ford (F), and Chrysler. However, for me, the debate hinges on whether Chapter 11 is a viable path for the automakers to restructure. I am inclined to believe that it is not a viable path because it would be difficult to raise DIP financing (critical for any reorganization) from private sources in the current credit environment. Therefore, the government would be forced to become the DIP financier of last resort to avoid Chapter 7 liquidation.
Andrew Ross Sorkin suggests that the government do just that. And maybe he’s onto something.
Given all sides of the argument, I have sided with those who advocate for some kind of government aid - whether it come before or after bankruptcy. But either way, in order to work, that aid MUST come with strict provisions, and at a cost to shareholders, debtholders, and management.
What say ye?
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This article has 15 comments:
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James1213
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2 Comments
Nov 20 08:29 AMIf we can bail out the banks who created of this crisis, I believe we can loan the auto makers a a cash infusion until the credit markets are working again.
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redbaron
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174 Comments
Nov 20 08:43 AMTo not do anything, is to risk something dark and deep, and I don't want to go there.
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Patti
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1 Comment
Nov 20 09:07 AM-
User 302339
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1 Comment
Nov 20 09:23 AM-
mgsav
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1 Comment
Nov 20 09:27 AM-
mray44
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1 Comment
Nov 20 09:41 AM-
ins-exec
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1 Comment
Nov 20 09:43 AMWe loaned money to the banks to soften credit to help keep business afloat, has it happened? No! they're hoarding it and not letting the money recirculate to help stimulate the economy. Congress knows this but are doing nothing about it. How about this. They either soften the credit or take the money back simple as that. I am 60 years old and a veteran of Viet Nam and have seen my country become a debtor nation all as result of greed and political corruption and the sad part is no one not one person is being held accountable
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Lazaris
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12 Comments
Nov 20 10:57 AMGM built millions of trucks and SUV's because people wanted them! Its not GM's fault that gas went to $4.00 plus and those people that wanted that SUV or truck can no longer afford to drive it. Do all you "green" people want the electric VOLT to die? GM is on the cutting edge of "green" and new technologies!
The UAW has agreed to a 50% wage cut for new hires, and is taking over the retiree health care in 2010.
This mess was created by wall street, GM was well on the way in their restructuring , and they were caught off guard just like EVERYONE was with the wall street meltdown.
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UFO51
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1 Comment
Nov 20 10:58 AM-
Plowboy
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41 Comments
Nov 20 11:41 AMThe issue isn't ... do you want to bail out the Big three... the issue is do you want the USA to implode? Bush and his right-wing nut cases created this issue 9 financial) while being fixated on abortion, gays and made-up wars now they fail to lift a finger to help American's.
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PacificGatePost
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26 Comments
My Website
Nov 20 03:02 PMHere is the type of plan Congress should consider >
pacificgatepost.blogsp...
Trying something outside the box like this, is the only way to save the U.S. Auto Industry.
There is much creative talent hidden inside the U.S. Big 3 that has been smothered by mismanagement and the UAW. ... and they actually "make" something, .... unlike Wall Street. Detroit deserves saving.
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Joshua Lacey
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37 Comments
Nov 20 06:37 PM-
Mike Inmich
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16 Comments
Nov 20 08:29 PMYou also mention the difficulty in closing dealers due to state laws.
I disagree with your assertion that management needs to go. I think it is down right amazing that the big 3 have survived this long with this union, this set of federal laws, and the general hate that exists toward the big 3 in the popular culture, led by the ignorant media.
Said stupid federal laws include:
1) Unions with virtually unlimited power to extort in some states, and no unions in others, an anomaly exploited by the foreign competition and not available to the big 3. Even if the big 3 abandoned perfectly good plants and built new ones in the south the UAW would have them by the nuts. No other country in the world has this setup.
2) CAFE laws. The big 3 are criticized for opposing these laws. I view it as a negotiation, and the big 3 were representing the customers (most of your readers) who wanted larger cars and trucks than the other side wanted.
For 30 years the big 3 were right, the customer did not want higher CAFE if it meant small, slow cars. I'm an expert in fuel economy and the primary determinent of efficiency is weight. The rest if efficiency is working around the edges- and always for a stiff price.
For the past yearor so customer demand exceeded the CAFE limits and the advocates of higher CAFE were right, but I think they just got lucky. The notion that there would have been not problem for the big 3 if they just rolled over and accepted the highest levels of CAFE proposed by the tree huggers is wrong. They would have gone bankrupt long ago.
CAFE is probably the worse law in the history of regulation and there was/is an obvious alternative. The feds should have imposed a direct tax on gasoline like every other western nation, often in the range of $3-$6 per gallon. GM and Ford complete quite well in European nations where this is the case, and yes the vehicles are smaller and more fuel efficient. GM and Ford could have competed here under these rules as well but the US gov chose not to go to this approach due to political ineptitude and fear of voters. How come everywhere else they do? I don't know.
Worse, since the Japanese were coming from a small car background, has lower labor costs which matter much more on small cars, and quite frankly a small car reputation, CAFE disproportionately hit the big 3, big time.
Note under a gas tax, there is nothing that says who competes in which market. If Ford wanted to specialize in trucks because that was their strength, they were free to do so. CAFE uses a hatchet approach that says if you want to sell in the US, you have to meet a fleet average.
Well over half of Ford's pickups are historically used commercially, higher now since high gas prices are killing the non commercial market. Making Ford meet CAFE truck standards makes no more sense than making Mack Truck or Caterpillar do so. Yet that is exactly what the feds did and it was a big step in their demise.
Get it. The big 3 got screwed by the worse set of laws in history.
One other thing. How come the liberals are pro union except when it comes to buying union made products? How come the Obama stickers are always on Hondas and Toyotas, the biggest union busting companies in the history of the US?
No other nation on earth has the self hate that we are seeing in this debacle. Only after its gone will we realize that a country without manufacturing capability is a third world country.
Like I said, it’s amazing they lasted so long.
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BUGGS
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15 Comments
Nov 21 09:49 AM> I don't like it, but I agree with the author's stance, i.e., some
> aid, but with lots of provisions that would come with a cost to management,
> unions, debtholders, and of course, shareholders as well.
>
> To not do anything, is to risk something dark and deep, and I don't
> want to go there.
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nwconsumer
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1 Comment
Nov 22 04:14 PM