StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

An Auto Bailout Too!

20 Aug 2008
Posted by Pete Davis
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Washington is in a bailout mode following the Fed's bailout of Bear Stearns on March 14 and the Treasury's standby authority to bailout Fannie Mae and Freddie Mac, codified in H.R.3221 enacted on July 30.  Is the auto industry next?

On July 30, Senate Democrats agreed to take up a $6 b. loan guarantee for the auto industry when they return in September.  There are several problems with such an action:  1) It won't work; 2) It would be costly to taxpayers; 3) It would bailout one foreign owner and disadvantage others; 4) It would impede the restructuring of the auto industry; and 5) It would only the delay the firing of Big Three auto workers for a short time.

We went through this before with the Chrysler bailout in early 1980.  On January 7, 1980, President Jimmy Carter signed H.R.5860 into law.  It provided Chrysler with a $1.5 b. loan guarantee ($1.2 b. was used.), but only at the price of laying off nearly half its workforce, 20,000 white collar and 42,600 blue collar workers.  Chrysler's creditors took payment of 30 cents on the dollar on $600 m. of debts, and another $700 m. of debts were forcibly converted into preferred stock which was worth much less.  Meanwhile, much less deserving equity holders were made better off.  The warrants that Treasury got for the loan guarantee and the guarantee fees more than paid off the roughly $300 m. cost to taxpayers, but I doubt the taxpayers will be so well protected this time. 

Senator Debbie Stabenow (D-MI) has made it very clear that she see's the $6 b. loan guarantee as the first tranche of $25 b. of loan guarantees sought by Detroit's Big Three auto makers.  The $6 b. will be scored by the Congressional Budget Office as costing taxpayers $900 m.

Chrysler recovered for a time with the K car and by inventing minivans, but in 1999, it sold out to Germany's Daimler-Benz AG, and they sold 80% of it to the Cerberus Capital Management L.P. in 2007 for $7.4 b.

Step back for a moment and look at what has happened to the U.S. auto industry.  It changed hands to foreign firms and moved South as explained in this International Herald Tribune article.  This happened because Detroit sought quick profits in gas guzzling SUV's and trucks, produced less reliable and desirable cars than its foreign competitors, and agreed to union contracts it couldn't live up to.  Now Detroit wants to be bailed out of the consequences of a long history of poor management decisions.  If the Big Three are bailed out, what about the U.S. auto workers making better cars for foreign firms in the South? 

The marketplace can impose harsh consequences on workers in failing firms, but if we relax those standards, everyone will be a little worse off, and those workers would only <!--[if gte mso 9]> Normal 0 false false false MicrosoftInternetExplorer4 <![endif]--><!--[if gte mso 9]> <![endif]--><!--[if !mso]> <![endif]--> <!--[if gte mso 10]> <![endif]-->get a temporary respite. 

President Bush and Senator McCain have had to courage to say no bailout, and I doubt Congress can overcome their opposition this year.  However, next year, if Senator Obama wins the White House, more taxpayer money may head towards Detroit.

No auto bailout, no airlines bailout

The taxpayers are having a hard enough time choking down the bank bailouts. Freddie and Fannie and Lehman Brothers are next in line. Isn't that enough?

Bailing out Detroit once again

I agree with you, bailing out GM and Ford is too expensive. In any event, there isn't going to be anything left to bail with once Paulson finishes bailing out Fannie and Freddy. I also agree that even more of the business should be allowed to go to the foreign firms running non-union shops in the south. It is sad because the unions weren't the cause of the incompetence that brought GM and Ford down.

The problem is that the boys up in Detroit never took energy policy seriously. They never had a clue that it was going to blindside them again in our decade as it had in the 1970s and 80s. They're losers who have gotten it wrong way too often.

Rather than bail them out again, what about a forced marriage to the international oil majors? The oil companies at least are well managed and understand what is going to happen with energy prices. Even though they wouldn't be happy having to prop up a failing industry, almost anyone could do a better job than the current crew.

Would a government health

Would a government health care system that took on the benefits of auto industry retirees sufficiently bail them out?

Oil-auto would be an unholy alliance. Big Oil prefers gas guzzlers because they drive up oil prices. BigOil lobbying has blocked most of the energy conservation legislation for the past 2 decades.

Auto Bailout

Minnesota Mom -- Amen!

Policy Pete -- Kevin Hassett of AEI recommended letting Chrysler fail and merging GM and Ford.  I doubt any international oil companies want to run any auto companies.

Bahko -- Senator Obama proposed that two years ago, but he has backed off of it since.  It wouldn't help the Big Three where they need it most, and it would create a long line of other big employers who would want the same treatment.

Auto Bailout

Oh, so the oil companies wouldn't like the auto companies draped around their necks. My bad. The sardonic is not always easy to grasp.

Bailouts to boost employment ?

Unemployment is getting to a nasty level. U3 is reported as the "official" unemployment number, but U6 is more reflective of what is happening out there . . . take a look at U6 in Table A-12 (10.6%).

U6 includes marginally attached workers, including those working part time who would like full time work, and those indicating they want and are available for a job (and have looked for work in the recent past).

I'm running into lots of people who've had hours cut at their jobs. U3 understates this rapidly growing problem. Also there are small business people (self-employed) who are losing work/contracts etc. They are considered "employed" but many aren't making money right now.

I wouldn't exactly call it a

I wouldn't exactly call it a "bail out", but the recent "housing act" extended corporate tax breaks to Chrysler even though these days it is a partnership, not a corporation.

But what's a housing act for? (Well, also to legislate that a Canadian-owned railroad car manufacturing plant in Alabama located 300 miles from the Gulf coast is actually now part of the Gulf coast hurricane relief zone, so it can get millions of dollars of tax-favored financing ... but I digress.)

Beyond Detroit

The Big 3 collapse hits parts suppliers as well.

At least 300 layoffs will hammer Indiana's largest automotive city as Delphi's electronics arm pares jobs after a 32 percent drop in second-quarter U.S. sales.

Layoffs in the state's massive auto-parts sector helped push the Indiana jobless rate to 6.3 percent in July, and the state surpassed the national rate for the second straight month.

Kokomo's unemployment rate has risen in recent years with previous Delphi cutbacks rippling through the city and Howard County. The county's jobless rate hit 7.7 percent in June. That was the highest jobless rate among Indiana metro areas.

On Monday, officials in Delphi's Kokomo offices announced the electronics division will let go 600 of its 3,200 white-collar workers in the United States by late December.

Looks like your last sentence should be amended

Bush is the worst President ever.

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