StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Auto Industry Bailout Pros and Cons

17 Nov 2008
Posted by Pete Davis

After weeks of debate, we're no closer to consensus in Washington on a bailout for the Big Three auto companies.

White House Press Secretary Dana Perino just said the White House would support an amendment to the Section 136 Department of Enerngy program to speed up those loan guarantees of up to $25 b.  "We think there is a bipartisan path to getting this done very quickly -- this week."  She said Senate Democratic leaders had not revealed their amendment yet or offered to negotiate a compromise.  A Senate vote is expected Wednesday.  Senate Democratic leaders and the Big Three auto companies want $25 b. from the $700 b. Troubled Asset Relief Fund.

Perino reiterated the Administration's opposition to using TARP to help the auto companies.  "That won't happen." she said.  When asked if a bankruptcy declaration by any of the auto companies would be acceptable to the White House, she responded that would be "the companies' decision."

President-elect Barack Obama supports direct aid for the Big Three, but he has said taxpayers should be protected too.

The hangup is whether to insist that loans or loan guarantees be conditioned upon an assessment of "financial viability" over the next 10 years as under the Energy Department loan guarantee program or not, as under TARP.  Treasury Secretary Hank Paulson has evidently concluded that taxpayer loans should not be given to firms that can't demonstrate their long-run financial viability, although he didn't apply that standard to Bear Stearns, AIG, Fannie Mae, or Freddie Mac.

The Big Three financed Center for Automotive Research has estimated that the demise of the auto industry would cost 239,341 direct jobs, 973,969 supplier jobs, and 1,738,034 other jobs from $150.7 b. less personal income.  Federal, state, and local governments would be hit with $14.3 b. of increased transfer payments, $21.1 b. of less Social Security payroll taxes, and $24.7 b. less personal income taxes.

However, today's New York Times makes a point that most economists would make: the demise of the Big Three would not eliminate all Big Three auto jobs.  Many, but not all, of those jobs would be picked up by foreign automakers at existing or new plants here in the U.S., but those would be non-union jobs at lower wages and with fewer benefits.

At this point, I don't see how the Big Three automakers avoid major restructuring that may include foreign takeovers.  The only question will be whether taxpayer money eases the pain temporarily.


Obama and The Big Three Auto Companies

There is a terrible weirdness to Washington these days. The keys to the Treasury have fallen into corrupt hands and key members of the political class seem intent on getting as much cash out to their friends before the game comes crashing down to a halt. We all know it is dishonest; we all know it is profoundly corrupt. No one can stop it. Fear is used to justify complete nonsense. The banks are failing, the insurance sector is failing, the investment banks are infected with a strange disease; clouds of invisible derivatives are festering in the polluted skies of New York. Run, panic, hide. The sky is falling.

Only it isn't. The remnants of our democracy are being looted. The bill for what has already been taken is so large the next generation will never be able to repay it. If Obama stands for the change we need then he should stop it.

The US auto industry is not Ford, GM, and Chrysler. It is those companies plus a number of large, well-run firms owned by foreigners. The latter haven't asked for bailouts. They know it is just another recession which we'll weather as we always do. If Obama does try to paper over decades of big three waste and incompetence, then the bailout will come at the expense of the programs he was elected to fix such as health care. It would be a mistake that would unhinge his presidency before it began.

Auto Bailout

Foreign run auto companies operating in the U.S. employ approximately 78,000 workers, and the Big Three are downsizing from 240,000.

Obama and The Big Three Auto Companies the change we really need

The change we need is true accountability in the "Public Sector" where the fundamentals of our economy seem to have come unhinged.

The public markets in this country, once the greatest free market concept put into practice, a system that has allowed though the years the greatest ideas and most motivated entrepreneurs access to capitol while allowing the average citizen the opportunity to participate in the process now seems to be completely broken. No longer are ideas that are good for the country and the world funded by responsible well-meaning citizens. Instead today the stock markets now largest casinos in the world overreact, manipulate and act as the second largest taxing agency in the country. And now the largest taxing agency in our country the Federal Government is going to step in and help fund the party.

For the right to PLAY with the public’s money the management teams of public companies, which in my opinion have no resemblance to private sector, should be held as financially accountable for the decisions they make as their private sector counterparts. Too much of the compensation for the corner office is guaranteed and determined by an elite group of inbreeds, a concept that should roil true free market capitalists. The variable portion of this compensation is also too often tied to short-term measures that are too easily manipulated to once again benefit the smallest group of elitists that play with other people’s money in the stock market, as opposed to long-term fundamentals that position our nations largest companies with the ability to compete in a global marketplace. These public entities have made years and years of irresponsible decisions for personal gain and backslapping because those decisions have not directly impacted their own pocketbooks’ as they would have if they were truly private companies.

This sickness begins in our markets where the entire focus of funding good ideas has given way to short term investments in making a profit today off of irrational behavior that is encouraged to help increase the tax that is levied on our economy and extends into the corner offices of our public companies who are complicate in the game.

For the right to access the publics money there should be strings attached. Taxation of investments could be tiered based upon the length of the investment to encourage a longer term focus on supporting good ideas and the decisions of the upper management of our countries public companies should reflect the publics goals of long term profitability and job creation. One option help accomplish this goal is to vest they’re compensation over a period of time long enough to determine its success and that compensation should reflect the effort and risk they invest in the organization. If we believe this will discourage the best and the brightest from participating then they can fund their own ideas in the real private sector. Besides if they have done such a good job based upon the structure of the game today we wouldn’t be talking about change.

Remember the cataclysm that was going to occur if we let the steel companies fall and let the rebirth of healthier companies begin with the goal of positioning our country with the ability to compete on a global scale. This will not happen if we continue to privatize the profits and socialize the losses.

Capitalism is the greatest idea we have never tried.

Big 3 Bailout

In short, I agree. However, if it is deemed to a bailout, then let's include getting rid of the union as part of the negotiations.

In addition, I personally know several individuals that either own their own dealership(s) or are associated with the auto industry (i.e. tire companies and others) that have been very successful financially (millions) and/or are compensated with exotic trips (sometimes 3 a year for those I know).

The union workers are so short sighted, that many would rather lose their jobs than disband the union. I have worked for a unionized organization and saw firsthand, those who reap monetarily though they didn't carry their weight. While those who were dedicated to their jobs and the organization were not compensated for their efforts. Needless to say, I was disappointed and frustrated to see what went on. I left the organization for private industry, the best decision I made. I am now very happy professionally and financially. I owe my employer a good days work, I love my job and the people I work with. If they don't work as a team, the company gives them a chance to change. If they choose not to change, they are out the door. Get rid of the union!!!

Automobile industry bail out

Why don’t we use the bail out money to help the automakers make the public transportation we need instead of promoting adding more automobiles to the congested roads we have? By the way this also would help to balance the huge trade deficit, improve the air we breathe and give us more time to be with our families instead of being stuck in traffic.

Auto Bailout

Mass transit is desperately needed on both coasts and in many areas in between.  Increased investment their would make a lot of economic and environmental sense.  Unfortunately, political sense is otherwise.  Americans have always had a love affair with big automobiles.

I don't have the statistics at hand, but our government subsidies of automobiles are at least an order of magnitude larger than our mass transit subsidies.  All you have to do is to travel abroad to see the difference.

Why Making Detroit Fund Public Transport Won't Work

You have a good idea but it won't work. Public transport only works well when the number of people per unit of area is highest. Regrettably, one of the legacies of the age of automobiles is diffuse housing concentrations. People with cars chose to live in the far suburbs with the lowest densities. Public transport in these areas makes little economic sense because the distances travelled by public transport per customer served are too great. First deal with land use policy to force tighter zoning and population density and then put Detroit to work.

Why Making Detroit Fund Public Transport Won't Work

I agree that we must deal with land use policy but you are I think is going to be much harder to move people from the suburban homes than to give up their cars. Also lived in Edmonton Alberta, which is a very low density city and it has an excellent public tranportation system that people actually use.

In addition the density in the East Coast corridor, California and many other urban areas is high enough to sustain public transportation.


At least in the current economic conditions. What are the costs to our economic system of liquidation? Would costs be lower if Congress provided funds for a restructuring to occur? These are the questions.

The Bush administration is opposed to a government role in restructuring. Period. Bush would prefer to accept the least optimal potential economic outcome for ideological reasons.

The Democrats want a restructuring process instead of sending a 'bridge loan to nowhere'.

Arguments are being made based on emotional reactions to unions, government intervention in markets and pressure from wealthy special interests to rescue themselves from their management failures.

Economists could do everyone a favor and focus on the system wide economic costs and benefits of different approaches to restructuring. A liquidation would impose enormous dislocation costs on the system and is NOT an optimal economic solution. We need better discussion of options, researched and informed opinion and less emotional bloviation.

How does a bailout increas demand?

I don't see how a bailout, loan, whatever, addresses the problem. The reason the auto companies are in trouble is lack of demand for their product right. Count American made cars in any parking lot, far and few between. I haven't heard anyone articulate how giving these companies money changes the poor perception the their brands. Not to mention, it does nothing to change the economic conditions preventing many people from buying cars from anyone.

Depends on where you look

Where I live the foreign-made cars are few and far between. It all depends on where you look--you can see whatever you want to see.

Think; per passenger mile

'...our government subsidies of automobiles are at least an order of magnitude larger than our mass transit subsidies.'

Not even close. Last time I looked, the subsidy from general revenues of the Federal govt to highways is about 1/2 cent per passenger mile travelled. For mass transit it was about 50 cents.

Per passenger mile is changing

The cost is shifted to the individual in the US, as we are all forced to own cars (expensive), pay insurance, gas, etc. It costs me a lot more than 1/2 cent a mile to get anywhere, especially when I add in gas, maint, insurance. Parking fees are a big deal for workers in some metro areas. No usable mass transit in my neighborhood.

But cost per mile on mass transit is declining here. A good example of shrinking cost per mile is in the Twin Cities, where mass transit use (buses) has soared the past year or so. Where buses used to be half full they are now overflowing . . . you can't get a parking place in the park 'n ride lots, and now they are looking at putting in double decker buses to increase capacity, also expanding and opening more ride lots. People switched to the bus during the high gas price era, and they aren't going back to their cars.

When Americans get serious about mass transit (using it and making it efficient and creating a good network) the cost per mile will drop . . . a lot. Amtrak is also getting much higher ridership these days which is also reducing cost per passenger mile.

I use mass transit when I can . . . but unfortunately in the US it has been viewed as a need for the lower classes . . . now that the middle class and above has begun using it there is more political will to make the system work efficiently. That's what we're seeing here . . . people are asking for more mass transit, and it has turned into a significant political issue this past cycle. I expect, as people lose jobs and are forced to take lower paying jobs that the push for increased mass transit will continue.

If the auto companies go under (and people continue to avoid purchasing cars) there will be much more appetite for mass transit. We are all trying to save money where we can, and reducing mileage on the cars is one of the biggest ways to save.

At my house we're talking about going back to being a one car family . . .to save on insurance, gas, maintenance, etc. I think we can achieve this goal within the next 3-5 years . . . and it's funny because we started our marriage with one car (the first 4 years of our marriage we shared a car, husband could walk to work and I was able to use bus system to my job) and now we will probably go back to that model, in fact we'll have to if we want to have enough money to retire.

Unintended consequences

Ask anyone of their opinion of General Motors and you will get a number of descriptive comments like ‘bloated giant, inept management, overpaid employees, etc.” Ask the average taxpayer if we should bail-out GM and you get a resounding NO! Add me to that group . . . . until I begin to think of the unintended consequences.

If GM were to declare Chapter 11, it would set the broad automotive industry, and many connected industries, into turmoil. That would set off a chain reaction throughout the U.S. economy, impacting service industries, small businesses, mom and pop stores, communities, states, and, perhaps, even foreign economies.

What seems like a tough-love decision to punish GM for past missteps and out-and-out arrogance will cause unimaginable hardship to closely aligned industries. Steel, aluminum, copper, tire and rubber, and electronics would be severely damaged, creating a real national security threat.

The automotive industry is based on volume. This scale allows automotive OEMs and suppliers to operate on thin profit margins, while making a reasonable total profit. This is true for both domestic and transplant automakers. Thus, the key to success, or survival, is volume.

Looking back over time, the U.S. economy experiences a recession every decade with a resultant downturn in new vehicle sales with an average decline of 24% and the steepest decline of 32% in 1982.

In 2008, the industry was hit with a double whammy, fuel prices over $4 per gallon and the credit debacle. The resultant effect is a change in mix of the types of vehicles consumers are demanding and an erosion of credit availability, leading to a 38% decline in sales and the loss of profitability at the domestic Big 3 and many of their suppliers.

Without a doubt, the credit crisis has exacerbated an already bad time for automakers; not just for domestic manufacturers, but for all automakers. Even world-class companies like Honda and Toyota are experiencing significant reductions in U.S. sales since the Leman Brothers collapse with declines of 25% and 23% respectively.

Back to the GM situation and the potential repercussions, should they be forced into bankruptcy. As previously discussed, many automotive suppliers are already feeling the pinch of the 2008 recession. Should GM file for protection under Chapter 11, several forces would come into play. These are Back to the GM situation and the potential repercussions, should they be forced into bankruptcy. As previously discussed, many automotive suppliers are already feeling the pinch of the 2008 recession. Should GM file for protection under Chapter 11, numerous forces would come into play. These are:
1. Lack of liquidity at marginally profitable suppliers would force them into bankruptcy,
2. A further erosion of consumer confidence would result in a further auto sales decline, perhaps to levels not seen since the 1950s,
3. The domino effect would bring down Ford and Chrysler, and severely damage the transplant OEMs who are also dependent of volume sales,
4. Related industries would be succumb to the erosion of volume in the auto sector,
5. With a further erosion in consumer confidence, auto sales could plummet to 7 - 8 million units,
6. The ripple would be felt by all automakers, including the transplants,
7. More forecloses would ensue as laid off workers are unable to meet mortgage payments,
8. Communities, schools and local services in blighted areas would be affected,
9. States will face massive cuts or face bankruptcy,
10. The U.S. economy would face a massive unemployment, loss of taxes and an erosion of national security capabilities, resulting in a economic environment worst than the great depression.

auto bail out

And all of this needs to happen...

The criminal executives that run these companies need to be fired and imprisoned. Every single cent of their wealth and assests seized. Make no mistake they are criminals who have stole from their employers, stole form their employees, stole from their investors and stole from uncle sam. Greed, arrogance, immorality, unethical closed door deals and shear stupidity have ruled Detroit for 20 years. Lawyers, HR managers, bean counters and ex-cons run manufacturing, particulalry automotive and automotive suppliers. Honest, hard working, moral, intelligent men and women have been run out of the automotive sector. They dont like working with Jackels.

The fat lazy UAW workers need to have their pay cut in half, all medical benefits ended. If they dont like it, get a real job like the rest of America. They contributed to the downfall, but their part in miniscule compared to the systematic pillaging by the of the upper management. The UAW and their workers are nothing more than overfeed pigs. Disgusting to see them on TV.

Too many ignorant, poor, non-deserving, non citizens, irresponisble, never had any business buying a home people need to be tossed out on the street and get real jobs and live in trailers and apartments like they should of in the first place. Or move back home with mom and dad because they never grew up. They had no business or wealth to substantiate buying a home. And yes the greedy bankers who gave them the money need to be tossed in jail.

The people that work for a living, pay their bills, dont overspend, and are responsible are taking it in the ass..the problem is we are the ones that reluctantly voted for John McCain. Obama the "free cheese looter/moocher" president has won. The idiots that put him there are the ones that will have their hands out the farthest.

Its going to get real bad. And the people that actually wipe their own ass are going to be the people that suffer the most. The bums and permanent underclass will know no different (they'll just get some more free cheese) and the criminals in the banks and New York will just count their stacks of cash from their yachts.

signed Nuclear Pissed and preparing for the worse...

if you want to save the big

if you want to save the big three then your gonna have to kill off the unions. they once served a purpose, now their just another business to leach off corporations. GM knows it needs to do its share of cutbacks, but with some union workers wages ranging in the 60-80 dollar an hour range how can they compete. now yearly cafe standards are forcing retooling of machinery. now tell unions to shove it, let the industry refine itself which supply and demand will do, and then GM can do its buggeting off that. gaurantee you that if this bailout werent an option this would be the route they'd be lobbying to get the union off their back and more leaniant CAFE standards

auto bail out is bad idea

It seems the CEOs of the Big Three will be headed back to Washington DC early December. And, this time they might carpool instead of flying the private corporate jets. But that does not change the fact that bailout is the wrong solution. I have written a detailed article entitled "Big Three Auto Bailout is Wrong Solution" to make my case. You can read the article in detail here:

US Auto Industry

Any Taxpayer funds given to the Auto Industry will only encourage the continuation of the arrogant, stupid, and selfish bad business policies of the Auto Industry executives and the UAW members. What is fair about letting the highly paid executives and union workers continue their featherbed deals, perks, stupid business decisions, and etc with taxpayer money after these people took so much money from the Auto Industry that they bled the Auto Industry to death. Let them go bankrupt so other parties can buy the assembly plants and other facilities to re-start these plants as non-union automobile manufacturing operations. Let the Big 3 Executives disappear with the money that they took from the Auto Industry, but do not let them have any Taxpayer Funding to continue their bad business practices. The big 3 automakers are already in debt up to their ears. Any taxpayer money that they get will just go to pay off the bank debts that occurred when these financial geniuses borrowed money to pay dividends, in order to drive up the stock prices, which enriched themselves through their stock options. Let them all disappear, especially as a lesson to all of the other Enron type MBA financial geniuses that caused these problems. If the Enron type MBA financial geniuses that caused these problems disappear then the UAW feather beds that they created will also disappear with them.

The USA government is going to continue to just crank up the presses and print more dollars, T-Bills, Government Bonds (and let the buying power of everyone else's wages fall as the value of the dollar falls) to pay for the US balance of trade, government payrolls, entitlements, pork barrels, government operations, social schemes, wars, and etc. Foreign Governments and their rulers might look stupid but they really are not stupid. They will continue buy the real estate, industries, breweries, hotels, factories and financial institutions located in the USA with the decreasing value bonds and dollars that we gave to them to manufacture the things that we imported rather than us working to manufacture these things. The USA Government is supporting this by calling it "Investing in America". This stupidity will eventually change this country into a third world country when foreign countries discover that we will not repay (redeem the bonds) the money that they are lending us to buy their products. The USA population will become employees (or slaves) to the foreign countries that will own everything in the USA. Our children and grandchildren might also have to change to the religion of the business owner if they want a job. We need to re-industrialize and manufacture the things that we consume, rather than pay people in foreign countries to manufacture the things that we consume. Future nationalization (ala Mexico) of foreign owned assets is another discussion topic for another day.

Yes, I think we can deal with them.

This is an opportunity for the taxpayer to get reforms. We can use it. Make them reform, revise, rethink, retool, and repay. I do think that the collapse of the Big Three would devastate the economy. I've heard few people disagree with this theory. Too many more people would be hurt; it could tip the scale too far to recover.
While we've got their attention, and as Sen. Dodd is doing as I write, get them thinking about more green solutions to gas and gridlock. While they are doing this, they might also think about how they rip us off at the service bays and the sales offices of America. Reform should also include an end to usurous sales and services practices. If we're going to help them, they should return the favor by creating transparency in their dealings with the consumer.
They look at least a bit more humble and thoughtful than two weeks ago, I think we can deal with them.


Its great to bailout the automakers however have you tried to buy a car lately? You practically have to have perfect credit. So what good will it do if no one can buy a car. Also whats to stop the automakers from filing BK and never having to repay the money.

Bailout is not good for tax payers!

I think that the bailout is not a good reason for the U.S. because no one really knows if the money will help the economy until the bill is passed and even then it may not help the auto industry and bring down the economy as a whole. We also think that the money that will be given to the industries will not be easily repaid or given lightly. In order to give the money to the companies the government would have to raise taxes thus draining money from the people. Then on the other hand once the companies get the money the tax payers would not have money so it would just make the situation worse than it already is.

The bailout is bad for the tax payers!

I think that the bailout is not a good reason for the U.S. because no one really knows if the money will help the economy until the bill is passed and even then it may not help the auto industry and bring down the economy as a whole. We also think that the money that will be given to the industries will not be easily repaid or given lightly. In order to give the money to the companies the government would have to raise taxes thus draining money from the people. Then on the other hand once the companies get the money the tax payers would not have money so it would just make the situation worse than it already is.

I think we are now

I think we are now living in an interesting times. We're just expecting that the congress should make ways to improve fuel-economy standards most especially to the community. Btw, how about the oil demands?

Our country is in the midst

Our country is in the midst of financial crisis that’s why we must be wise on how are we going to spend our money. Bank of America just can’t stay out of the headlines. Whether it’s Bank of America getting a bailout, getting slapped in a class action lawsuit, or getting into a tiff with Merrill Lynch executives over lying to them about the company they just bought, they get into the news. Oddly enough, just like the absorbed asset Merrill, they are being stung with requests to disclose their bonuses. It appears that they used the quick loans they got from the taxpayers (which they aren’t required to pay back) to pad their executives’ bank accounts. Mario Cuomo, attorney general of New York, and U.S. Rep Barney Frank aren’t happy with Bank of America for enriching themselves after they nearly went broke.

Lord, Mr. Ford, what have you done?

The auto bailout, along with the finance bailout, is kind of a catch 22. If we don't bailout, industries that would naturally have died off are allowed to and the superior companies that are able to persevere as a business are allowed to do as their right is to take over as unworthy competitors fail. However, the problem with doing so is that it would put hundreds of thousands out of work and puts us immediately into another Depression. I think that it ought to be mandatory that Chrysler and GM merge. Neither of those companies are going to be viable long term. Maybe they should be allowed to shrink down to just Dodge, Chevy, GMC Trucks for industrial uses, Jeeps and Corvettes, but that's just me. (Then again, the best selling full size pickup is the Ford F150...I guess maybe just down to Jeeps and Corvettes.) Ford seems to be the one automaker out of the big 3 that is going to be able to survive. All that being said, some sort of concession has to be reached with the UAW, which they have been doing fairly well. The practice of Job Pooling should only be done amongst UAW workers, out of their own pocket. Granted, unions have a purpose, and the need for them to establish to safeguard labor against the abuses of management has a significant precedent in the historical record. Anyone who claims that there shouldn't be any unions is really just saying that they should be able to treat people however they want and not pay them anyway. Hopefully we can at least get Ford to start turning out cars that are completely competitive with Honda and Toyota.

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