Bailout for automakers?

[Meadmaker]

I'm surprised there isn't more talk about this here. Congress is considering giving 25 billion bucks or so, as a loan, to Ford, GM, and Chrysler. Is the lack of talk due to not caring? Or shell shock from wave after wave of bad news?

At any rate, I have very mixed feelings about this issue. On the one hand, I don't think it is appropriate to use government money to bail out private business. That seems, just in principle, to be a very, very bad idea.

However, Ron Goettelfinger (sp?), President of the UAW, has been all over the airwaves here in Detroit, saying that without a bailout, the companies will go under, and simply stop making cars. The executives of the companies have kept a lower profile, but they basically say the same thing.

For the sake of argument, let us assume that this is true. Let us assume that the prospect of the Detroit Three, formerly known as the Big Three, going out of business, is real. Do people realize how thoroughly, amazingly, bad this would be for the economy of America. I don't mean just a little bad. I mean Great Depression sort of bad. I think the failure of the car companies would touch off a deflationary spiral that was as bad as it has ever been in this country. Housing prices would plummet further. There would be more turmoil on Wall Street. All of this would cause instability, and further chaos in the financial markets as more mortgages and consumer loans failed. I think 20% unemployment by next year would be an optimistic projection.

We can look and say that it is the car companies' own fault for being in this mess, and there is undoubtedly some truth to that. It might also be that a bailout wouldn't help. It could be that it isn't really necessary, and is just a clever ruse to get corporate hands on taxpayer dollars.

However, if what they are saying is true, we had better bail them out, because if you think it's bad now, just wait til next year if they go under.

Full disclosure statement: I do not work for any of the Big Three, but I am extremely confident my job would be gone in the first wave of "ripple effect" layoffs to follow a shutdown of one or more of the major automakers.

[Darth Rotor]

However, if what they are saying is true, we had better bail them out, because if you think it's bad now, just wait til next year if they go under.

Full disclosure statement: I do not work for any of the Big Three, but I am extremely confident my job would be gone in the first wave of "ripple effect" layoffs to follow a shutdown of one or more of the major automakers.

Are we forgetting the Chrysler bailout around 1980? It sorta worked out in the end, didn't it?

The question is, do they have to pay the money back to the treasury or not?

DR

[tyr_13]

I really wish Toyota would just buy up some of their assets. The business model in Detroit just isn't working. It is a combination of factors in my view, but not adjusting fast enough to consumer demand (seriously, 25mpg isn't 'good', my 95 Intrepid gets that), and overly onerous employment costs and regulations (over paying some workers, not being flexible with the work force by being able to reallocate positions) obviously don't help.

Bailout or not, these companies need to dramatically re-organize.

[Francesca R]

I'm surprised there isn't more talk about this here.Some is happening here (http://forums.randi.org/showthread.php?goto=newpost&t=126034)

Congress is considering giving 25 billion bucks or so, as a loan, to Ford, GM, and Chrysler.I think the 3 hoped to get access to the $700billion legislated last month but apparently that's off the table, per your Treasury Secretary.

At any rate, I have very mixed feelings about this issue. On the one hand, I don't think it is appropriate to use government money to bail out private business. That seems, just in principle, to be a very, very bad idea.Well there are plusses (saving the economy from a worse public cost) and minuses (moral hazard, protectionism, etc)

However, Ron Goettelfinger (sp?), President of the UAW, has been all over the airwaves here in Detroit, saying that without a bailout, the companies will go under, and simply stop making cars. The executives of the companies have kept a lower profile, but they basically say the same thing.These people have vested interests so one should probably apply critical thought. This (http://www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__001.pdf) is a non-partisan supposedly "independent" think tank's analysis which is not so dire as the predictions you cite.

For the sake of argument, let us assume that this is true. Let us assume that the prospect of the Detroit Three, formerly known as the Big Three, going out of business, is real. Do people realize how thoroughly, amazingly, bad this would be for the economy of America. I don't mean just a little bad. I mean Great Depression sort of bad. I think the failure of the car companies would touch off a deflationary spiral that was as bad as it has ever been in this country. Housing prices would plummet further. There would be more turmoil on Wall Street. All of this would cause instability, and further chaos in the financial markets as more mortgages and consumer loans failed. I think 20% unemployment by next year would be an optimistic projection.Why assume that "for the sake of argument" if it is probably a biased prediction. And where do you get those projections from? No thanks.

How about Chapter 11 instead, which is actually at least as stable as relying on government, and leaves out the moral hazard to not fix the (uncompetitiveness) problem? How about--if there is government assistance--then the government gets preferred equity as in the case of the "smarter" bank bailouts in Europe? And, although carmakers have up and downstream links to other parts of the economy, they are not as central to it as banks are.

[Meadmaker]

These people have vested interests so one should probably apply critical thought. This (http://www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__001.pdf) is a non-partisan supposedly "independent" think tank's analysis which is not so dire as the predictions you cite.


The problem with this analysis is that is talks about job losses and economic effects from three sources.

There is the direct loss of auto company employees.
There is the indirect loss of supplier employees. (That's me.)
There is the loss of jobs due to lowered consumer spending by laid off workers.

It leaves out the biggest impact: the bank failures and similar problems for the financial industry. A lot of those employees have debts that won't be paid back. If you think that's bad, the companies they work for have industrial strength debt that will never be paid back. Failure of the auto industry would cause a huge wave of commercial and individual bankruptcies. You thought the foreclosure crisis was bad? This will be worse. This will cause an already troubled financial system be even further weakened. The paper itself hints at a couple of other little problems that aren't so little:


Finally, the bankruptcy
of any of the Detroit automakers may have serious implications for their pension funds
and the level of obligations of the Pension Benefit Guarantee Corporation, as well as
funding of the nation’s health care system. The Detroit Three are directly and indirectly
responsible for funding the health care of 2 million employees, retirees, and dependents
of their own companies and their suppliers.

It seems unthinkable to me that this 100% failure scenario could occur. However, if it did, it would be bad with a capital B. If, indeed, a bailout could prevent it, and if, indeed, it was necessary to do so, it would be worth it.

I'm not sure that's the case. I'm not sure that the 100% shutdown scenario that Goettelfinger and the execs have been discussing is a realistic scenario, but I wondered if people understood the implications if it should occur.

Personally, I tend to agree with Mitt Romney, who, in the New York Times today called for letting them go bankrupt, but referred to a "managed bankruptcy" under Chapter 11. (The link can be found on Drudge.) However, even that would require some sort of government intervention. If the situation were allowed to run its usual course, and they simply shut down, it could be catastrophic.

[tyr_13]

At some point some loss is going to have to take place. Fewer workers or paying some workers less for example.

However, this bailout doesn't mean that people will then start buying their cars. That is the real big problem. A lot will have to change for that to happen.

[noch1Narr]

Meadmaker- what you and Mr.Romney suggest makes sense.
Maybe, while the big 3 are in chapter11, the government could loan(!) them a substantial amount of money with the provision that it be used to produce vehicles that are substantially more fuel-efficient than most of the dinosaurs produced until recently. A managed bunkruptcy would still have a considerable ripple effect, but there, too, some government assistance might help ease the transition, both for laid off workers (retraining/relocation?) and for the parts supliers..?

[Francesca R]

The problem with this analysis is that is talks about job losses and economic effects from three sources.

There is the direct loss of auto company employees.
There is the indirect loss of supplier employees. (That's me.)
There is the loss of jobs due to lowered consumer spending by laid off workers.No it considers second-round effects.

It leaves out the biggest impact: the bank failures and similar problems for the financial industry. A lot of those employees have debts that won't be paid back. If you think that's bad, the companies they work for have industrial strength debt that will never be paid back.GM's corprate debt has long discounted a decent probability of failure, as do its CDS spreads. What this means is that the markets are already substantially prepared for this (as are equity holders--see the stock price of GM and Ford). As for the employees, you are assuming they never get re-hired, contrary to all available evidence of manufacturing downsizing in your country.

Failure of the auto industry would cause a huge wave of commercial and individual bankruptcies. You thought the foreclosure crisis was bad? This will be worse. This will cause an already troubled financial system be even further weakened.It will be "bad". I do not agree it will be worse or even as bad as the housing slump in respect of main-street impact. Although the timing is rubbish.

[tomwaits]

American automakers have been dying for some time now. I, for one, welcome our (semi)new Japanese autolords.

[Francesca R]

Toyota and Honda are not in great shape either. Tata is da new boss.

[tyr_13]

American automakers have been dying for some time now. I, for one, welcome our (semi)new Japanese autolords.

I've been a big Toyota fan from the time I toured their production facilities in Aichi, Toyoda shi.

Also when I fell in love with the Prius before I even knew what it was. Those are some strong frame designs.

As long as Toyota keeps it's efficiency high, as well as keeping up with new demand/technology, I don't see it in serious trouble.

I do wish the Diatsu line was better. I want a Mini over here. A carbon fiber one, but still I like anything that looks like a shuttle pod from Star Trek.

[tomwaits]

Those are some strong frame designs.

That's what she said.

:duck:

[Meadmaker]

At some point some loss is going to have to take place. Fewer workers or paying some workers less for example.

However, this bailout doesn't mean that people will then start buying their cars. That is the real big problem. A lot will have to change for that to happen.

This is a total myth. GM sells more cars than any other carmaker in the world. Corollary: It makes more cars than any other carmaker.

They can, and have, dealth with steadily declining market share. What they (apparently) can't take is a sudden evaporation of the car buying market, and a sudden transformation of consumer interests, away from minivans toward smaller vehicles.

Meanwhile, they have some very generous contract terms with their unions. There is especially the "jobs bank", in which laid off workers continue to receive most of their pay. That's killing them. Even if they close a factory, cash continues to flow out.

When something awful happens to the business, it is fair to blame the people in charge of the business. I have no problem saying the car companies have been mismanaged. What I am pointing out is that you might think this only affects people who work for the car industry. That's not true.

Many people thought that only people trying to sell homes were affected by property value declines. Apparently, there was a little bit more of an impact than originally foreseen.

[Francesca R]

Who thinks this "only affects the auto sector?". And that isn't the arbiter about whether to publicly support the companies or not.

[balrog666]

This is a total myth. GM sells more cars than any other carmaker in the world. Corollary: It makes more cars than any other carmaker.

They can, and have, dealth with steadily declining market share. What they (apparently) can't take is a sudden evaporation of the car buying market, and a sudden transformation of consumer interests, away from minivans toward smaller vehicles.

Meanwhile, they have some very generous contract terms with their unions. There is especially the "jobs bank", in which laid off workers continue to receive most of their pay. That's killing them. Even if they close a factory, cash continues to flow out.

When something awful happens to the business, it is fair to blame the people in charge of the business. I have no problem saying the car companies have been mismanaged. What I am pointing out is that you might think this only affects people who work for the car industry. That's not true.

Many people thought that only people trying to sell homes were affected by property value declines. Apparently, there was a little bit more of an impact than originally foreseen.


This wasn't sudden and this wasn't news to anyone in the auto industry.

GM has been losing money on every car they've built in the US for decades! Not weeks, not months, not years, but decades.

They spun off GMAC (which actually made most of their profits) to insure its survival. Now they have to deal with what's left.

.

[Meadmaker]

No it considers second-round effects.


Barely. Consider this paragraph:

The scale of the contraction of the
Detroit Three would overwhelm any attempt by the international producers to keep their
existing suppliers in business or to find alternative suppliers, here or elsewhere. U.S.
consumers would be forced to rely on only imported vehicles as a source of new vehicle
purchases in the first year. However, we do not assume that the international
automakers in the U.S. lay off their employees at any time.

Uhh...how does that work? Their suppliers are out of business, but they don't lay off their US employees? I don't understand. Without their suppliers, they don't have parts. How do they build the cars? It says it right there in the paragraph. US consumers would be forced to rely on imported vehicles. A Toyota produced in Kentucky isn't an imported vehicle. Toyota won't lay off the workers from the plants that aren't producing cars?

They said what they would consider


1. DIRECT: Direct changes in employment, compensation and personal income tax
revenues that are a result of the Detroit Three contraction in production and
employment.

2. INDIRECT: This is the “supplier effect”. Indirect changes in employment,
compensation and tax revenues that are a result of a cancellation of purchased
inputs to automotive production..

3. SPIN-OFF: These are the expenditure-induced effects in the general economy.
Spin-off effects represent the loss of economic activity due to reduced spending


What isn't factored in is the fact that these employees, and the companies that employ them, owe a whole bunch of people a whole lot of money. If they lose their jobs and their companies go bankrupt, those debts don't get paid back. This causes banks to fail.

As with the home foreclosure problem, all of the pricing of the debt was based on the fairly reasonable assumption that not all homeowners failed to pay all at once.

Oopsie!

As for the employees, you are assuming they never get re-hired, contrary to all available evidence of manufacturing downsizing in your country.

By whom? Sure, they will eventually get rehired. I don't think this depression would last a whole decade, like the one in the '30s, but in the short term, cars and food are what we make in America. We don't need more food workers.

[Francesca R]

Barely.Well you should take it up with the Center for Auto Research if you think it is not pessimistic enough. I suspect it is overly pessimistic myself. I am not going to argue about it with you though :)

They said what they would consider [ . . . ]Don't you see that 1, 2 and 3 are precisely the effects that you then go on to say are not factored in? Most of the scenarios' job losses are not from the automakers themselves

If they lose their jobs and their companies go bankrupt, those debts don't get paid back. This causes banks to fail.Banks do fail. Which banks exactly? Citigroup and BofA and JPM are not going to fail due to the Detroit three, no.

As with the home foreclosure problem, all of the pricing of the debt was based on the fairly reasonable assumption that not all homeowners failed to pay all at once.I don't follow the relevance. Debt markets are priced for a significant probability of GM or another failing. Do you think that market participants are sitting idly by not realising there is a problem? GM debt has been priced for default for years. It seems that it is you that apprehended the situation more recently, not the markets.

[Meadmaker]

I don't follow the relevance. Debt markets are priced for a significant probability of GM or another failing. Do you think that market participants are sitting idly by not realising there is a problem? GM debt has been priced for default for years. It seems that it is you that apprehended the situation more recently, not the markets.


Were they priced for simultaneous failure of all three? Which would trigger failure of the whole supplier network?

I happen to be a Bank of America customer. They recently took over the biggest regional bank in Detroit. They didn't price my loan higher as a result of my working for an automtive supplier. In other words, that particular portion of the debt market has not factored in the possibility of GM, Ford, and Chrysler's default. I think there are lots of other areas where that has not been factored into the market rate, either.

Hopefully, we won't find out.

One scenario that avoids the nightmare goes a bit like this: One of the big three just plain goes belly up. A different auto company, like Toyota, or maybe a large investment company, buys a factory, and some interest in dealerships, and a few bits here and there of the old comapny. After a couple of hundred million dollars of investment, the factory continues to crank out cars, but without the current UAW contract, and without the retiree issue. That avoids a lot of the catastrophic collapse. The suppliers would still supply, although with disruption. The workers would still work, although at a lower pay rate. Even that would be pretty bad for the economy, but not catastrophic.

Somehow, I think the government has to ensure the continuation of a domestic auto industry, and some sort of "soft landing" for the current version. Otherwise, things could be bad. Just plain bad.

[Meadmaker]

Banks do fail. Which banks exactly? Citigroup and BofA and JPM are not going to fail due to the Detroit three, no.

And of course, they might not last that long:

http://www.reuters.com/article/topNews/idUSTRE4AI91420081120?feedType=RSS&feedName=topNews&rpc=22&sp=true

[rikzilla]

Have any of you guys seen the documentary: "Who Killed the Electric Car?" ?? GM actually built a viable zero emission vehicle. It was a pure electric called the EV-1 which had a range of 120 miles (3rd generation batteries...their 1st gen ranged about 60 miles)
it also went zero to sixty faster than many gasoline vehicles. GM did this in response to a tough new California law that mandated auto makers must offer a viable zero emission vehicle by a certain date or be restricted from selling in California. GM built the car...but at the same time sent legions of lawyers to sue California. They defeated the law. They then recovered all the EV-1's in circulation (they were only offered as leases) and sent them to a remote site in the desert where they were all crushed.

Apparently they didn't want anyone to know that pure electric cars were viable as they could not make as much money from them. Global Warming be damned.

Well screw them. These people have demonstrated no thought for social responsibility, why should society be made responsible for their problems?

Oh, and BTW, when the "big 3" came begging to DC....all 3 CEO's jetted in on their own private jets. 3 guys...3 separate jets. Nice.

Again...screw them!

-z

[Miss_Kitt]

I agree with Meadmaker's analysis. What is likely to happen is that at least ONE of the Detroit majors has to sell its major assets--at fire sale prices--to an overseas manufacturing conglomerate. The car line(s) are retooled to match the international market and the new US market, and within a year or so, the new models of the old marque are available. Because the assets are sold, not the company itself, the old UAW contracts and pensions liabilities are not the responsibility of the new owner, and that in and of itself will pretty much cover the issue of making a profit.

I am amazed by people who squak about the impact of the reduced spending of the laid-off car plant workers and supplier workers (they would undoubtedly cut back, but likely stay in business)--but blithely assume that the billions of dollars from the government would just be pumped out of the magic money well in DC. That money is, and can only be, from tax dollars; tax dollars collected from businesses and individuals who have done a better job of facing the facts than GM and friends.

There's also the interesting issue of the vastly overpopulated dealer market. Apparently, car dealerships have some special protections in state laws all over the US, such that they are not subject to the normal market pressures. A quick check via Google reveals TEN GM dealers in the Greater Seattle area alone. And that's just new car dealers on the official GM dealer site! Contrast this with 5 Subaru dealers, and 6 VW dealers. Does GM really sell that many more cars?

The other issue is that US carmakers have been 'priming the pump' by providing big rebates and incentives, which are reimburseable to the dealerships--and GM has postponed making those payments. So the local dealers are the ones absorbing that cost at the moment -- GM central is in worse shape than is perhaps realized.

As another post noted above, the US automakers have been ignoring market trends for decades. I freely acknowledge that the refusal of the US Government to include SUVs in the automobile mpg requirements is part of the issue, but a smart business would have not waited for the regulatory issue before moving their production towards the smart longer-term market. They would be creating more quality vehicles, and fewer DVD fold-down screens on clunkers.

I haven't bought a US brand car in my adult life. I've had too many object lessons in my parents' and friends' cars. I don't have a whole lot of sympathy for the people who are 'in the bucket' on their SUVs and big pickups that never seen anything more uncivilized than a school parking lot. I'm sorry for the people who are going to get hit by the cycle of consolidation and reorganization; but as a Boeing brat who grew up when "Will the last person leaving Seattle please turn out the lights?" was an actual billboard, I've seen that people adapt and survive.

Nobody has a right to make the taxpayers support them in an untenable business, whether they are the CEO or the guy pushing rivets. The world grows and changes, and what is a viable business changes, too. There are some winners and losers in the short-term, but in the long term, it's a win for everyone to let the more effective, efficient, smart and flexible manufacturers produce goods that will meet people's needs.

No bailout! I can see there being a role for 'bridge loans' while a bankruptcy or piecemeal sale is being worked through--specifically, to keep the suppliers who support multiple lines of car manufacturers solvent as they adjust to not having a big customer pay its bills--but I don't want to reward Detroit's auto industry for their short-sightedness. I don't want to have them saved from the mistake of believing that they were right to spend their money on lobbying Congress for special treatment, instead of investing in R&D. I don't think car dealers or line workers at the plants are any more entitled to their jobs than the people who worked for phonograph manufacturers or gas streetlight servicemen. Technology marches on; the market changes. Old firms go under, or change; new firms fill new needs.

Just my thoughts, MK

[TragicMonkey]

Let them eat cake.

[Francesca R]

I am amazed by people who squak about the impact of the reduced spending of the laid-off car plant workers and supplier workers (they would undoubtedly cut back, but likely stay in business)--but blithely assume that the billions of dollars from the government would just be pumped out of the magic money well in DC. That money is, and can only be, from tax dollars; tax dollars collected from businesses and individuals who have done a better job of facing the facts than GM and friends.Yes but, government bailouts can make a profit for the taxpayer, such that it is investor/lender--not spender--of last resort. (Chrysler, 1979)

[rikzilla]

Well if one of those beggars was wearing a $100 suit and was named Mr. Iacocca I'd be inclined to agree. However Iacocca was brought in to save Chrysler and then rolled up his sleeves and went to work. These are the rich idiots who ran these companies into the ground...and come begging from G-IV bizjets.

Let them live or die by the market like good capitalists should.

-z

[Darth Rotor]

I find it curious that Congress will allow 500-700 billion in aid to banks, a non industrial sector, but is fudging on about 25 billion, less than a five percent of the suggested bank bailout, to an industrial sector that has suppliers, supply chains, logistics chains, and third order impacts all over the economy. Liposuction in order? Sure. Death out of petty revenge? What for?

In whose pockets are the Senators and Congressmen, folks? Looks like the financial sector, whose interests cross our national boundaries. The Big Three, for all their faults and the UAW's recalcitrance, are a domestic asset, a potentially warm industrial base. We have seen twenty years of a worship of an abstract free market, with some significant downsides. At what point does one consider a course change?

Granted, US automakers have, since the early 1970's, consistently turned their backs on leading the tech. rik, your EV-1 story is germane. Likewise the Maverick and Gremlin.

But rik, regardless of how odious you or I find the suits in charge of the Big Three, I look to those who build cars, and their families, and their communities, and I ask: must we sacrifice them for the sake of sticking our fingers in the eye of those G-IV flying suits?

My gut says no.

DR

[Francesca R]

I find it curious that Congress will allow 500-700 billion in aid to banks, a non industrial sector, but is fudging on about 25 billion, less than a five percent of the suggested bank bailout, to an industrial sector that has suppliers, supply chains, logistics chains, and third order impacts all over the economy.It's not cut-and-dried, but some of the rationale is:

1--The rest of the economy depends much more on banks than on domestic auto-makers
2--Banks are significantly more vulnerable to confidence crises (A run on WaMu could also floor Citigroup and BofA and banks in Europe and Asia, whereas GM shutting down is more likely to boost business for other auto companies)
3--Banks do not tend to come out of chapter 11 bankruptcy. Sure it's difficult for any company to do, but non-financials do it all the time.

[Meadmaker]

I am amazed by people who squak about the impact of the reduced spending of the laid-off car plant workers and supplier workers (they would undoubtedly cut back, but likely stay in business)-


If the "nightmare scenario", which involves near simultaneous failure of all three domestics, and the ceasing of operations, this is not likely to be the case.

Most suppliers would also cease operations. The "new domestics" (our term for Toyota, Honda, BMW, etc. operating in the US) are an important part of our business, but not enough to keep us in business. That means Toyota plants in the US would also be shut down temporarily as supply chains are reestablished.

We could survive some sort of "managed bankruptcy", which would still require government intervention to achieve, but actual failure of the Big Three within a period of months would certainly drive us, and a lot of companies, out of business.

It all gets very complicated because the elephant in the room that no one wants to talk about is the union contracts. Under bankruptcy, they're gone. No Democrat wants to have anything to do with any plan that touches them. In addition, the retiree health benefits are huge. They probably need to go as well, but that means a couple of million suddenly uninsured people, who don't have jobs. That's a big problem.

[Francesca R]

It all gets very complicated because the elephant in the room that no one wants to talk about is the union contracts. Under bankruptcy, they're gone. No Democrat wants to have anything to do with any plan that touches them.Perpetuation of deeply uncompetitive union agreements is one of the big reasons why those who favour bankruptcy do so.

I suppose that if a democrat government "can't touch that" at this stage of the game, they never can.

[Disbelief]

Perpetuation of deeply uncompetitive union agreements is one of the big reasons why those who favour bankruptcy do so.

I suppose that if a democrat government "can't touch that" at this stage of the game, they never can.

But much of the non-competitiveness disappears in 2010, so why not just bridge the gap with the requested loan. While others here talk about how the "suits" have ruined the industry, they have zero idea of all the changes that have taken place in the past ten years to truly make the Big 3 more competitive. Knowing that 2010 was the make or break year, they were buckling down even more to make it there. The current financial crisis, which the $700 billion recipients are mainly responsible for, is what has driven them so quickly to this point. Toyota lost money in the third quarter and even with 0% financing they have done poorly in the current market.

[Jimbo07]

While others here talk about how the "suits" have ruined the industry, they have zero idea of all the changes that have taken place in the past ten years to truly make the Big 3 more competitive.

Maybe they have, in fact, done a good job! However, I wonder if something highly symbolic, like all 3 resigning, might prompt a loosening of the purse strings...

[Disbelief]

Maybe they have, in fact, done a good job! However, I wonder if something highly symbolic, like all 3 resigning, might prompt a loosening of the purse strings...

But that might be a bad decision if they are truly capable, yet paying the price for failures of previous executives. Here is an interview with someone who follows the industry closely, not just a sideline critic:

http://www.huffingtonpost.com/diane-tucker/journalist-to-gop-youre-1_b_144481.html

[Jimbo07]

But that might be a bad decision if they are truly capable, yet paying the price for failures of previous executives.

That's why I called it a symbol. They're being taken to task for having travelled on private jets. They may have to make hard personal decisions and fall on the sword. Perhaps others just as (or more) capable could be put in their place. I'm thinking PR move. They don't seem to have that game down, if the last couple of days are any indication.

[Disbelief]

That's why I called it a symbol. They're being taken to task for having travelled on private jets. They may have to make hard personal decisions and fall on the sword. Perhaps others just as (or more) capable could be put in their place. I'm thinking PR move. They don't seem to have that game down, if the last couple of days are any indication.

No, they clearly do not have the PR moves down considering the beating they take for asking for a little while the financial fatcats haven't been heard from.

Anyway, I think that they should forego a salary (and bonuses) next year as a symbolic move and show that they are truly there to fix things. That may be more symbolic than falling on the sword and even show the UAW that they are willing to sacrifice.

[Meadmaker]

And of course, they might not last that long:

http://www.reuters.com/article/topNews/idUSTRE4AI91420081120?feedType=RSS&feedName=topNews&rpc=22&sp=true

But then again, they are eligible for a bailout, so they'll probably do ok.

I guess Citigroup doesn't have any union contracts.

[balrog666]

Perpetuation of deeply uncompetitive union agreements is one of the big reasons why those who favour bankruptcy do so.

I suppose that if a democrat government "can't touch that" at this stage of the game, they never can.


That is the point. If none of these management teams can stomach planning for and executing a reorganization at this point, they will never have the guts to do it.

And in 60 days the Obamama administration will show up and green-light the business killing "Card Check" union-boosting legislation for the UAW. "Game over, dude." :(


But much of the non-competitiveness disappears in 2010, so why not just bridge the gap with the requested loan. [snip]


GM is burning through more than $1 billion per month - how much will it cost to get them to last until March 2010? Add in Ford and Chrysler. How much in US taxpayer dollars are you willing to burn to achieve that limited (and practically meaningless) goal?

And do you really think anything will change after that? :boggled:


Maybe they have, in fact, done a good job! However, I wonder if something highly symbolic, like all 3 resigning, might prompt a loosening of the purse strings...


And yet that would require some slight interest from them in having these companies survive. No sign of that yet. :(

.

[rikzilla]

I find it curious that Congress will allow 500-700 billion in aid to banks, a non industrial sector, but is fudging on about 25 billion, less than a five percent of the suggested bank bailout, to an industrial sector that has suppliers, supply chains, logistics chains, and third order impacts all over the economy. Liposuction in order? Sure. Death out of petty revenge? What for?

In whose pockets are the Senators and Congressmen, folks? Looks like the financial sector, whose interests cross our national boundaries. The Big Three, for all their faults and the UAW's recalcitrance, are a domestic asset, a potentially warm industrial base. We have seen twenty years of a worship of an abstract free market, with some significant downsides. At what point does one consider a course change?

Granted, US automakers have, since the early 1970's, consistently turned their backs on leading the tech. rik, your EV-1 story is germane. Likewise the Maverick and Gremlin.

But rik, regardless of how odious you or I find the suits in charge of the Big Three, I look to those who build cars, and their families, and their communities, and I ask: must we sacrifice them for the sake of sticking our fingers in the eye of those G-IV flying suits?

My gut says no.

DR

Well DR ole buddy,...
Maybe you are right. However I'm not convinced. Of course Obama will sign off on the bailout because his allegiance is with the UAW in saving those jobs you mentioned. I however have more personal experience. See, I once worked for a little company called MCI/Worldcom. When our management was sent off to jail with our company in bankruptcy, the commercially viable bits of the business were sold off to properly run corporations. I never lost my job, my paychecks just started coming from Verizon instead. Our corrupt management went off to jail where they belonged. If they could have gotten a gov't bailout they'd have simply pissed that away on limos and hookers and god knows what... No DR, the only correct thing to do is let these businesses fail or thrive by the free market. There's a reason why the "Big 3" are failing and they need to evolve along with the market. If they can't do that then market Darwinism is supposed to take over. Capitalism right? Do we socialize their profits? (other than the proper taxes that is) If not, then why must we socialize these losses?

I'm a union guy myself and I really, really feel for the people all down the line who may lose jobs over this...but it simply is not right to use the rest of us as a safety net for any business big or small. Maybe I'm not being particularly pragmatic or realistic? But maybe, just maybe the pain of collapse and reorganization is just what we need for long term health?? The US auto industry is a sick old man, giving him a cane may seem nice and helpful but maybe letting him croak and getting a new fresh start would be smarter.... ??

Just sayin'
-z

[Meadmaker]

See, I once worked for a little company called MCI/Worldcom. When our management was sent off to jail with our company in bankruptcy, the commercially viable bits of the business were sold off to properly run corporations. I never lost my job, my paychecks just started coming from Verizon instead.

On a philosophical level, I agree. However, imagine if AT&T, Verizon, MCI, and every other domestic phone company all went bankrupt within the space of a few months. You might say that some other phone company would pick up the slack, but at least for a while no one would be maintaining phone lines. Businesses wouldn't be able to make phone calls. And, of course, all the phone companies and phone company employees would owe lots of people lots of money, and they wouldn't pay it back.

Keep in mind that this whole economic mess started because some people couldn't pay their mortgages. The auto company collapse would be bigger than that. Lots bigger.

If we were looking at a possible General Motors bankruptcy, with Ford having two years worth of life blood in it, and Chrysler being able to last four years, there would be no huge problem. That isn't what we're looking at with this impending crisis. In the space of six months, a huge chunk of American manufacturing could just stop.

If that happens, Francesca doesn't think Citi would fail. I think she's wrong. Citi is already on the brink of collapse, and is going hat in hand to the government. Citi would have a whole new wave of foreclosures to deal with, plus a lot of bad commercial loans. They would sink.

I really don't know what the government ought to do. I don't have enough data to say how bad things are. I don't know what the union reaction would be if GM entered Chapter 11, was allowed to cancel the existing contracts, and came back with 40% pay cuts and less job security. (That's likely what would happen. Those of you outside of Detroit probably haven't heard of American Axle, but that strike, and its settlement, was huge news, even if it was widely unreported. If you're interested, ask.) I don't know whether people would buy cars from a bankrupt company. Buying a car isn't like having a phone contract.

So, I don't know what to do, but I do know what to avoid. A sudden crash landing of the Big 3 would send us into a full blown depression. That has to be avoided.

but it simply is not right to use the rest of us as a safety net for any business big or small.

I think the analogy is more like a lifeboat. You are on the lifeboat. The auto industry is the Titanic. I don't think you can row fast enough to get away from the suction.

[Beerina]

Well if one of those beggars was wearing a $100 suit and was named Mr. Iacocca I'd be inclined to agree. However Iacocca was brought in to save Chrysler and then rolled up his sleeves and went to work. These are the rich idiots who ran these companies into the ground...and come begging from G-IV bizjets.

Let them live or die by the market like good capitalists should.

-z


Iacocca responded by getting the smaller models on the fast track. And profitably.

The current auto makers treat the small cars as loss leaders to keep their average CAFE fleet standard down, while they sell the huge cars that make tons of profit.

So you just ride out the 1 1/2 year recession every 5 years, lose a few billions, then make tens of billions in profit selling the enormous, loaded cars.

It's a perfectly fine business model except for two things:

1. People don't want to buy large cars during recessions -- nor during periods of high gas prices. The latter has been going on regularly since the late 1990's.

2. Recent "credit crunch" devastating the auto market's loan arms, which in some cases, were the only part that was profitable (which is also fine.) But tough times and credit means no sales = no profits, and no 6.8% interest loans = even more no profits since people are defaulting.


Certainly someone in the industry should have woken up because of issue #1 above. European and Japanese car makers already make compact cars, and profitably, due to their domestic markets.

But it's easier as an exec to just float along, hoping to get through the next huge profit cycle, then retire. Indeed, the cycle, where you take over when it bottoms out in exchange for huge stock options, which you exercise when the profits are huge, is more their style, if you ask me.

And some got "unlucky" enough that the companies may not make it through this down cycle because of compounded effects.

But not insurmountable. And not without a decade of leading warnings.

[rikzilla]

Well I guess this is a case of; If I default on my $250,000 mortgage then I'm in trouble...but if I default on my $250,000,000 mortgage then my bank is in trouble.(Didn't Donald Trump get a bailout just for this reason?)

[Meadmaker]

So today's headline is that Citi gets a 20 billion dollar bailout. Yay for Citi. I know I'm pleased as punch to give my share to make sure they remain solvent.

The more I think about the bailout of Citi et. al. versus the proposed bailout of manufacturers, the less sense it makes to me.

If the Big 3 went belly up and just ceased operations, I know what would happen. We would stop making cars in America. Even Toyota plants in Kentucky, and Mercedes in Alabama, and Honda in Ohio, would at least temporarily stop making cars. You can't replace an auto plant, or an auto parts plant, in the space of a few days.

If Citibank stopped making loans, some other bank would keep making loans. It's a lot easier to expand capacity at a bank than it is to expand capacity at a rivet making facility.

I'm not saying that there ought to be a bailout for automakers or the rest of the auto industry, but I'm just questioning why it is that there ought to be a bailout for banks. What is it about Citigroup that makes it too big to fail? I happen to have a mortgage with Citigroup. (I'm a B of A customer, but once upon a time my mortgage got sold, and it ended up with Citigroup.) If they went out of business, I could hope that no one would be able to collect my money but, sadly, I'll bet someone else could be found, and my life would be unaffected. Meanwhile, if I were about to take out a new loan, there are other banks.

The more I think about it, the more I think that this crisis came about because a lot of people can't pay their debts, and a lot of people are counting on them to pay their debts. And what is the proposed solution? Make sure people can continue borrowing money. I think there might be something fundamentally wrong with this analysis.

[COLONEL]

All this bail out is , Just a big bandaid and who to say that down the road this won't happen again , Look at Chrysler they have already been bailed out and now they need bailing again . I say let them file bankrupcey and start over . If they ( the Govt ) really want to help, then give the money drectly to the people that are facing forclosers on their homes That way they would get to keep their home and they would be helping the banks as they paid their morgages . Look what happened when They gave money to AIG it ,was Buss. as usual CEO's got their bonuses and the American public got F***ed

[Disbelief]

GM is burning through more than $1 billion per month - how much will it cost to get them to last until March 2010? Add in Ford and Chrysler. How much in US taxpayer dollars are you willing to burn to achieve that limited (and practically meaningless) goal?

And do you really think anything will change after that? :boggled:




If the bailout of the banks frees up money for credit (which was supposed to be part of the point), then they will easily make it to 2010. Of course things will change, as they have been changing. Of course, since you have been oblivious to evidence presented that undermines your little rants against the industry, I don't expect you to understand.

[PaKu]

I keep hearing about this " too big to fail" companies..

isn't that becoming a variant of monopoly?
maybe such companies should be carved up like Bell Telephone before they become too big?
Otherwise, one has "only" to grow big enough and do whatever they want ( e.g. to grow that big) because the govn't (taxpayers) will HAVE to bail them out eventually

[Meadmaker]

If they ( the Govt ) really want to help, then give the money drectly to the people that are facing forclosers on their homes

In my house, my workshop area is too small, the kitchen doesn't have enough counter space, and the bedrooms are too close to the living room, which creates constant fights between those who wish to stay awake and watch television, versus those who wish to sleep. I wish that were not the case, but I bought the house I could afford, not the house I wanted.

I would be mad as heck if my money went to people who bought houses they couldn't afford.

What I'm questioning is the wisdom of any bailout. The only possible reason to bail out a company that is failing is to prevent the spinoff damage. I understand what the spinoff damage would be from a sudden collapse of the auto industry. It would be Bad. I would hope that there would be some way to avoid that without handing money to some people who drove their companies into bankruptcy, but if that were the only way, it would be worth it.

I'm not so sure about that when it comes to banks. There are plenty of banks that haven't failed. If the goal is to make sure credit is available, why not give money to banks that haven't collapsed?

Again, this contrasts with the auto industry. There are no American auto companies that haven't failed,or aren't about to fail, and the transplants wouldn't be able to take up the slack in time to prevent the spinoff damage.

[Meadmaker]

I keep hearing about this " too big to fail" companies..

isn't that becoming a variant of monopoly?
maybe such companies should be carved up like Bell Telephone before they become too big?

I've had the same thought. An awful lot of people in Detroit say that there is one too many car companies. The solution, they say, has to involve going from three to two.

I'm not so sure about that. I think maybe going from three to four would be better. I'm a low level auto industry insider. I certainly see the economies of scale that come from having a big company, but I also see the inefficiencies from the same cause. I'm not so sure that the industry wouldn't be better off if the bankruptcy judge for GM found a way to break them into two or three. I think an extra company could survive, and thrive. The problem isn't the inefficiency of a smaller company. The problem is the capital required to start such an entity.

[balrog666]

If the bailout of the banks frees up money for credit (which was supposed to be part of the point), then they will easily make it to 2010. Of course things will change, as they have been changing. Of course, since you have been oblivious to evidence presented that undermines your little rants against the industry, I don't expect you to understand.


GM owes over $200 billion in long term debt. How much more can they borrow? And who would be foolish enough to lend it to them?

.

[Francesca R]

GM owes over $200 billion in long term debt. How much more can they borrow? And who would be foolish enough to lend it to them?Quite. GM's debt trades below 20 cents. The market is not about to extend any credit.

[Disbelief]

GM owes over $200 billion in long term debt. How much more can they borrow? And who would be foolish enough to lend it to them?

.

Once the economy stabilizes, they will get money because they will have lost much of the legacy costs and will be the low cost producer in the US. Then, they will be able to make money off of their full line of vehicles and not just off trucks/SUVs and luxury.

[Francesca R]

Why do you think that existing creditors completely disagree with you?

[ponderingturtle]

Have any of you guys seen the documentary: "Who Killed the Electric Car?" ?? GM actually built a viable zero emission vehicle. It was a pure electric called the EV-1 which had a range of 120 miles (3rd generation batteries...their 1st gen ranged about 60 miles)

There was a thread on that movie a few years ago.

The problem is that people do not want an electric car. That car was only ever made because California wrote a law that mandated a fixed percentage of the sales after a certain date had to be electric cars.

So it did not matter how much the car cost to make and how much money each one lost, the auto makers needed electric cars that people would buy. Once the law got repealed there was no need to continue with such a monetary loss proposition.

As for selling the cars built, that had some legal issues that they would have had to support them.

There are plenty of people who will convert a car into an electric car. If people wanted electric cars they can get them. They just do not want to pay the cost for one, and have it as a second vehical.

[rikzilla]

There was a thread on that movie a few years ago.

The problem is that people do not want an electric car. That car was only ever made because California wrote a law that mandated a fixed percentage of the sales after a certain date had to be electric cars.

Well that and the fact that the Clinton admin made a subsidy deal with the big 3 to create zero emission cars.

So it did not matter how much the car cost to make and how much money each one lost, the auto makers needed electric cars that people would buy. Once the law got repealed there was no need to continue with such a monetary loss proposition.

The law wasn't repealed. The State of California was sued by a small army of lawyers bought by a consortium of auto makers and oil companies. There was also a "grass roots" movement of people who fought having recharging stations built... a fine bit of astro-turfing, again by oil companies in thin disguise.

As for selling the cars built, that had some legal issues that they would have had to support them.

Support them? When EV-1s arrived at dealerships for maintenance they just rotated the tires and refilled the washer bottles. The dealers had nothing to sell these people with electrics!

There are plenty of people who will convert a car into an electric car. If people wanted electric cars they can get them. They just do not want to pay the cost for one, and have it as a second vehical.

There are lots of people who can home-build a car too...but not many folks likely to buy such a thing. Mass production with quality controls and lowering costs will create an EV that people will buy. We know this from the large waiting lists for EV-1's...watch the movie man! The EV-1 was not the end-all-be-all of modern transportation by any means, but it was a very useful vehicle for most commuters, nevermind the whole Global Warming thingy... If "we the people" must bail out an industry I'd like to bail out the one most socially responsible. Maybe, just maybe, our bailout money should come with some green strings and stipulations.... Building gas munching clunkers with fold-down plasma screens is not the way forward.

-z

[Meadmaker]

Maybe, just maybe, our bailout money should come with some green strings and stipulations
So far, it has. Washington has made about 50 billion dollars available for such things. The problem is that those efforts are too long term to stop the cash burn now.

The movie distorts the reality of the situation, by the way. We talk a lot about cars in this neck of the woods. The EV-1 would never have been a commercial success, and more fossil fuels are burned to run an EV-1 than a gas powered machine. If you get your electricity from some other source, an electric vehicle might help reduce CO2 emissions, but if you burn coal to make your electricity, you'd be better off skipping the middleman and just pouring gas into the tank.

[Disbelief]

Why do you think that existing creditors completely disagree with you?

Because I am way more forward thinking than them.:D

You do know that they change their ratings from time to time, so just because the current outlook is grim does not mean that it will stay that way.

If "we the people" must bail out an industry I'd like to bail out the one most socially responsible. Maybe, just maybe, our bailout money should come with some green strings and stipulations.... Building gas munching clunkers with fold-down plasma screens is not the way forward.

Which is why the Big 3 have been going that way. You do know that GM and Chrysler have built fleets of hybrid busses for large metro areas that save far more gas (based on usage) than your average Prius? You do realize that the Escape hybrid is garnering good reviews? You do know that GM has more hybrids available than any other automaker? You do understand that they are trying to get a game changer out in the Volt?

Just because you don't think they are going green does not make it a fact.

[rikzilla]

So far, it has. Washington has made about 50 billion dollars available for such things. The problem is that those efforts are too long term to stop the cash burn now.

But when GM created the EV-1 and Toyota created the EV version RAV...and people who had these things raved about them...why did GM collect every last one and crush them? Why did Toyota load their EV RAVs on ships for Japan? It bugs me every time I see that stupid Toyota commercial with those guys weaving a Prius out of twigs and saying they are "working on" producing a zero emission vehicle "someday"....looks to me like someday was back in 1996.

The movie distorts the reality of the situation, by the way. We talk a lot about cars in this neck of the woods. The EV-1 would never have been a commercial success, and more fossil fuels are burned to run an EV-1 than a gas powered machine. If you get your electricity from some other source, an electric vehicle might help reduce CO2 emissions, but if you burn coal to make your electricity, you'd be better off skipping the middleman and just pouring gas into the tank.

True but there are many completely clean and viable ways of producing your electricity. Not only that but even a coal fired plant can be made cleaner than a million gasoline burning cars. One big smokestack can be scrubbed easier than a million little ones.

-z

[rikzilla]

Just because you don't think they are going green does not make it a fact.

How 'bout this? You tell me how shredding hundreds of nearly new EV-1's over the objections of thousands of people who wanted to own one fits the "green" movement. Similarly how does sueing the state of California to overturn groundbreaking clean air regulations..how does that one fit?

Take your time.

-z

[Disbelief]

How 'bout this? You tell me how shredding hundreds of nearly new EV-1's over the objections of thousands of people who wanted to own one fits the "green" movement. Similarly how does sueing the state of California to overturn groundbreaking clean air regulations..how does that one fit?

Take your time.

-z

Theyu crushed the vehicles for safety reasons (could not have them just sitting around), to protect proprietary information (could not just leave them sitting around) and for tort protection.

As for suing the state of California, which all of the automakers did, it was because of the high cost of trying to do business in CA. It would be difficult if not impossible to meet the mandates, and then they would have to build different cars for CA than they would sell in other parts of the country. Since it is the federal gevernments responsibility to set clean air regulations, they were perfectly within their rights.

You want cleaner air, ask your congressman to press for a much higher gas tax so that the consumers would force the automakers to build more efficient vehicles.

[Francesca R]

Because I am way more forward thinking than them.:D

You do know that they change their ratings from time to time, so just because the current outlook is grim does not mean that it will stay that way.Not ratings agencies. Every investor who doesn't lend to them unless paid a "junk" rate.

[Meadmaker]

But when GM created the EV-1 and Toyota created the EV version RAV...and people who had these things raved about them...why did GM collect every last one and crush them?

I'll have to look up why they collected and crushed them. That doesn't make sense to me. If they sold them, then they didn't own them, and didn't have the right to crush them. Unless they didn't sell a single one of them, just gave them to fleet customers for use, they couldn't collect and crush them.

I'll look it up. I'm pretty confident that the answer is not that they were afraid of the cars because they were too cheap, or easy to service, or other such conspiratorial theory.

ETA: To answer my question, they only leased the vehicles. None were sold. The reason for that decision was liability concerns. They were too new and had too many potential problems to trust them for sale in this lawsuit infested nation.

The wikipedia article on the EV1 gives a pretty quick, and accurate, summary of the program and why it wasn't a commercial success.


True but there are many completely clean and viable ways of producing your electricity. Not only that but even a coal fired plant can be made cleaner than a million gasoline burning cars. One big smokestack can be scrubbed easier than a million little ones.


Not for CO2. At least, not easily. You have to put the carbon someplace. Where is that? One solution would be to pump it through pipes and grow algae with it, and then extract oil from the algae for biodiesel. I really like that idea, because I have investments in penny stocks that want to do just that. However, I haven't quit my day job while waiting for the fantastic returns. It turns out no one, including my penny stock companies, has figured out how to do it to cost effectively.

[COLONEL]

I would be mad as heck if my money went to people who bought houses they couldn't afford.

. I would be too . I am talking about the guy that has a house and a family and because of job out sourceing and plant closings has lost his job and fallin on hard times . How would you feel if you lost your job tomorrow and could not afford your home .

[Meadmaker]

I would be too . I am talking about the guy that has a house and a family and because of job out sourceing and plant closings has lost his job and fallin on hard times . How would you feel if you lost your job tomorrow and could not afford your home .


That would be a bummer, but that won't happen. It's true that I have a mortgage, and making the payments would be difficult, but when I bought the home, I bought it with the knowledge that I could be temporarily unemployed at some time in the future. I could have bought that other home with the bigger kitchen and extra bedroom. The bank was willing to lend me almost twice what I actually borrowed. I really would have liked that home much better than the one I live in. Instead, I bought a home I could afford, and I keep a few thousand dollars in the bank to tide me over in case of unemployment.

I would feel sorry for that family that lost their home because one or both of the wage earners lost his/her job, but not sorry enough to give them some of my money so they could enjoy their home. I don't think the ants should have to help out the grasshoppers during hard times. I'm for a social safety net to keep people from starving, but not to let them keep their remodelled kitchens.

There is one exception, and it relates to the topic of this thread. If the foreclosure of their home would cause disastrous ripple effects beyond them losing their home, something has to be done about it. However, every attempt should be made to find a way to do that without giving money to people who squandered their own money. This is true for automakers and for homeowners.