Rethinking the Car Bailout

As we all know, W has gone against his party again and supported a $17.4 billion “loan” to the Detroit 3.  I was opposed to it when it was debated in Congress and was delighted the republicans blocked it; it was the first thing they’ve done to act like a party of fiscal conservatism in a while.  When I first thought about W’s bailout, I was against it, but the longer I think about it, the worse it gets.

In addition to getting the government in the picking winners and losers game which is not the appropriate role of government, there are two specifics that really stick in my craw:  treating the Detroit 3 as a unitary “automobile” business and the lack of specific conditions attached to the loans.

Let’s look at the first problem.  GM, a publicly held company, gets $9.4 billion this month and is scheduled to get $4 billion more later.  Chrysler LLC, a company wholly owned by a private investment group, gets $4 billion now.  Ford, a publicly held company, asked for nothing now, but apparently may get in trouble due to supplier relationships if either GM or Chrysler goes under.  The differences among the Detroit 3 are staggering. 

GM is the unquestioned big dog of the three with about 47% of the domestic makers’ sales while Ford has about 31% and Chrysler comes out with 21% of car sales; for the purpose of this post, I’m ignoring the market share of the foreign transplant car makers.  Thus in an equitable world, you would expect GM to get about $8.3 billion; Ford to get about $5.4 and Chrysler to get about $3.7 billion of the pie.  Clearly private enterprise is not equitable though; there are winners and losers unless the government gets in the way.

How to explain the difference?  By looking at the monetary needs alone, clearly Ford is the best managed of the Detroit 3.  Theoretically they should be rewarded more, but they are getting no money.   GM is the largest and getting the most, but is the least successful; again looking at the money requirements alone.  Chrysler is about on track in the loan business.  But Chrysler is privately held by Cerberus Capital Management, L.P., which is a private investment firm. 

What does a private investment firm do?  Well generally, they buy companies, try to rehab them and then sell them for a profit, or buy them to split them apart and sell the parts for a profit.  While that doesn’t sound very productive for the country or the employees of the companies that are sold off, it does serve a valid purpose of making money and weeding out inefficient companies and practices.

In Chrysler’s case, clearly Cerberus has no interest or belief that Chrysler can become competitive as they are not willing to put their own money, which they have plenty of, into the business.  If they think Chrysler is a dog, why does the government, W and the democrats, think pouring $4 billion down the drain is a good idea?  Is it not likely that Cerberus will bleed the $4 billion out of Chrysler and then dump them?  There is absolutely no indication they are trying to run a profitable car company.  I don’t think Cerberus should get a dime of tax payer money.  It is a scam and an outrage.  W and Paulson and the democrats should be ashamed of themselves.

GM is at least trying to run a car company and trying to make a product and profit.  The argument that falling into bankruptcy would cause them terminal damage is compelling; I don’t know if it is true or not though.  I do know if they can’t get their wages in line with the profitable transplants, their management team is not smart enough or creative enough to be able to build cars that cost $2,000 more than their competitors and be able to sell them.

The second thing that gets my goat about the bailout is the lack of conditions.  At least the Senate debated some of the prerequisites for the loan as absolutely essential to move forward; when the UAW balked at pay cuts, the Senate said no.  The Senate was correct in my opinion.  The Senate wanted the bond holders to accept equitization, to which they agreed.  The employee, both current and retired, benefit packages were to be restructured, which was also agreed.  But the sticking point was the car makers had to reset wages “competitive” with the transplants.  The UAW refused to do this, correctly betting that W would bail them out and (likely correctly) the Obama administration would not force the wage cuts.  The W bailout makes these conditions mere suggestions.  In other words, Cerberus can take the money and provide well earned bonuses to Cerberus management and nothing for Chrysler.  GM could do whatever they choose with the money; I suspect they would put it to good use, but there is no guarantee.  And Ford is out there alone fighting the good fight.  I have not owned or driven Fords out of choice, but when my current GM product dies I will certainly not buy another GM or Chrysler product.  I may go with Ford or, more likely, I may go with one of the foreign car makers.

I see no way Chrysler will survive at all due to Cerberus’ management intent.  While GM and Ford likely will survive, the lack of preconditions on the loan is gross negligence by the W administration.  The loans will probably be recalled as GM cannot become competitive without UAW assistance; I believe the UAW, as did the Eastern Airlines union, would rather see GM go bankrupt rather than give up any salary.  It is a sad commentary on the UAW and the condition of the country that we could get to this point.

Comments

[Jerry Scarborough]

A lot has been made of those nasty southern senators who voted against the congressional bailout. Yes they all have foreign automakers in their states. But they are also all right to work states. I think they were adhering to their ideals.

Also, I have seen Senator Corker's speech on the Senate floor. His compromise plan was very well thought out. And, it was grounded in good financial principles. But, the UAW knew that Bush would bail them out if Congress didn't. And, they knew their wholly owned subsidiary - the Democratic Party - would be in power by the time the Bush bailout expired. If anyone had an opportunity, and a reason, to torpedo the congressional bailout, it was the UAW.

[Jon M]

As a sidelight it is interesting to note that Cerberus owns not only Chrysler, but has also acquired a controlling interest in GM's financial arm GMAC. Since Ford is not participating, the bailout seems almost like a reimbursement to Cerberus of its expenses in acquiring Chrysler and control of GMAC. Having friends in high places obviously helps.

[Haggy]

As I wrote in the past I will never buy a new product from one of these companies again. Just as I have moved all of my banking business to non-bailout companies I will do this as well.

[JRS]

I have my doubts that all of the elements of this complex situation
can come together by Mar 31. to avoid going into bankruptcy.

[Populista]

I think the whole thing is a PR stunt to help W have some other legacy than as the worst president ever. Maybe to help make him look like the president who saved the US automobile industry (if indeed it can be saved).

[Andrew Smith]

These were all political decisions masquerading as economic decisions. W himself admitted to abandoning the free market to "save" the automakers because for once he didn't have the courage to stick to his own principles. That should not be surprising as he only did so when it fit his agenda, much like Congress only intervenes and supports aid for auto companies for two reasons:

1) It obscures the fact that they aided in causing the problems of the US auto industry by forcing ridiculous regulations on them; and

2) It enables them to win union votes and gives them a political tool to use against those who opposed the aid, claiming that they want to bust more unions.

When it's all said and done, none of this will have helped the auto industry or the country as a whole, and it prolongs the recession. All this nonsense not only violates the principles of the Constitution by interfering in businesses and making things worse economically, but also puts the burden back on the taxpayers as usual.

I would rather see all these automakers go bankrupt and a cheap competitor come in, buy up their carcasses, and produce cars that people actually want and can afford. It would cost jobs but I'm quite sure it would restabilize the market much faster and more efficiently than this boodoggle would and we wouldn't be saddled with the costs and inevitable inflation.

[Timo Kokko]

Andrew,
It is very hard to argue with your presentation. Good job.

[Joe Lukasiewicz]

Too bad Congress did not hold the banking industry to the same standard as the Big 3. One of my investments is a bank that is in line for millions in the give away, yet they still announced a dividend payout for shareholders.

Bush was NEVER a free-market prez. He imposed tariffs on steel imports which nearly destroyed the domestic industry even at a time of record high commodity prices. He boasted of being the first prez with an MBA, and he leaves behind a legacy of financial ruin. I've come to believe Yale and Harvard are nothing but diploma mills. If you've got the money and family credentials, you are allowed to enter and leave with a degree.

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