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

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 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 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.

 

[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/topN...?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