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The Coming Auto Bailout

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The 3 American automakers are all in deep trouble, with General Motors leading the way. Last quarter GM and Ford burned through nearly $30 billion in cash and GM may not have enough to last through the end of this year. Over the most recent 4 years, GM and Ford (the two largest US auto companies) have lost more than $85 billion.

House Speaker Pelosi and Majority Leader Harry Reid are now both saying that they favor using some of the $700 billion in bailout money to assist the auto makers. The most recent figure is something in the range of an additional $25 billion in government loans. If you recall, this would be on top of the first $25 billion of taxpayer money that was recently promised to the Detroit 3 to help them build new fuel efficient vehicles.

Although I live and work in Michigan and the loss of any of the 3 auto companies would devastate this state, the idea of a government bailout is a horrible one. This bailout will not change the underlying fundamentals of the US auto market, and it will not correct the obvious competitive disadvantages under which the US companies operate. Unfortunately, the auto industry is heavily regulated and American companies have been hurt badly by this type of government intervention in the market. Nevertheless, the management at the Detroit 3 is now begging for more of the poison that helped to make them sick in the first place. It's a disgusting spectacle to watch as the businessmen who run what were once the world's most powerful industrial companies are now seen licking the boots of Pelosi and Reid, begging for a government handout. Ugggh.

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The 3 American automakers are all in deep trouble, with General Motors leading the way. Last quarter GM and Ford burned through nearly $30 billion in cash and GM may not have enough to last through the end of this year. Over the most recent 4 years, GM and Ford (the two largest US auto companies) have lost more than $85 billion.

House Speaker Pelosi and Majority Leader Harry Reid are now both saying that they favor using some of the $700 billion in bailout money to assist the auto makers. The most recent figure is something in the range of an additional $25 billion in government loans. If you recall, this would be on top of the first $25 billion of taxpayer money that was recently promised to the Detroit 3 to help them build new fuel efficient vehicles.

Although I live and work in Michigan and the loss of any of the 3 auto companies would devastate this state, the idea of a government bailout is a horrible one. This bailout will not change the underlying fundamentals of the US auto market, and it will not correct the obvious competitive disadvantages under which the US companies operate. Unfortunately, the auto industry is heavily regulated and American companies have been hurt badly by this type of government intervention in the market. Nevertheless, the management at the Detroit 3 is now begging for more of the poison that helped to make them sick in the first place. It's a disgusting spectacle to watch as the businessmen who run what were once the world's most powerful industrial companies are now seen licking the boots of Pelosi and Reid, begging for a government handout. Ugggh.

Interesting...

Gags can you explain how exactly Michigan has been hurt by the government? How did the government hurt the auto industry and the businesses in Michigan? I do know that Michigan has one of the highest tax burdens in the country but I'm trying to understand this stuff and I don't live in Michigan.

Edited by dadmonson
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I had an interesting thought on this the other day. I forget the figure, but I know that the auto makers because of the unions have basically become quasi-welfare states, and the amount of money they pay for health insurance is so high that's it's the largest part of their account ledgers. Why not turn all that over to Obama's universal healthcare? The auto makers will see a boom in revenue! :)

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You joke Kevin, but this is one of the things that GM was hinting at a while ago. Their argument goes: "in other countries, the government pays for health care, so we're at a competitive disadvantages paying for ours".

Dadmonson: Typically, losses are a destruction of wealth. Losses mean one spent (say) $100 and produced something worth $99. When a loss-making entity is propped up with government money, it does not change the fact that there is a loss in real terms, which is simply "made up" by having the government take money from someone else (generally a profit-maker -- aka wealth creator) and hand it to the wealth-destroyer. The subsidies simply encourage and allow ongoing wealth-destruction.

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Interesting...

Gags can you explain how exactly Michigan has been hurt by the government? How did the government hurt the auto industry and the businesses in Michigan? I do know that Michigan has one of the highest tax burdens in the country but I'm trying to understand this stuff and I don't live in Michigan.

The government regulates almost everything in a vehicle, from the door latches to the airbags to the exhaust systems. The government also regulates the gas mileage that vehicles must achieve. Perhaps most damaging though, the government forces businesses to collectively bargain with the unions. For years the American car companies have been paying wages and benefits to union workers that far exceed those paid for similar work in other countries and in non-union plants located in the US. Part of the blame for this certainly falls on the shoulders of management, which clearly needed to put its foot down and not agree to the unsustainable labor contracts that have been signed in previous years.

The fact is that US car companies have cost structures that make it impossible for them to be profitable by building and selling small, fuel efficient vehicles. When the public demanded large and expensive SUVs and trucks, the US companies usually made money. However, when the public demanded fuel economy, they began bleeding cash like crazy. Also, the lack of available capital (due to bad labor contracts with the UAW) has made it difficult to fund new product development. It is a hugely expensive undertaking to create a new vehicle and the lack of cash at the US companies made it so that they were far less successful in developing new car models than the foreign companies. In the final analysis, the companies that make the best vehicles at a given price point will end up being the most successful. Unfortunately, for years the US companies made poor quality cars and trucks. Even though their quality has improved considerably in recent years, the public still frequently perceives their vehicles as being poorly made.

As far as the State of Michigan is concerned, much of the damage here has been self-inflicted. We have high taxes, pro-union labor laws, and horrible political leadership. It’s sad because this state has a lot to offer in terms of natural resources and beauty, but the statists in Lansing have done very little to encourage businesses to come here.

You joke Kevin, but this is one of the things that GM was hinting at a while ago. Their argument goes: "in other countries, the government pays for health care, so we're at a competitive disadvantages paying for ours".

Yes, in fact the pseudo-capitalists at the US car companies have been lobbying for national healthcare for years. If I remember correctly, GM was in favor of Hillary Clinton's plan when it came out. They wanted the taxpayers to cover them for the poor labor contracts they made with the unions. Nauseating.

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Nauseating it is indeed. What upsets me most about this situation is the immediate condemnation of laissez-faire capitalism by the ignorant masses and the power hungry politicians. It gives more fuel to the collectivists to take over corporations and nationalize them to "save" the poor workers who through their irrational demands contributed to the collapse of their own cow.

The biggest shame is that business leaders today all sleep in the same bed with bureaucrats and policy makers. What a quagmire, but oh so predictable.

Edited by Mensch
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Analysts are now openly saying that GM is headed for bankruptcy. This seems to be the best option, as it would allow them to get out of their ridiculous labor contract, downsize and become more economically viable. A government loan is going to just prolong the agony.

GM’s third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy,” wrote Shelly Lombard in a report issued after the earnings release. “And we aren’t referring to the $25 billion of federal loans designed to incentivize production of fuel-efficient vehicles. At this point, that’s like bringing a Band-Aid to a train wreck.”

GM said it is already close to the minimum amount of cash it needs just to run its business day to day, “leaving nothing to cover the huge operating losses its North American business continues to incur,” added Ms. Lombard.

http://www.financialweek.com/apps/pbcs.dll.../811079973/1036

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Analysts are now openly saying that GM is headed for bankruptcy.
Nationalization, maybe?

It seems almost certain that the government will give them money. Allowing them to go bankrupt would produce opportunities for rejuvenation in the industry and would be a great blow to unions. I think it's too much to hope for.

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This morning Senator Sessions, who is against the auto bailout, was joking that somebody should tell Paulson that Bush made him Treasury Secretary a while back; he seems to working under the delusion that he's still an investment banker. Sessions continued, saying this: "We need to ask these questions: what is the nature of government? where are we going to stop". [CNBC 11/11/2008]

If the government really wants to spur the auto industry, it should give these $50 billion to Toyota, Honda and so on, who run a vibrant part of the U.S. auto-industry, with plants all over the Southern states (mostly GOP?) and employ over 100,000 people. Of course, that is not what the government should do, but it would be far better than giving it to people who will destroy part of it.

Edited by softwareNerd
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You could give the American companies $100 billion and it won't solve their problems. They are uncompetitive because their management has agreed to labor contracts that make them uncompetitive and create legacy costs that make it impossible for them to be profitable selling small, cheap, fuel efficient vehicles. Small, cheap and fuel efficient happens to be what America wants right now. Management has known about this situation for at least the last 30 or 40 years, but now they want the taxpayers to bail them out. That may give the union boys a few more years to collect their bloated pay and benefits, but it isn't going to change any of the fundamental underlying economics that make these companies uncompetitive.

Snerd, I assume you saw yesterday's WSJ opinion page. There was some generally good advice there.

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At this point it has reached the point where unions can be informed that the contract they are insisting on will *bankrupt* the employer. And the unions do not care. Delta Airlines, and now the auto companies. And the businesses have *no* recourse once they are unionized.

Union goons are rapidly rising to the top of my shit list, though they will have work to do getting above environmentalists.

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According to Pelosi: "It is essential for the domestic automobile manufacturing industry to re-emerge as a global, competitive leader in fuel efficiency and in new, path-breaking energy-efficient technologies that protect our environment," Pelosi said in a statement. "For the automobile industry to be truly viable, it must continue to move in this direction. I am confident Congress can consider emergency assistance legislation next week during a lame-duck session, and I hope the Bush administration would support it."

http://www.detnews.com/apps/pbcs.dll/artic.../811110423/1031

In 6 months or a year, when Washington decides that Detroit isn't building the kinds of cars that they think should be built, I wonder if the clowns at GM will rue the day they asked for government help.

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The UAW has about 500,000 members. So, $50 billion is like giving each member a loan of about $100,000 so that they can keep doing what they're doing. This, in order to keep some of the best paying of low-skilled jobs. When the economy is tanking one of the most important adjustments that needs to happens is lowering of employment, and of wage rates. The only way the UAW will forced to cut pay substantially is if the car companies go bankrupt and can "walk away" from their union contracts.

A sane government would, at the very least, insist that the union cut pay and benefits. Even an honest mixed-economy bureaucrat would insist that the UAW bring pay and benefits to about 70% of what the Jap companies are paying in the south.

Unfortunately, I have no doubt that the government will bail these guys out. Once again, the GOP are playing lead socialists. Paulson is urging Congress to help the auto companies.

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What I find most disturbing about this auto bailout is not so much that it has been proposed--we live in a mixed economy so that is expected--it's that the car companies want it so bad and seem to think it's a good business plan. It just weird to see the descendants of great men like Henry Ford now begging from money from the government. Don't these men have any pride?

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Someone on the radio program earlier made a good comment. It's possible for the union to take a vote and lower their pay to aid their company, but they will do no such thing. It's very telling that these people would sooner force everyone else (and future taxpayers) to pay for their subsidization than to even lower their own standard of living.

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From what I herd Bush is against it.
Paulson is pushing for it, saying he wants Congress to do it. I assume he would not do this unless he had Bush's backing. The debate between Bush/Paulson on one hand and congressional Democrats on the other hand appears to be whether the $25-50 billion should come out of the "TARP" ($700 billion), or whether Congress makes a separate move. Edited by softwareNerd
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Don't these men have any pride?

No. GM execs were leading the charge for Hillary-care back when she was trying to socialize our healthcare system. Again, they wanted the rest of us to pay for their bad decisions.

From what I herd Bush is against it.

Despite his recent speech before the G20 conference, he hasn't exactly shown himself to be a principled defender of Capitalism over the last 8 years. Of course the politically expedient thing to do is to support the bailout. That's why I fully expect a sufficient number of Republicans to support it and Bush to sign it.

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I just received the following e-mail from GM:

Dear Philip,

You made the right choice when you put your confidence in General Motors, and we appreciate your past support. I want to assure you that we are making our best vehicles ever, and we have exciting plans for the future. But we need your help now. Simply put, we need you to join us to let Congress know that a bridge loan to help U.S. automakers also helps strengthen the U.S. economy and preserve millions of American jobs.

Despite what you may be hearing, we are not asking Congress for a bailout but rather a loan that will be repaid.

The U.S. economy is at a crossroads due to the worldwide credit crisis, and all Americans are feeling the effects of the worst economic downturn in 75 years. Despite our successful efforts to restructure, reduce costs and enhance liquidity, U.S. auto sales rely on access to credit, which is all but frozen through traditional channels.(emphasis added)

The consequences of the domestic auto industry collapsing would far exceed the $25 billion loan needed to bridge the current crisis. According to a recent study by the Center for Automotive Research:

• One in 10 American jobs depends on U.S. automakers

• Nearly 3 million jobs are at immediate risk

• U.S. personal income could be reduced by $150 billion

• The tax revenue lost over 3 years would be more than $156 billion

Discussions are now underway in Washington, D.C., concerning loans to support U.S. carmakers. I am asking for your support in this vital effort by contacting your state representatives.(emphasis added)

Please take a few minutes to go to www.gmfactsandfiction.com, where we have made it easy for you to contact your U.S. senators and representatives. Just click on the "I'm a Concerned American" link under the "Mobilize Now" section, and enter your name and ZIP code to send a personalized e-mail stating your support for the U.S. automotive industry.

Let me assure you that General Motors has made dramatic improvements over the last 10 years. In fact, we are leading the industry with award-winning vehicles like the Chevrolet Malibu, Cadillac CTS, Buick Enclave, Pontiac G8, GMC Acadia, Chevy Tahoe Hybrid, Saturn AURA and more. We offer 18 models with an EPA estimated 30 MPG highway or better — more than Toyota or Honda. GM has 6 hybrids in market and 3 more by mid-2009. GM has closed the quality gap with the imports, and today we are putting our best quality vehicles on the road.

Please share this information with friends and family using the link on the site.

Thank you for helping keep our economy viable.

Sincerely,

Troy Clarke

According to the bolded passages above, GM has successfully restructured its operations but now it is the innocent victim of the credit crunch. In order to save the economy and America itself, owners of GM vehicles should contact their Congressional representatives and request a bailout. I maintain that the GM execs will come to regret what they are doing.

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Why prop up a failing company when quite frankly they just need to go bankrupt?

GM has clearly shown that they can't stabilize their business so why give them billions to burn through? The fact of the matter is the executives of this company are using the mantel of "all those poor workers" losing their jobs to allow them to keep their jobs.

GM and Ford both need to seriously downsize, if bankruptcy is what they need to do that they need to realize that. If they really need the money, then they can go to a bank (one that is healthy anyway) and make the case as to why the need the money. GM and Ford is only asking for a bailout because their business is so far in so much shambles that a real bank will not actually give them a loan.

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I have a question and perhaps one or more of you can answer it...I don't know much about unions, being from Texas and all, but aren't these US auto makers required by law to use union labor?

Also, the last time I bought a car (an Explorer from Ford) I heard that 20% of the auto's cost pays for employee health care. If the companies are forced to use union labor and their health care costs are that high, no wonder they want socialized medicine and a bail out. Jeez!

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