Bailout of the big 3, is it really such a bad thing?

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chiaroscuro
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Bailout of the big 3, is it really such a bad thing?

Post by chiaroscuro »

Many people on this board have ranted at the possible bailout of GM, Ford, and Chrysler. This is what I have heard on the radio. If one of the big three folds 2.4 million jobs (direct and indirect employment) will have to be cut in the near term with many of those cuts probably being permanent. If all three go under, 3 million jobs will be permanently lost. Now that would be catastrophic for the US at the moment. I have also heard on the radio that these companies are having great difficulty getting financing, after all we are in credit crisis. So the question that has to be asked is, are loan guarantees really a net negative for the US economy in this current environment?
Last edited by chiaroscuro on 17 Nov 2008 20:08, edited 2 times in total.
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Post by Nemo2 »

Question is, will they keep getting get bailouts in order to continue producing cars that, (many), people don't want to buy?
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Post by Scanman »

Here is a snip from John Mauldin's column last friday. I apologize if it seems a bit long but it is food for thought.
Let's all acknowledge that having GM go bankrupt would not be a good thing. But it is not the end of the US automotive industry, nor even of GM. Let's think about what a GM bankruptcy might look like. In a bankruptcy, the debt holders line up to come up with a restructuring plan so that they can maximize the return of their loans or obligations. The shareholders get wiped out, but with GM down over 95%, that has largely been accomplished. That process has happened with airlines, steel companies, and tens of thousand of other companies. It is called creative destruction.

First, let's understand that the real owners of GM are the pension plans, as I wrote in 2004. They are the entities with the largest obligations and the most to lose. They are the biggest stakeholders in a successful GM. Giving them the responsibility for making a new, leaner, meaner GM with realistic union contracts would be rational; otherwise they would lose most of what they have.

Factories need to be closed. Auto sales are down to 11 million cars a year, the lowest since 1982, which was the last major recession. Automotive companies sold cars at such low prices in the last few years that sales went to 16 million a year. But the cars that have been sold will last for a long time. Few people are going to buy a new car when the old one is working fine, especially in a recession and a Muddle Through economy. Further, does GM really need eight automotive lines, some of which have been losing money for years?

A restructured GM with realistic costs could be quite competitive. They have some great cars. I drive one. It is four years old and so good I am likely to drive it for at least another four.

At some point after the restructuring, the pension plans could float the stock on the market and get some real value. If actual pensions need to be adjusted, then so be it. While that is sad for the GM pensioners, is it any sadder than for Delta or United Airlines or steel company pensioners who saw their benefits go down? For the vast majority of Americans, no one guarantees their full retirement. Why should auto trade unions be any different?

Taxpayers in one form or another are going to have to pay something. Unemployment costs, increased contributions to the Pension Benefit Guarantee Corporation, job training, relocation, and other costs will be borne. So, it is in our interest to get involved so as to minimize our costs, as well as help preserve as many jobs as possible.

Sadly, I think it is likely that a Democratic majority next year will quickly pass a bailout that will not solve any of the longer-term problems. Obama evidently wants to appoint an "automotive czar;" and the name being floated is the very liberal Michigan former Representative David Bonior, whose anti-trade and pro-union positions are well known. This is appointing the fox to guard the hen house. It is not a recipe for the restructuring that is needed.

The bailout for GM is a bailout for the trade unions and management (who not coincidentally both made large contributions to the Democratic Party and candidates). US consumers are simply going to buy fewer cars in the future. That is a fact. Spending $50 billion does not address that reality. That $50 billion can be better spent by helping workers who lose their jobs. Without serious reforms a bailout will simply postpone the problem, and there will be a need for more money in a few years. And do we think that the management which got GM into the current mess is the group to bring them out?

And as to the argument that "We bailed out Wall Street, so why not GM?" it doesn't hold water. What we did and are doing is to try and keep the financial system functioning, so we don't see the world economy simply shut down. But don't tell the 125,000 people who have lost jobs on Wall Street that it was a bailout. That number is likely to go to 200,000. No one thinks that a restructured GM would see anywhere close to half that number of job losses.
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Post by Springbok »

My feeling is that if it is the workers that need protecting, then they should first do something to protect themselves. On X-country checkup, I think I heard that wages and benefits for a Canadian autoworker amount to ~$75/hr or let's say $150k pa.

Perhaps they could keep their rate, but share jobs?

If Canada provides handouts and the overall business continues to decline, you can be sure it will be the Canadian plants that get closed. Then what have we got for our handout money?

I think that our government should rather provide incentives to the public and companies to buy vehicles. Especially for ones with over a certain % Canadian content and with better fuel consumption. Better than handing money to mismanaged corporations who will bail out as soon as they get the money.
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Post by TrueMrP »

If it's the jobs we're after then I'll quote Milton Friedman "...create any number — for example, have people dig holes and then fill them up again, or perform other useless tasks."
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Post by Icarus »

If you think the problem is simply liquidity -- that GM has a great business model but can't get a loan simply because the credit environment is so tough -- then loan guarantees could make sense. Does anyone actually believe that?

I think they make cars that no one wants with costs that are fundamentally uneconomic. A loan won't help a fundamentally unsound business model. Of course there will be tremendous hardship for those laid off that needs to be mitigated, but the money spent bailing out the big three (and it will be money down the drain since the loans will never be repaid) could be spent for unemployment benefits, retraining, etc. This is just a complete waste of money in opinion. You are subsidizing a zombie business so that a select number of workers and executives can keep taking home a paycheque. I think the argument that the economy will sustain too much damage if the big three go is a complete red herring. They're going to go under anyway (or continue to require subsidies). That same amount of money could be used for infrastructure, for example, which would be a far more efficient use of capital.

I have tremendous sympathy for the workers, but you can't prop up a dysfunctional business with subsidies forever. That will only hurt the economy as a whole in the end.
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Post by millergd »

The question is who gets f**ked if GM goes bankrupt: stockholders? bondholders? employees? taxpayers?

The most telling sign is the airline industry, which underwent massive bankruptcy earlier this decade. What's relevant is the 600,000 UAW retirees who draw retirement benefits, which is 3x the number of active UAW workers at General Motors. GM's retiree health care liabilities are about $51 billion. As the airline industry did, the Big 3 would do their best to offload their pension obligations onto taxpayers through the Pension Benefit Guarantee Corporation.

Warren Buffett noted that GM is a health care and benefits corporation with an auto manufacturing industry attached to the side. Those that argue "let it die" fail to account for the social obligations GM provides (rather than taxpayers), which can't be eliminated without political repercussions. Rick Wagoner is playing the game very well to make sure that politicians will share the blame if it fails. This whole debacle is explaining why the U.S. needs a universal health care system.

So taxpayers can throw $25b at it now to keep GM miserably alive and have the added benefit of more car buying options (which means cheaper cars), or we can own $50b+ in pension obligations later and watch car prices go up in an auto market with fewer vendors.

We'll be watching Social Security go through the exact same hurdles in another decade. Will we be arguing "screw it, let it go bankrupt?"

~millergd~
Last edited by millergd on 17 Nov 2008 22:28, edited 2 times in total.
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Post by Clock Watcher »

If the issue is adding liquidity to the system, then it doesn't matter who it goes to. I say give it to Honda or Toyota who make cars people want. Then we achieve the double goal of adding liquidity to the system and rewarding excellence.
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Post by lilbit »

Heard somewhere (can't remember where - senior moment) that Honda can change models in seconds, but it would take GM weeks or even months. Their business model has been lagging for a long time, and they have learned nothing from the "upstarts". So, although their employee treatment has been extremely generous, they also have production design problems.
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Post by Icarus »

millergd wrote:So taxpayers can throw $25b at it now to keep GM miserably alive and have the added benefit of more car buying options (which means cheaper cars), or we can own $50b+ in pension obligations later and watch car prices go up in an auto market with fewer vendors.
GM makes cars. It has expenses to make those cars that consist of, in addition to materials and labour, the legacy costs of the mini-welfare state that they've created. If it can't sell cars people want at prices they're willing to pay and turn a profit, then it is a fundamentally unsound business destined for insolvency. That article that you referenced from Newsweek is from 2005. There was no credit crisis at that time. GM has been on this path for a long time now. In fact, the credit crisis suits their purposes because they can make themselves seem like a victim of circumstance, when they are not. So my question is how will a $25B loan turn a fundamentally unsound business into a sound one? If it will, then I'm all in favour. But I see no reason to think people will suddenly want to buy big-three cars at prices that will support their structural costs. If it's just a $25B handout and the business model remains non-viable, then you're just prolonging the inevitable and making it more expensive. You're taking money from the productive part of the economy (present or future) and subsidizing the unproductive economy. The good thing about recessions is that they clean out the deadwood. The process is painful, and there is a role for government to mitigate it, but government cannot simply lend money and then will an economically unsound business to become a productive enterprise. In the end, taxpayers will still be on the hook for the knock-on costs, and will be out another $25B that could have been better spent.

If the big three go into Chapter 11, some form of domestic car manufacturer will emerge, hopefully in better economic shape. Even if it does not, there is still ample competition in the auto market.

I also don't understand why a single big manufacturer must be saved, but thousands of smaller employers need not be. If one uneconomic business must be saved because it employs 100 000 people, then why not 1000 businesses that each employ 100 people? In fact, why let any business fail? After all, there are always additional social costs.
We'll be watching Social Security go through the exact same hurdles in another decade. Will we be arguing "screw it, let it go bankrupt?"
There is no analogy between a corporate employer and a social entitlement. The benefits that would be maintained at the big-three would be subsidized by tax dollars that, in part, come from people with much less generous entitlements. That said, if Social Security has liabilities greater than its assets, then there will have to be some tough decisions about raising taxes or lowering benefits. Ultimately a society cannot consume more than it produces, a fact that the US will have to learn at some point. Remarkably, they do not yet appear to have reached that realization.
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Image
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Post by gummy »

Back to the Future: (?)

In 1939, RCA demonstrated the "television" at the world's fair.
By the 1950s, more than 90 U.S. companies made TVs.
In 1974, Matsushita bought Motorola's TV business.
By 1991, only a dozen U.S. plants made TVs.
By the mid-90s, the last of them (Zenith), gave up the ghost.

Now, TVs are again assembled in the U.S. ... by foreign companies.

The year is 2010:
Toyota buys Ford
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Post by MaxwellMcGee »

Icarus wrote:I think the argument that the economy will sustain too much damage if the big three go is a complete red herring. They're going to go under anyway (or continue to require subsidies). That same amount of money could be used for infrastructure, for example, which would be a far more efficient use of capital.
Agreed 100%. Let no one delude themselves into thinking that the $25BN is a loan, it is most certainly a grant. Now since we're using $25BN of taxpayer money so that a bunch of union workers can keep their jobs, I think the taxpayers should at least get something useful out of the deal. I'm sure the taxpayers would much rather have functional infrastructure (repaired roads, bridges, intra- and inter-city transportation systems, sewage systems, power plants, etc.) rather than more Suburbans and Impalas that no one wants.

If you're going to spend your way out of an economic crisis, at least have some useful tangible output with some societal benefits to show for your efforts.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Studebaker Hawk »

chiaroscuro wrote:If one of the big three folds 2.4 million jobs (direct and indirect employment) will have to be cut in the near term with many of those cuts probably being permanent. If all three go under, 3 million jobs will be permanently lost.
Nonsense. We're not talking about a Chapter 7 liquidation bankruptcy but rather a Chapter 11 reorganization bankruptcy filing. A Chapter 11 filing would accomplish a number of things: debt would be re-financed and/or converted to new equity (sorry - existing shareholders get screwed but at a current price of ≈$3 the screwing's pretty well factored in), the wages/benefits/pensions situation would finally be faced head on, the number of dealerships could be reduced, Rick Wagoner could be turfed. The downside: a further precipitous decline in sales with a resulting ripple effect and a huge hit on the Pension Benefit Guaranty Corp. That probably means that the gov't needs to be creatively involved in re-structuring. Creative <> bailout.

Jack Welch - It's time to consider Chapter 11 not a bailout and the NY Times lays out how it might work.

If not Chapter 11 now, then Chapter 7 later (or maybe sooner).
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Post by Dennis »

North Americans are going to buy x number of motor vehicles regardless of which manufacturer makes them. If the foreign owned manufacturers inherit these sales then they will set up more NA factories (legislated if necessary). Ultimately, there should be little change in the numbers of jobs provided by the industry.

Consolidation of the industry is a necessity.
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Post by biker »

From what I have read in the media GM has about $17 Billion in cash and at the current 'rate of burn' will be out of cash by Feb/09.Asssuming GM's share of the $25 Billion bail out is around $10Billion.What has been accomplished?
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Post by biker »

lilbit wrote:Heard somewhere (can't remember where - senior moment) that Honda can change models in seconds, but it would take GM weeks or even months. Their business model has been lagging for a long time, and they have learned nothing from the "upstarts". So, although their employee treatment has been extremely generous, they also have production design problems.
I have been in the Honda plant at Alliston Ont and saw one production line producing both Vans and Sedans at the same time.I have also been in about 6 Detroit 3 plants and never saw this type of production.Although it may exist somewhere now.
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Re: Bailout of the big 3, is it really such a bad thing?

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chiaroscuro wrote:If one of the big three folds 2.4 million jobs (direct and indirect employment) will have to be cut in the near term with many of those cuts probably being permanent. If all three go under, 3 million jobs will be permanently lost.
You're about to see a process whereby 1/4 of employees relocate to another job that pays 1/2 the wage, but is still higher than the national average, 1/4 are forced into early retirement with what most of us would judge to be an acceptable pension/LIF, 1/4 of the jobs shift from people who don't give a damn to people willing to work hard, and 1/4 of the jobs being eliminated because they were unnecessary.

It's a matter of time. You can let it happen in 2009, or you can pump tens of billions into the hole to make it happen in 2010 instead. There isn't room for 3 domestic manufacturers. When one or two of them fails, you'll see the other(s) rebounding.

The unions don't give a damn, they've already indicated that they want the employees to sink with the ship.

The days of unskilled labourers owning 3,500ft houses, two new SUVs in the driveway and a fool-proof pension are over. It's an anachronism that needs to be fixed.
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Post by Peculiar_Investor »

gummy wrote:Image
You forgot to include the Titanic, aka the US Taxpayer, in the picture :wink:
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Re: Bailout of the big 3, is it really such a bad thing?

Post by millergd »

Studebaker Hawk wrote: Nonsense. We're not talking about a Chapter 7 liquidation bankruptcy but rather a Chapter 11 reorganization bankruptcy filing. A Chapter 11 filing would accomplish a number of things: debt would be re-financed and/or converted to new equity (sorry - existing shareholders get screwed but at a current price of ≈$3 the screwing's pretty well factored in), the wages/benefits/pensions situation would finally be faced head on, the number of dealerships could be reduced, Rick Wagoner could be turfed.
Here's a great example of Chapter 11 in action: Linens-n-things:
On May 2 2008, Business Services Industry wrote:GARDEN CITY, N.Y. -- Lifetime Brands, Inc. (Nasdaq NM: LCUT) today announced that it expects the Chapter 11 filing by Linens 'n Things, Inc. ("Linens") to have no material impact on Lifetime's financial condition.

Jeffrey Siegel, Lifetime's Chairman, President and Chief Executive Officer, commented, "Since mid-2007, we have utilized trade credit risk protection to offset the financial risk of a Chapter 11 filing by Linens. As a result, we expect that today's filing will have no material impact on Lifetime."
6 months later...
On October 16, About.com wrote:Linens 'n Things has been unable to find another company to take over its operations after filing for bankruptcy protection last May. The home furnishings retailer faced two major obstacles - tough competition and an even tougher economy.

As a result, the stores which are still operating will begin going-out-of-business sales immediately. Total liquidation should take about 11 weeks.
And GM wouldn't be any different in an environment where car sales have declined by 3m/year from it's peak, and those who just watched their GM bonds get trashed will glowingly throw more money at it post-bankruptcy?

$25b will inevitably be spent, either as a loan to GM or as government benefit checks to unemployed workers, pension benefits, etc. It's naive to believe that 100,000 worker benefits can simply disappear with bankruptcy and $25b will be spent on infrastructure projects instead. (FYI, $25B on infrastructure would only build 1.75 urban tunnels and employee ~8800 workers.) Worst case is that $25b gives GM a lifeline for 1 more year, best case is that it can hang on until 2010 and watch the 2007 UAW-negotiated cost cuts start to kick in. And its huge social entitlement drag will eventually wean away as the number of retirees drawing on legacy benefits continues to decline.

~millergd~

p.s. as for other 'decaying infrastructure' arguments, don't forget that the small-government Republicans passed a $286 billion infrastructure bill in 2005.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Studebaker Hawk »

millergd wrote:Here's a great example of Chapter 11 in action:
Chapter 11 is nothing more than a chance to re-organize. Circumstances, internal & external, may be such that the inevitable is only delayed.
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Post by Shakespeare »

I expect that 3 into 2 will go - eventually.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Springbok »

Studebaker Hawk wrote:
chiaroscuro wrote:If one of the big three folds 2.4 million jobs (direct and indirect employment) will have to be cut in the near term with many of those cuts probably being permanent. If all three go under, 3 million jobs will be permanently lost.
Nonsense. We're not talking about a Chapter 7 liquidation bankruptcy but rather a Chapter 11 reorganization bankruptcy filing.
Your post got me wondering what happened to Studebaker :)

Wikepedia to the rescue

Did you know that Studebaker's first car was an ELECTRIC car and it was built from 1902 for about 10 years?

Image

http://en.wikipedia.org/wiki/Studebaker ... utomobile)

Interesting that they moved all production to Canada before eventually closing shop altogether.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by AltaRed »

Studebaker Hawk wrote:
millergd wrote:Here's a great example of Chapter 11 in action:
Chapter 11 is nothing more than a chance to re-organize. Circumstances, internal & external, may be such that the inevitable is only delayed.
The problem with a Big 3 Chapter 11 filings is there is a good chance revolutionary change may not happen to re-structure the industry. Too many executives and unions wanting to preserve as much of the status quo as possible. What is really required here is a complete inside out overhaul, i.e elimination of the existing management and union structures, replaced by a 'risen from the ashes' fresh start. It will take a lot of discipline by lawmakers and politicians to force such change.

I would guess about 50% of current Big 3 model lines and its production capacity need to vanish. One example of a re-born Chrysler would be a firm making mini-vans plus the Jeep line. Everything else, except perhaps a few specialty cars piggybacking off the same parts as the minivan line, is expendable. As an example, no one needs a Dodge Ram pickup line that competes with 4-6 others of similar characteristics.
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Re: Bailout of the big 3, is it really such a bad thing?

Post by Icarus »

AltaRed wrote:The problem with a Big 3 Chapter 11 filings is there is a good chance revolutionary change may not happen to re-structure the industry. Too many executives and unions wanting to preserve as much of the status quo as possible.
Then they will deservedly go bankrupt. For sure there will be no fundamental change if taxpayers throw money at them every time they get into trouble. This is the whole reason that businesses are allowed to fail.
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