U.S. automakers next after Fannie Mae bailout
September 15, 2008
The ink isn’t dry yet on the $200 billion Fannie Mae bail out and Nancy Pelosi is chatting up bailing out automakers in Detroit! Where does it stop? America’s entire infrastructure will be socialized before the next President takes office! Pelosi’s plans may have to be placed on the back burning pending repercussions over the Lehman firesale.
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11 Responses to “U.S. automakers next after Fannie Mae bailout”
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This is a bailout of the UAW. The $25 billion bailout is the cost the Big Three have to pay to meet union demands to stay in business. So this is really job welfare to insure UAW workers have jobs.
When Obama, Biden, and even Miller, Tauscher, DeSaulnier, Torkleson, and Buchanan talk about “working people” they mean they are going to help unionized supporters like UAW, CTA, Nurses, Cops, Public Employees.
Where’s $25 billion help for CPAs, dentists, store owners, waitresses, office workers, auto repair shops.
Squat for you unless you belong to a union.
So “rights” have become defined by which corporate entity you identify as your ticket to the big bucks in DC.
Sad.
We have got to stop congress from bailing out everyone, we have got to let the market correct itself. These are just bandaids on a severe wound. It has to heal on it’s own. When everyone realizes we are just going to have to grin and bear it, the sooner we can start to be responsible for our own woes.
There is much more to this than just bailouts…
The government would have been much better off subventing current at risk mortages, than giving billions to banks that caused the crisis in the first place. The auto fiasco is a totally different situation.
If the government lets GM go under (and they won’t), the companies who supply GM will go under right along with them. The net job loss will be in the millions and you will see a depression instead of just a recession. Keep this in mind, if the big three close, all that will remain is Japanese and Korean products in the United States. The profits made from sales of those vehicles will not remain in this country and the amount of taxes collected by our government pertaining to auto sales will plummet. The auto manufactureres are suffering form past UAW contracts, huge retirement benefits and poor management. If they file Chapter 11 reorganization, they will have the same opportunity to shed thier past obligations as the airlines did and between that and new products coming out, could very easily return to profitability in three to five years. No matter what happens in this country, we cannot let american businesses die. If we let that happen, our way of life changs for the worst. No matter how you cut it, there is no way we would be able to sustain another three to five million americans out of work, without realizing devastating results.
General Motors has too many government contracts to go out of business and the repercussions form their demise would be felt al over the world. GM does a lot of business in Europe, just as Ford does and if I’m not mistaken, their European markets are profitable. If you look at the current market, you will notice as gasoline prices tumble, truck and SUV sales are starting to climb again. Americans have a very short memory and we are a spoiled bunch. We like our toys and our big cars and I can guarantee you this, if gas settles close to where it is now, americans will be out of their gas sippers and back into guzzlers in no time flat.
I agree with WSJ estimate that public bailout of Detroit should include receivership like the airline bailout. I would take it further.
- Current execs and director boards— fired
- Current stock holders..too bad
- Government Pension Guaranty kicks in to cover existing UAW retirement obligations, but the union madness stops there, including paying workers not to work. Besides, despite UAW, I don’t think workers’ should be penalized as a class, per se. But the UAW bosses, yes. Their pensions and private assets should be forfeit to the rank and file. Bankrupt them instead of the public.
Receivership either winds down 5 of 8 GM brands for example and rebuilds market-winning product that keeps the Pelosi’s in Congress from micromanaging design and production.
Then, possibly sell stock that takes the concern back to publicly traded stockholders (or private equity group)
But the current executives, board, and union bosses need to fall on swords cause they were all just playing the game for their own benefit.
The only real way for the old style American auto companies to be saved is to allow them to go into bankruptcy. Here is why:
- the biggest problem they face are the legacy costs from union contracts that obligate them to excessive wages, work rules (that require them to pay people not to work), excessive wages, and excessive benefits. Bankruptcy will allow a court to review AND CHANGE those contract terms to something more reasonable - the unions will never agree to these needed changes otherwise.
- Filing for bankrupty (there are different kinds you know) can buy these companies time to reorganize - it does not put the companies out of business. All of the workers are not thrown out in the streets, they continue working while the company restructures. Remember United Airlines went into bankruptcy and emerged. Not all firms do survive, but this is the best chance these particular companies have given the competition they face in the automobile market.
- The US government cannot continue to bail out companies with failed operating models. That rewards the incompetent with your tax dollars and drives up the already staggering Federal debt. Plus, if the companies don’t change their operations significantly, they will fail anyway. They need to have their creditors, suppliers, and workers watching over them and ensuring they suceed. Propping them up with money without making the needed changes merely staves off the inevitable.
Doesn’t the UAW manage the medical retirement benefits? I agree nationalize it, clean house, merge GM & Chrysler, and then take it private again….get Steve Jobs to manage it for 6 months….He’d do it just for the hell of it for $1 a yr.
Since we are nationalizing our core industries (auto, banks, home mortgages), in addition to representatives in Congress and President, why not let voters select who gets to be CEO and Board of Directors!
Why should Barnie Frank have all the fun?
To Kris Hunt
You are absolutely correct and I agree with you 100%. However, even if the auto makers go into a (reorganization) chapter 11 bankruptcy (and they probably will), their problem is deeoer than that. They have no operating capitol. This is the purpose of a government loan. If you remember back to Chryslers troubles in the 80’s, they paid back all the money the government loaned them in a short amount of time.
If the auto makers are going to survive, they need to be able to do research and developement and plant modernization. They have to have day to day operating funds. The best thing that can happen to the three of them is to go into chapter 11, which will give them the opportunity to shed the weight of all their past lopsided UAW contracts. In todays paper, the union president Ron Gettlefinger announced there will be no union concessions, He feels that the issues that the auto manufactures are facing are not the unions fault and therefore they should not participate in any part of the solution.
No matter what your feelings about who or what caused the demise of the once great General Motors, they along with Ford and Chrysler cannot be allowed to go out of business. If they do, the repercussions will be catastrophic.
This WSJ editorial makes the best argument I’ve seen on this topic…
As President-elect Barack Obama prepares to enter the White House, he must ponder what to do about the world’s trouble spots: Iran, Iraq, North Korea, the Caucasus. And, oh yes, Detroit.
On Friday, General Motors and Ford announced more multibillion-dollar losses in the third quarter; closely held Chrysler doesn’t publicly report results. When GM, which seems in the worst shape, was 45 minutes late releasing its results, rumors spread that a bankruptcy filing was imminent. It wasn’t, but the company says it could run out of cash in the first half of next year. Make that the first quarter if the current cash bleed continues. GM is lobbying furiously for emergency federal assistance, with Ford and Chrysler close behind.
Let’s assume that the powers in Washington — the Bush team now, the Obama team soon — deem GM too big to let fail. If so, it’s also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.
Associated Press
In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver — someone hard-nosed and nonpolitical — should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.
That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.
These are radical steps, and they wouldn’t avoid significant job losses. But there isn’t much alternative besides simply letting GM collapse, which isn’t politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government’s Pension Benefit Guaranty Corp.
But giving GM a blank check — which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant — would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.
The current economic crisis didn’t cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous “legacy costs,” but those didn’t just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.
A few years ago the UAW even waged a spirited fight to protect the “right” of workers to smoke on the assembly line, something that simply isn’t allowed at, say, Honda’s U.S. factories. Aside from the obvious health risk, what about cigarette ashes falling onto those fine leather seats being bolted into the cars? Why was this even an issue?
When GM’s bond ratings plunged into junk territory a couple years ago the auto maker sold 51% of its financing arm, GMAC, to Cerberus, a private-equity powerhouse. Then last summer Cerberus bought 80% of Chrysler from Daimler for just 25% of what the German company paid for the company a decade earlier. It looked like a great deal at the time, like buying a “fixer upper” house at a steep discount. Until, that is, you have to shell out big bucks to shore up the foundation, repair the leaky roof, etc.
Cerberus tried hard in recent weeks to sell Chrysler to GM, with government financial assistance. Controlling GMAC’s lending to GM dealers and customers gave Cerberus enormous leverage at the negotiating table. Cerberus squeezed hard, say industry analysts and insiders, but the GM board balked. Last Friday the companies said the talks were off — “for the moment,” as the company’s chief operating officer put it.
For the moment? How about, like, forever? Buying Chrysler would just give GM an excuse to delay the fundamental task of putting its house in order. Management would turn its energy to producing pretty PowerPoint slides with all the requisite buzzwords: synergies, transformation, downsizing, rightsizing and exercising. What’s needed, instead, is exorcising.
A thorough housecleaning at GM is the only way to give the company a fresh start. GM is structured for its glory days of the 1960s, when it had half the U.S. car market — not for the first decade of this century, when it has just over 20% of the market. General Motors simply cannot support eight domestic brands (Cadillac, Buick, Pontiac, Chevrolet, GMC, Saturn, Saab and Hummer) with adequate product-development and marketing dollars. Even the good vehicles the company develops (for example, the Cadillac CTS and Chevy Malibu) get lost in the wash.
Nevertheless, the current board of directors and management have stuck stubbornly to this structure. The lone exception was a dissident director, Jerome B. York, who resigned a couple years ago. He warned that without fundamental changes the “unthinkable” might happen to GM. Well, here we are.
Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.
That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job — selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers — and even returned money to the government.
As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family’s control of Ford Motor. But keeping the family in the driver’s seat wouldn’t be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.
Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it’s now 2008, 35 years since the first oil shock put Japanese cars on the map in America. “Since the mid-Seventies,” one Detroit manager recently told me, “I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out.”
Which is why pouring taxpayer billions into the same old dysfunctional morass isn’t the answer.
Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper.
Write to Paul Ingrassia at paul.ingrassia@dowjones.com
http://www.techcrunch.com/2008/11/29/a-modest-proposal-for-the-auto-industry-stop-building-cars/
A Modest Proposal For The Auto Industry: Stop Building Cars
by Michael Arrington on November 29, 2008
Everybody these days has some advice for the beleaguered U.S. auto industry. Bail them out. Break up the unions. Do something about the dealerships. Do something about spiraling health care and pension costs. Design cars people will love. Etc.
There’s always the “be more like Apple” advice that’s been going around for a couple of years. Make the iPod of cars. One that people love so much that they’ll pay a premium for it. Robert Scoble handed out pounds of this kind of advice a couple of weeks ago.
But there’s a reason why the car companies can’t build the iPod of cars. It’s because they’re so weighed down with all the logistical nightmares of actually building the stuff that goes into those cars.
Apple doesn’t actually make any of the parts that go in the iPod or iPhone. Factories, mostly in Shenzhen, China, do that. Most of the big PC manufacturers don’t actually build computers or any of the parts that are in them. Every part is made by different companies that specialize in building that particular thing. Even final hardware assembly is outsourced. Dell and some others do some final assembly themselves to allow for easy customization, but they are quickly getting out of that business, too.
If the car companies want to be more like Apple, they need to stop building any actual cars.
Vertical integration kills real research, because every company is doing their own work. With personal computers, every component has a vibrant and competitive market that drives innovation, quality and cost control. The big PC brands just design the final product and outsource the actual building of it.
Every major car manufacturer designs their own engines and drivetrains, manufacturers many of the important parts of the car, assembles it, manages a network of dealers and own their own finance companies to help people pay for those cars. Over the years they’ve dabbled in outsourcing, but the current trend is actually more vertical integration, not less.
Who’s the Intel of engine manufacturers? Why isn’t there one?
The best way forward for the automotive industry is to rip itself apart and start doing things sensibly, like the PC industry does. It won’t make any one company more stable, of course. In fact, it means competition will regularly drive companies at every point in the process out of business. But none of those companies will be in a position to drive our economy south if they do go out of business. Someone better will just take their place.
Does this mean our cars will be built in China? Yeah, it does. There’s no avoiding that. U.S. workers are just paid too much to build cars any more. Detroit may become the center of the car design world, with highly skilled and highly paid workers designing the iPod of cars, but the parts will be built elsewhere, and assembled elsewhere.
There’s a counter argument, that Toyota is the most vertically integrated car company in the world, and also the largest and healthiest. I argue that they’re the only ones that can do it profitably over the medium run in such an inefficient market because they have scale. If the market changes, which it is, that vertical integration model will fail.
And here’s the thing - this kind of change could never happen quickly in a normal market. There are just too many people negatively affected to make it work. But right now, with the auto-makers on the edge of collapse anyway, all we have to do is nothing to make this happen. Let the big car companies fail. Don’t bail them out. Their assets will efficiently move to the highest value use. There’s a good chance that ten years from now we’ll have a whole new crop of U.S. auto companies designing (and overseeing the assembly of) some really awesome cars.
I argue that they’re (Toyota) the only ones that can do it profitably over the medium run in such an inefficient market because they have scale.
Actually, GM & Ford had the scale but they squandered it when they believed
the fantasy projections of our warped “wisemen” (economic prognosticators and free market con artists) and political bull shit artists of either liberal or conservative ilk.
It was also well know when I was at Ford over a quarter century ago that innovative spirits always took a back seat to marketing and financial opportunists. This is the very toxic atmosphere that still pervades the auto industry: Hell, they spent all that lobbying money against CAFÉ for what?
Nice article and has a lot of truth. Whatever happened to the “by wire” architecture that was gonna make cars more modular?
Maybe the Volt can save GM, but their finance/marketing people want to step on it at 40K+…too bad…