The anatomy of an auto bailout.

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**dogma**

Samuelson is smart guy. I've found new respect for him in recent months.

Article here.

How to Bail Out General Motors

Robert Samuelson

So it's come to this: General Motors, once the world's mightiest industrial enterprise, is now flirting with bankruptcy. Ford and Chrysler may not be far behind. Car and truck sales have collapsed. GM is rapidly exhausting its cash reserves and may soon be unable to pay its bills. Here's the dilemma: GM and other U.S. automakers ought to be rescued to minimize damage to the economy, but the rescue should require tough conditions that neither the Democratic Congress nor the incoming Obama administration seems willing to support.

In a booming economy, a GM bankruptcy might be tolerable and useful. It would remind everyone of the social costs of mediocre management and overpriced unionized labor. But far from booming, the economy is declining at an apparently accelerating rate. Confidence among small businesses has dropped to a 28-year low, according to a survey released last week by the National Federation of Independent Business.

No one knows what further havoc a GM bankruptcy might inflict. A study by the Center for Automotive Research (CAR) estimates that 2.5 million jobs would be lost in the first year. The logic: if any of the "Big Three" went bankrupt, many suppliers would also fail; because car companies share suppliers, all U.S.-based manufacturers would suffer crippling parts shortages. American production would virtually stop until new supplier arrangements emerged. "It takes 6,000 to 14,000 parts to make a vehicle," says Sean McAlinden, CAR's chief economist. "If you don't have one, you can't make it."

This may be too pessimistic. In a Chapter 11 bankruptcy, GM would "reorganize." It would suspend many existing debt payments and continue normal operations. Perhaps. The snag is that even in "reorganization," GM would require new loans and these might not be available. "Historically, when companies go bankrupt, there's 'debtor in possession' financing—investors lend you money, but they get repaid first. That market has evaporated because of the credit crunch," says auto analyst Rod Lache of Deutsche Bank. No loans, no production. Another possible pitfall: worried about warranties and service, customers might shun a bankrupt GM's vehicles.

Why run these risks when the 6.5 percent unemployment rate seems headed toward 8 percent and almost a quarter of the 10 million jobless have been out of work for six months or longer? Just to satisfy a purist "free market" ideal? It doesn't make sense. But neither does it make sense simply to heave taxpayers' money at automakers. The objective is not to rescue the companies or workers; it is to shore up the economy and improve the U.S. industry's competitiveness. A bailout won't succeed unless other things also happen.

First, auto companies' existing creditors need to write down their debts. Even with federal aid, companies will shrink. Economist McAlinden estimates that the country has surplus assembly capacity of about 4 million vehicles, much owned by the Big Three and destined to be shut. GM will need a $25 billion government loan to get through the recession and cover closing costs, says Lache. But GM already has $48 billion of debt. Unless the old debt is sharply written down, GM would be overburdened and its rendezvous with bankruptcy would merely be delayed. Already, shareholders are essentially wiped out.

Second, labor costs need to be cut. By Lache's estimates, GM's hourly compensation—wage plus fringe benefits—totaled $71 in 2007 compared with Toyota's $47. Health benefits for retirees (many in their 50s, having retired after 30 years) are expensive. These costs contributed to GM's massive cash drain, $31 billion since 2005. But the United Auto Workers opposes making concessions. Just the opposite. Government aid, says UAW president Ron Gettelfinger, is needed "so that auto companies can meet their health-care obligations to more than 780,000 retirees and dependents." The bailout should be more than union welfare.

Finally, automakers need a consistent energy policy. Congress demands that companies produce more fuel-efficient vehicles (35 miles per gallon by 2020, up from 25mpg now). But politicians also want low gas prices. These goals are contradictory. To encourage consumers to buy fuel-efficient vehicles, Congress should mandate higher gas prices. Gasoline taxes could be raised gradually (say a penny a month for four years, possibly offset by other tax cuts). Wild swings between low and high fuel prices have crippled the U.S. industry by erratically shifting buyer preferences—to and from SUVs.

In bankruptcy, a judge can modify a firm's labor contracts and debts. GM needs the benefits of bankruptcy without the uncertainties, but the political process—so far—resists that desirable bargain. The conditions that Democrats seem to be discussing are mostly rhetorical gestures against high executive compensation (already limited) and in favor of more fuel efficiency (already legislated). The lame-duck Bush administration hasn't helped the conversation. It rejects additional assistance without saying why; if aid is forthcoming, it doesn't suggest what might be useful conditions.

We are now seeing the first political side effects of the open-ended $700 billion rescue of financial institutions. With so much money going to so many recipients, boundaries and rationales need to be established. When is public intervention justified? Who deserves support and why? Otherwise, political firepower will increasingly rule. The reason for imposing tough conditions on the auto industry is not only to improve the odds of success, but also—by the sacrifices required—to make the process sufficiently unpleasant so that countless other companies and unions won't demand similar handouts. In 1979, when it rescued Chrysler from bankruptcy, the Carter administration insisted on concessions from management, investors and labor. We should do as much or more.

© 2008

**Frazzled**

Buy American. Buy a Honda.

**Frazzled**

http://news.yahoo.com/s/nm/20081117/ts_nm/us_autos_bailout_opinions

ATLANTA (Reuters) – As Congress debates legislation to help struggling automakers on Monday, many Americans said they were uneasy with the plan, arguing that while it may save jobs, it would reward companies for pursuing bad business practices.

In interviews from New York to Los Angeles, everyday Americans said the proposed $25 billion rescue plan was unfair and said it would make it harder to reform U.S. automakers.

"They need to restructure. If they get bailed out they are not going to do it," said Eric Smith, a paint contractor interviewed in Chamblee, Georgia, on the outskirts of Atlanta.

Democrats crafted the plan to help General Motors Corp, Ford Motor Co and Chrysler LLC, and hope to pass it during a post-election session of Congress starting on Monday.

The three companies, whose gas-guzzling vehicles have been losing market share to Japanese rivals for years, are lobbying for the money to help them restructure and survive the economic downturn.

The stakes rose on Friday, when Goldman Sachs suspended its rating on GM and said the automaker needs at least $22 billion in aid. Goldman also said it would be difficult for Chrysler to survive without help.

All three companies said Chapter 11 bankruptcy restructuring was not an option.

In interviews, many people said all of the options facing the automakers had drawbacks, including the proposed bailout.

"If they don't do it, a lot of people are going to lose their jobs," said Kevin Austin, 36, while fixing a car in a mechanic shop in Atlanta.

"But every big company is getting a bailout and the little people don't," he said.

The automakers are a symbol of industrial muscle in the world's richest country and their financial straits are seen as a sign of the trouble facing the U.S. economy as a whole.

Even so, the bailout is unpopular with many conservatives and others who say in a capitalist society businesses must stand or fall with a minimum of government interference. On Sunday, Arizona Republican Sen. Jon Kyl told Fox News American taxpayers should not be burdened with bailing out the auto industry.

"It's like nature's law: Only the fit survive," said John Berrotto, 50, a security director in New York who drives a Lexus and said he does not support the idea of a bailout. "Sometimes companies just don't make it," he said.

DOUBTS

In Los Angeles, which hosts the Los Angeles Auto Show this week, many people said they doubted a bailout was the best course of action. Some said it might be better for the companies to go bankrupt. Others said the industry could not survive long-term and that the bailout would be throwing good money after bad.

"I'm not sure they (the automakers) can be salvaged. Part of me says that if Honda and Toyota can make better cars in the U.S. with American workers, so be it," said Tom Reiter, who was interviewed in Los Angeles and drives a 2001 Jaguar XJ he said was a "big gas guzzler."

Scott Porter, a 34-year-old attorney, drives a 1996 Honda Accord, which he said he chose for its reliability. He said he opposed the bailout but might be willing to consider it if it was done the right way.

"Everybody is trying to claim they're poor. Everybody wants a handout. This (financial trouble) is something that's been a long time coming," Porter said in downtown Los Angeles.

"I don't see why it's a massive emergency all of a sudden," Porter said, adding that many other sectors were also in trouble.

Asked about claims by U.S. automakers that they could not make a profit manufacturing small cars, he said: "If you can't make a profit then you are going to go bankrupt."

(Reporting by Matthew Bigg; Additional reporting by Dan Whitcomb in Los Angeles and Rebekah Kebede in New York; Editing by Eddie Evans)

**sexiest_hero**

I'm really torn between helping and leting them fail. My wife is for saving them, i'm for letting them fail completely. They produced shoddy product and now they are paying the price.

Maybe they should go bankrupt get split into smaller more workable companies and then helped out to a good start.

I care less about the auto-makers and more about the hore of auto related companies that depend on them.

**Kilkrazy**

So far the bailout has focussed on saving the banks because they are the financial system on which normal commerce depends.

There is no point having a financial system unless there is a commerce system because that is the productive sector of the economy, which produces many important goods and services.

That does not mean GM has to be saved, however serious consideration needs to be given to the impact of them collapsing because it will have all kinds of knock-on effects such as creating a new bunch of bad debts for the banks to deal with.

**dietrich**

Congress needs to figure out how to make a bailout not a bailout. It's not a loan to meet operating capital - it's a loan to retool their plants to produce more energy efficient vehicles, to produce less hazardous waste, for job skill training for employees, or as part of some national health care program.

I'm of two minds. I'm opposed to throwing money at corporations. I also realize that having GM fail is bad. I would support some non "throw money at it" intervention - loans to retool, develop new tech, etc.

Isn't the whole point of government regulation that prevents monopolies to stop any companies from getting "too big to fail"?

I think that a lot of union industries are having the same problem as the federal government - benefits to retirees who are living longer. When social security was established, the life expectency of men was less than retirement age and for women, it was only a few years beyond retirement age. It was meant to help take care of old widows, who might not have family to help support them. Now, it covers a lot more people because they're living longer.

**Mattlov**

When I worked at a dealership it was insane the cost breakdown of why a vehicle was so expensive. $1000-$2000 PER CAR just to help cover retiree expenses.

Honestly, unionization was a good idea DECADES ago that should probably be eliminated.

**lord_sutekh**

Another problem is the unions themselves. The basic idea is fine, but when you have the level of bloating that has infected them, it hurts everyone. When stuff goes in the crapper like this, they need to back away from the trough, before it get repossessed. The workers will NOT thank their union reps for pushing so hard for the good-times status quo that they lose their jobs by the company tanking.

Now, I wouldn't agree that unionization is a bad modern idea; in fact, it's more important than ever, with corporations becoming more and more enamored with their bottom line. What's important is to cut out the corruption and make the unions adapt to changing markets and financial situations.

**dogma**

As Samuelson says, the unions need to be busted in a big way. The corruption in the UAW is just unbelievable in terms of its structural lien on actual working conditions.

That said, Chapter 11 is not an option. The ripple effect that would follow in the wake of a Big 3 collapse is simply unacceptable. It isn't so much the bankruptcy itself which is problematic, but the massive transition over to the unemployment dole. And the likelihood of even more mortgage defaults as a result of job loss.

Most likely what needs to happen to prevent calamity is the issuance of a loan to keep GM operating until a proper bankruptcy can be structured.

**Frazzled**

Thats what chapter 11 is about. Its just postponing the inevitable but taking $25BN out of the economy to do it. At the end of the day the Little 3 will still have to restructure. Lots of companies do it and come out just fine.

Edit: I should be clear. I feel for the workers that work hard, and for their families. Giving the same bunch of management losers more money to play with, taken from other hard working people and their families, only keeps those rich

ers employed.

**dogma**

Frazzled wrote:Thats what chapter 11 is about. Its just postponing the inevitable but taking $25BN out of the economy to do it. At the end of the day the Little 3 will still have to restructure. Lots of companies do it and come out just fine.

Edit: I should be clear. I feel for the workers that work hard, and for their families. Giving the same bunch of management losers more money to play with, taken from other hard working people and their families, only keeps those rich ers employed.

As I said, it isn't at all about the company itself, or even really its employees. But the cost of turning those employees into unemployed during a crisis founded on housing default due to substandard income.

So, yes, it is just postponing the inevitable, but that's the whole point.

**Frazzled**

Thats the problem. If its inevitable, let it happen. Quit kicking the working man/woman in the nuts to support rich automobile executives in Detroit? Those jobs are already being shipped to Mexico. The $25Bn will not help that. It will take money out of my pocket though, that I could have spent on my family that now goes to insure executive bonuses are paid.

Honda is here. Toyota is here. BMW is here. Mitsubishi is here. Nissan is here. Volkswagen is here. Ford, GM, and Chrysler are money sucking irrelevant entities at this point, shipping jobs to Mexico. They couldn’t design or build a competitive car to save their lives. Only Chapter 11 will force that. They will come out stronger or they will be bought. The economy could be awesome and these losers would still be going under, as they have been for years.

**dogma**

Frazzled wrote:Thats the problem. If its inevitable, let it happen. Quit kicking the working man/woman in the nuts to support rich automobile executives in Detroit? Those jobs are already being shipped to Mexico. The $25Bn will not help that. It will take money out of my pocket though, that I could have spent on my family that now goes to insure executive bonuses are paid.

It isn't ensuring executive bonuses Fraz. No one is talking about that at all. This is just your prejudice against market intervention, not a rational argument. Indeed, the bailout is primarily about keeping the working man away from the poor house because letting him get there will inevitably be far more expensive for everyone.

Frazzled wrote:
Honda is here. Toyota is here. BMW is here. Mitsubishi is here. Nissan is here. Volkswagen is here. Ford, GM, and Chrysler are money sucking irrelevant entities at this point, shipping jobs to Mexico. They couldn’t design or build a competitive car to save their lives. Only Chapter 11 will force that. They will come out stronger or they will be bought. The economy could be awesome and these losers would still be going under, as they have been for years.

You don't get it at all. The Big 3 are going to go under. The point is to push that event down the line so that their bankruptcy does not deepen the hole created by the current mortgage crisis.

**Kilkrazy**

Yes, I agree.

I don't think the USA or the world for that matter could currently withstand a big wave of major corporate bankruptcies. The wreckage has to fall and be rebuilt, but it needs to be demolished in an organised way not fall as a huge avalanche.

Every worker laid off from GW is not only losing their health insurance, they pass on their lack of income to all the companies they will not longer be buying from.

**Frazzled**

And what about all the jobs lost because of the social costs of funding that $25Bn bailout? Thats revenues, net income, food on the table for someone else. Companies go bankrupt all the time. GM will go bankrupt, restructure, and come out. $25Bn will delay that a few months, but burden the rest of the nation for years.

**dogma**

Frazzled wrote:And what about all the jobs lost because of the social costs of funding that $25Bn bailout? Thats revenues, net income, food on the table for someone else. Companies go bankrupt all the time. GM will go bankrupt, restructure, and come out. $25Bn will delay that a few months, but burden the rest of the nation for years.

The argument isn't that there will be no burden on th economy but that the bailout is a more regulated, and therefore greatly lessened, burden. Bankruptcies are not quick fixes like you seem to believe. If GM goes belly up it will not hasten economic recovery. It might hasten economic collapse, but it will certainly do nothing to fix the problem.

**Frazzled**

Throwing good money after bad doesn't help the problem either, it will just extend the period of the downturn.

Where does it stop btw? What about the other 30 major auto companies that have plants in the US? They need some bank. Do the suppliers get bailouts? How about the raw materials manufacturers? Then of course the transport agencies are sucking wind. They need help. The steel guys are doing poorly, have been run for a while. Agriculture's not so hot. I heard sugar growers aren't making money like they used to despite the tariffs. Power companies need help. They were hit by the fluctuation in energy-you can't expect them just to go on their own. What about all those construction workers that are out of work due to the housing shortfall. Those construction companies deserve help, if they fail tens of thousands of jobs are lost. Then Walmart will go down, and the Big Box retailers. Frankly this whole capitalist system needs a rethink. Despite the trmemndous growth in the last 20 years, it really isn't up to snuff is it. Those planned eocnomies were much better now that we think about it, veritable workers' paradises.

Nuts.

**dogma**

Frazzled wrote:Throwing good money after bad doesn't help the problem either, it will just extend the period of the downturn.

That's overly simplistic. Throwing money at the situation can lengthen the downturn, but so can a hands-off approach. The loss of sustainable income creates a market cascade which causes operation to seize up. No one is going to make any money if there is no demand for the products which are being offered. This isn't just another bankruptcy like you seem to believe. It is a very real part of the overall housing crisis which in currently threatening everyone's economic well-being.

**dogma**

Frazzled wrote:
Where does it stop btw? What about the other 30 major auto companies that have plants in the US? They need some bank. Do the suppliers get bailouts? How about the raw materials manufacturers? Then of course the transport agencies are sucking wind. They need help. The steel guys are doing poorly, have been run for a while. Agriculture's not so hot. I heard sugar growers aren't making money like they used to despite the tariffs. Power companies need help. They were hit by the fluctuation in energy-you can't expect them just to go on their own. What about all those construction workers that are out of work due to the housing shortfall. Those construction companies deserve help, if they fail tens of thousands of jobs are lost. Then Walmart will go down, and the Big Box retailers.

Yeah, and we can assess the affects of a bailout in each of those situations the responsible way. With internal industry data, not fecund ideological posturing.

Frazzled wrote:
Frankly this whole capitalist system needs a rethink. Despite the trmemndous growth in the last 20 years, it really isn't up to snuff is it. Those planned eocnomies were much better now that we think about it, veritable workers' paradises.

Nuts.

Yeah, fully planned economies are nuts. So are fully capitalist economies. There is a balance to be struck, and right now the adjustment which needs to be made is a leftward one. This isn't an either or proposition about ideological salience. All ideologies have their place, but extremes in any direction are universally deplorable.

**Frazzled**

http://abcnews.go.com/Blotter/WallStreet/story?id=6285739&page=1

**dogma**

So, the Big 3 used something which is essentially nominal in corporations of their size for corporate business? Woah, that's strange, and clearly inappropriate. Because, you know, 20,000 dollars is a significant amount of money when your operating costs are in the billions annually.

**Frazzled**

Do you actually pay taxes Dogma or just sit around on the internet? Paying the cost of finding and killing baby seals is essentially only a nominal cost to their business as well. Executive management lighting cigars with $100 bills taken from petty cash is nominal too.

**dogma**

Frazzled wrote:Do you actually pay taxes Dogma or just sit around on the internet? Paying the cost of finding and killing baby seals is essentially only a nominal cost to their business as well. Executive management lighting cigars with $100 bills taken from petty cash is nominal too.

I do indeed pay taxes, not much, but I pay them. My job is such that sitting on the internet is a pretty big part of it (defense policy researcher, I spend my days reading and writing, almost 24/7). I just think its foolish to point at what is a standard industry expense that has nothing at all to do with issue at hand when trying to criticize the formation of policy. It would be absolutely irresponsible to allow GM to fail there is no plan to deal with the mortgage defaults we currently have. Let alone the one's that would be caused in the wake of a Big 3 collapse. What does a corporate jet have to with that? What does 20,000 already allocated dollars have to do with that? That isn't even 1/3 the salary of the average GM worker.

**Frazzled**

If you think this sort of thing is not relevant, you're not living in the real world. You also missed the part where they had a fleet of private planes. It reflects the corporate arrogance involved, that nothing will change for these guys without the hammer of a bankruptcy judge. If they want to do thatand the shareholders are ok with that fine, but don't come begging to US taxpayers who don't have access to private jets to shuttle them home WEEKLY.

**dogma**

Frazzled wrote:If you think this sort of thing is not relevant, you're not living in the real world. You also missed the part where they had a fleet of private planes. It reflects the corporate arrogance involved, that nothing will change for these guys without the hammer of a bankruptcy judge. If they want to do thatand the shareholders are ok with that fine, but don't come begging to US taxpayers who don't have access to private jets to shuttle them home WEEKLY.

No Fraz, you're not living in the real world. Yes, they have a fleet of private jets, all major corporations do. It is the price of doing business when business is done half the world over. It would be far more expensive for them rely on commercial flights in terms of lost time, and lost opportunities. Here's the deal. Nothing is going to change for them. Bailout or no. Their contracts are such that they will be given their golden parachutes before any bankruptcy action is taken. It is simple ignorant schadenfreude to actively call for an action that you clearly have no knowledge of. Corporate arrogance. :S You are so caught up in your desire to punish people that you refuse to see the larger issues involved here.

I've said, repeatedly, that they need to go bankrupt. That hasn't been the point of any part of my argument. My point has always been that it is absolutely foolish to let them fail now because we have no idea how to deal with the ramification of that failure. Sure, we won't likely see a significant net job loss. Maybe 1.5 million total, on the high end. But those jobs won't actually recover for at least a year. What are you going to do with 3 million unemployed people for a year? How are they going to make mortgage payments? What are we going to do when they can't make them, and the housing crisis deepens?

**Frazzled**

Those contracts can easily be eliminated by a bankruptcy judge. If you're going to argue the merits at least have a knowledge of what can and can't be done.

No, most corporations don't have fleets of private jets. thats Hollywood fantasy. They especially DON"T KEEP THEM AT THE SAME TIME ASKING FOR A BAILOUT. It appears only companies asking to suck off the government teet are that brazen.

**dogma**

Frazzled wrote:Those contracts can easily be eliminated by a bankruptcy judge. If you're going to argue the merits at least have a knowledge of what can and can't be done.

And? Even if they are the average CEO is independently wealthy before he is given his parachute.

Frazzled wrote:
No, most corporations don't have fleets of private jets. thats Hollywood fantasy. They especially DON"T KEEP THEM AT THE SAME TIME ASKING FOR A BAILOUT. It appears only companies asking to suck off the government teet are that brazen.

I was clearly referring to corporations of the size, and scale of General Motors. And yes, they likely would still have them while asking for a bailout because they are likely either rented on a yearly contract, or owned outright. What, do you expect them to be sold? Who the hell his going to by a private jet Frazz?

It doesn't matter anyway. Your inability to do anything other than whine like a little girl about how people making more money than you are still going to be making more money than you betrays a failure of judgment. The bailout has absolutely nothing to do with the executives. It doesn't even have anything to do with bankruptcy per se. The Big 3 are going to go bankrupt, we simply cannot afford to let them to go bankrupt right now. I have said this at least 3 times in this thread. You have not responded. You have screamed like a child denied a cookie.

**Kilkrazy**

What's interesting is that France gave their car companies state support and they have managed to pull back and even thrive. The same didn't work in the UK.

Renault now owns 44% of Nissan. Renault had been nationalised at the end of WW2 and was privatised in 1996. 17% of Renault is still owned by the French government.

Nissan's basic problem was they built too wide a range of cars.

In the current climate even auto superpower Toyota are suffering.

Perhaps GM can pull through if they are helped.

**Frazzled**

I have argued why they can go bankrupt. Your failure to discern prudent management from imprudent management, and the negative PR effect this has is striking. There will be no bailout this year now.

For the record-yes sell or sublease the jets. That would have been step 1 two years ago. I've even banked those things in the past.

**Frazzled**

Kilkrazy wrote:What's interesting is that France gave their car companies state support and they have managed to pull back and even thrive. The same didn't work in the UK.

Renault now owns 44% of Nissan. Renault had been nationalised at the end of WW2 and was privatised in 1996. 17% of Renault is still owned by the French government.

Nissan's basic problem was they built too wide a range of cars.

In the current climate even auto superpower Toyota are suffering.

Perhaps GM can pull through if they are helped.

I'd agree if they hadn't been sucking wind for years. They literally cannot compete in anything outside of trucks/SUVs and haven't been able to do so since the Taurus first came out. They are antiquated butt ugly vehicles. Why can they market Opel in Europe but not here in a gas crisis? What moron has three to four differnet divisions competing with each other. They've been creamed in market share because they quite literrally have sucked since the early 80's-the last time a US company was bailed out.