Big Three Bailout?

[noee]

This just sickens me. Privatize profits, socialize risk, why should taxpayers bail these guys out?

Money Article - Big 3 Bailout?

The $50 billion loan package, first proposed by the auto industry last month, has won the support of presidential candidates Barack Obama and John McCain as their campaigns eye key votes in Michigan and Ohio.

On Tuesday, White House Press Secretary Dana Perino signaled the outgoing Bush administration was open to approving the loans.​

 

[J. Toronado]

Agree. Why doesn't the oil industry pay it with their windfall profits?

 

[Mike_Rupp]

No, the whole point of capitalism is that the strong survive and the weak fail through competition. Why should weakness and failure be subsidized?

 

[J. Toronado]

Well in this case I believe its because they fear that losing the American auto industry (or what's left of it) will send us into a deep recession or even a depression. So their answer, and I'm not an economist, is to try and bail them out now when its cheaper to do so then when the entire country is in the mire.

 

[Bannon88]

Yeah, because we can't go buy cars that don't come from the big three?

The big 3 screwed themselves with their arrogance years ago by refusing to change, shit happens. It's not like the oil companies are going to care if the gas is purchased for a chevy or a honda, as long as it's purchased. America isn't going to stop driving any time soon.

Toyota will be the largest auto manufacturer earlier than projected.

 

[J. Toronado]

The oil and auto industry have poured billions of dollars into lobbying efforts to keep us driving with gasoline. How much oil co PAC money has Bush taken over the years? How did he repay those same interests? Think its a coincidence that the oil industry has made more money in past few years then at any time in history?

 

[Bannon88]

Think it is also coincidence that the "easy" to drill oil is starting to dwindle? Why the sudden interest in offshore drilling, shale, or deep drilling? Or that China and India are consuming oil at an alarming rate? Or that the US hasn't build any new refineries to compensate for this growth?

Oil is expensive to drill, store, ship, refine, and distribute. Or did you think it is born in the ground under your local gas station?

 

[SGaynor]

I'm torn on this one.

I'm normally of the let'em fail persuasion. However, the US auto industry is pretty darn big (about 5% of GDP). Bankruptcy of GM, Ford and/or Chrysler would be bad. First off is the lost jobs that would occur, then the ripple effects (suppliers, transportation, etc.) of secondary companies going under. Then there is the pensions. Once in bankruptcy, these companies would shed their liabilities to the pensions, and would be transfered to the Pension Guarantee Corp (a federal entity) and the tax payer would pick up the tab (see the steel, airline industries).

GM and Ford, and to a lesser extent Chrysler, have already shed a lot of jobs (MI has the highest unemployment as a result). And are making headway in bringing out new vehicles.

Overall, the big 3 going under would be very bad, and they are all in danger of doing just that within the next year. It's really a question of which would cost more.

And actually, the proposal is for loans backed by the US Gvt, albiet at very low interest rates. Which is probably needed considering the sums the big 3 will need to stay running through 2010 (the credit markets are locked up - see credit crisis.). It's nota bailout in the sense that the gvt is giving them free money.

Personally, if loans are given, I'd like to see the gvt get preferred shares in these companies (to sell at a later date - presuming the stock prices rise). and that the senior management have significant pay cuts for the next X years. That's probably the best outcome. Maybe...

 

[noee]

Well in this case I believe its because they fear that losing the American auto industry (or what's left of it) will send us into a deep recession or even a depression. So their answer, and I'm not an economist, is to try and bail them out now when its cheaper to do so then when the entire country is in the mire.

Uh, in case you haven't noticed, there is a meltdown occurring in the financial industry right now. Have you ever heard of the concept of "moral hazard"?

These guys were de-rated for a reason. They suck. So, their cost to borrow has gone up. Welcome to the new world folks. Lever up so you can continue to lever up? C'mon, these are flawed business models and they need to exit stage left.

My point is, why the hell are all these bailout deals getting done (JPMorgan/Bear Stearns, the GSEs -Fannie/Freddie, etc.) where the fine print is allowing these guys to privatize the profit/gain and socialize the risk/loss.

Here's an idea: How 'bout a deal gets done to merge the 3 in to one company, shed the overhead and redundancy, consolidate assets, all that good merger stuff that can happen when done right. The airlines do it.

 

[SGaynor]

The oil and auto industry have poured billions of dollars into lobbying efforts to keep us driving with gasoline. How much oil co PAC money has Bush taken over the years? How did he repay those same interests? Think its a coincidence that the oil industry has made more money in past few years then at any time in history?

What the hell are you talking about?

What does "lobbying efforts to keep us driving with gasoline" mean? Is there some law that says you have to use gas?

The car companies could care less what the powertrain is, as long as the cars sell. GM came out with an electric car about a decade ago, sold maybe 100 of them, and killed it. The only, and I mean only, reason hybrids were successful was because Toyota did a great marketing gimick.

They made their hybrid a completely different vehicle - the Prius. People bought it because it could easily be identified as a hybrid. This made it a status symbol - "I get good gas mileage. I'm saving the planet. I'm better than you."

Look at the other hybrids that came out near the same time: Honda Civic and Ford Escape. Up until the past year, neither company could barely give the cars away. The Civic gets basically the same mileage as a Pirus, and the non-hybrid Civic (which gets pretty good mileage) is one of the best selling cars in the world. So what was different?

There is no conspiracy between the oil companies and the auto industry. On top of it all, GM has been trying to develop a fuel cell (hydrogen) powered car for a decade and is coming out with the Volt in 2010. (a nearly all electric car - it has a gas powered generator on board to charge the batteries, but not power the car directly). Yeah, they are doing this because Exxon told them to...

 

[SGaynor]

My point is, why the hell are all these bailout deals getting done (JPMorgan/Bear Stearns, the GSEs -Fannie/Freddie, etc.) where the fine print is allowing these guys to privatize the profit/gain and socialize the risk/loss.

Here's an idea: How 'bout a deal gets done to merge the 3 in to one company, shed the overhead and redundancy, consolidate assets, all that good merger stuff that can happen when done right. The airlines do it.

I agree with your point on moral hazard. It's a slippery slope.

I just want to point out some common misconceptions that you've brought up.

A) Bear Sterns was not bailed out. It was sold at a fire sale. It sold for less than the real estate value of it's headquarters in lower Manhattan. The shareholders got hosed. The gvt did back some of the subprime holdings that BS held as an incitement for JPM. JPM was the real winner in this one. The BS/JPM merger was orchestrated by the Fed, just as you suggest for the auto industry (end of your quote).

B) Fannie May/Freddie Mac - the proposal is/was that the gvt would give them loans in exchange for preferred stock - the current stock holders would get wiped out. However, FM/FM are still solvent, can sell their bonds on the market and have not needed gvt loans; there was no bail out. But yes, for these companies, here was a clear case of moral hazard and lax oversight (which is no being rectified).

 

[noee]

A. Yeah, call it a merger if you want, JPM was the largest holder/backer of BS derivative instruments, so yes, they were heavily exposed and they got fed backing (US Treasury) and ended up enveloping BS. Afterall, JPM is one of the prime shareholders in the Federal Reserve. But, the Fed has been taking on "crap" backing these deals and loaning this money. At some point, it's got to be reckoned.

B. Not yet they haven't. I'm not sure how the regulatory controls are being implemented on these GSEs. They've had very little oversight in the past, this new bill changed some rules about their underwriting but they still haven't been brought under any kind of regulatory umbrella that I can see. Bottomline, these guys levered up and now it's unwinding. It seems a foregone conclusion that they will require the cash.

 

[SGaynor]

A. Yeah, call it a merger if you want, JPM was the largest holder/backer of BS derivative instruments, so yes, they were heavily exposed and they got fed backing (US Treasury) and ended up enveloping BS. Afterall, JPM is one of the prime shareholders in the Federal Reserve. But, the Fed has been taking on "crap" backing these deals and loaning this money. At some point, it's got to be reckoned.

B. Not yet they haven't. I'm not sure how the regulatory controls are being implemented on these GSEs. They've had very little oversight in the past, this new bill changed some rules about their underwriting but they still haven't been brought under any kind of regulatory umbrella that I can see. Bottomline, these guys levered up and now it's unwinding. It seems a foregone conclusion that they will require the cash.

Yep, lots of little details... I agree with all your conclusions. It will have to be reckoned in the end.

To my view, though, the problem isn't that ALL the investments are bad, it's that SOME of them are. Problem is, the bad ones are so convoluted with the good, that no one can figure which is which. That causes everyone to panic and nothing moves, hence the lock up of the credit markets. It will take a while to sort out the good and the bad.

It comes down to the saying: Do you have enough money to ride out the rough spot, or will you go under waiting?

So far, we've only had a handful of banks go under (compared with the 100/year during the late 80s/early 90s). So there's hope it's not as bad as everyone fears. But.....

 

[cptyarderho]

Mike, I agree. Let them fold/eat each other.

BTW, they make cars all over NA- Toyota in Ohio, etc...
There are working models for how to make cars here. They do not involve unions typically, or govt bailouts. With all these companies being publicly held stocks, they are all owned by investors from all over the world. So what makes the big three unique? Only their point of origin. I have not bought a car from them excluding my previous Jeep since high school.

 

[J. Toronado]

Another perspective on GM and the electric car.

In 1996, it was among the fastest, most efficient production cars ever built. It ran on electricity, produced no emissions and catapulted American technology to the forefront of the automotive industry. The lucky few who drove it never wanted to give it up. So why did General Motors crush its fleet of EV-1 electric vehicles in the Arizona desert? Some suggest that G.M. -- which says it invested some $1 billion in the EV1 -- never really wanted the cars to take off. They say G.M. intentionally sabotaged their own marketing efforts because they feared the car would cannibalize its existing business.

 

[RBBailey]

Redistribution of wealth comes in many shapes and sizes. Bailouts are stupid.

 

[noee]

It comes down to the saying: Do you have enough money to ride out the rough spot, or will you go under waiting?

Yes, Staying Power. The name of the game. Best lesson I ever learned from the guy who taught me about investing when I was but a wee pup.

So far, we've only had a handful of banks go under (compared with the 100/year during the late 80s/early 90s). So there's hope it's not as bad as everyone fears. But.....

Did you see where WaMu is offering CD's at 5%? They are desperate for cash, methinks the FDIC is watching them very, very closely.

There are working models for how to make cars here. They do not involve unions typically, or govt bailouts. With all these companies being publicly held stocks, they are all owned by investors from all over the world.

Did you see this little didee? This is exactly what you're talking about.

Another perspective on GM and the electric car. ....

Did you see the movie? Very interesting, especially the fact that Honda and Toyota were right there with GM, none of them really wanted this car to succeed. Who really knows what their motivations were?

 

[jhmover]

I think what's worse is, they all blew in the 70's already during the last oil fiasco. They didn't learn a damn thing from that mess. Everyone started buying small, efficient European and Japanese cars because suddenly no one wanted a gas hog. Then they turn right around and start building gas hogs again, now we have a repeat oil crisis, no one wants gas hogs, so now they want another bailout. I can't fathom that the overpaid geniuses who run Chrysler, Ford and GM couldn't predict that sooner or later the price of oil was going to go up and no one would want their gas hogs again. Like the man said, those who don't heed history will make the same mistakes again (or something like that). I guess the taxpayers should start bending over again.

 

[SGaynor]

Another perspective on GM and the electric car.

In 1996, it was among the fastest, most efficient production cars ever built. It ran on electricity, produced no emissions and catapulted American technology to the forefront of the automotive industry. The lucky few who drove it never wanted to give it up. So why did General Motors crush its fleet of EV-1 electric vehicles in the Arizona desert? Some suggest that G.M. -- which says it invested some $1 billion in the EV1 -- never really wanted the cars to take off. They say G.M. intentionally sabotaged their own marketing efforts because they feared the car would cannibalize its existing business.

So they spent $1B for nothing? "Some suggest..." Yeah, guesses and innuendo....

 

[noee]

Whew, just came across this on Mish:

New Auto Prices Falling

"The industry sees signs of hope even as GM, Ford, Chrysler Sales Collapse. Hope in a bear market is almost never rewarded. The bottom is unlikely to be in until hope is crushed and despair sets in. In the meantime I expect to see many auto dealers go bust.​

I wonder what their ASPs per vehicle model are? This can't be good.