Big Auto Wants $50B

[SDS]

Some good facts in this piece.

 

http://online.wsj.com/article/SB122688631448632421.html

 

Excerpt.

 

So, then we just cut executive pay and move on. Right?

[molson_golden2002]

So, then we just cut executive pay and move on. Right?

Perhaps we should give them a tax cut and deregulate them some more

[finknottle]

Perhaps we should give them a tax cut and deregulate them some more

 

Well, regulating them more and raising their taxes sure isn't going to turn them around.

 

That's why the conservative answer is to let them go under. Take our medicine and move on.

[DC Tom]

Well, regulating them more and raising their taxes sure isn't going to turn them around.

 

That's why the conservative answer is to let them go under. Take our medicine and move on.

 

That WSJ article certainly makes a good case for it, since it'd take a bankruptcy reorganization for GM to get out from under all those obligations, the way they're described.

[molson_golden2002]

That WSJ article certainly makes a good case for it, since it'd take a bankruptcy reorganization for GM to get out from under all those obligations, the way they're described.

I don't disagree entirely, but the government will have to step in and do something for all those unemployed workers because of the effect it will have on the economy. Will foreign companies just buy up the remnents? Do we really want to let this huge chunk of our manufacturing base go under? What steps do we take if these huge companies fail to ensure they don't drag down the rest of the economy?

[DC Tom]

I don't disagree entirely, but the government will have to step in and do something for all those unemployed workers because of the effect it will have on the economy. Will foreign companies just buy up the remnents? Do we really want to let this huge chunk of our manufacturing base go under? What steps do we take if these huge companies fail to ensure they don't drag down the rest of the economy?

 

In other words: "It's not that simple."

 

No, it isn't. In the interests of consistency, I maintain the same principle I expressed for the financial sector bailout: I could care less if individual companies fail, except at the expense of the economy as a whole. But IF the auto industry doesn't reorganize (providing the WSJ article was reasonably accurate), dumping money in to them is pouring it down a black hole.

 

And what's the Obama Administration going to do? Make the bailout contingent on dissolving some of those obligations and set a precedent for Federal interference in contract law? Or force the unions to take concessions...like THAT will go over well with Obama's base support. Ultimately, what I suspect will happen is Detroit will get what they ask for, with no incentive to change, thus making the entire auto industry a federal jobs program.

[KD in CA]

What steps do we take if these huge companies fail to ensure they don't drag down the rest of the economy?

 

"Bankruptcy" does not equal "fail". Let them sort out their issues under Chapter 11 like everyone else does who drives their business into the ground.

[DC Tom]

"Bankruptcy" does not equal "fail". Let them sort out their issues under Chapter 11 like everyone else does who drives their business into the ground.

 

It does, however, potentially mean a slew of unemployed. If GM goes in to Chapter 11, how many jobs are lost?

[KD in CA]

It does, however, potentially mean a slew of unemployed. If GM goes in to Chapter 11, how many jobs are lost?

 

Probably a lot. But handing them $25B with no material conditions (I'd bet heavily on that being the outcome) means $25B in the dumper and an even bigger problem when they come back in 5-10 years with their hands out again.

[John Adams]

It does, however, potentially mean a slew of unemployed. If GM goes in to Chapter 11, how many jobs are lost?

 

I agree with both of your posts. But I like the idea that under Chapter 11, GM has a lot more options than it has when it just gets a loan of 25-50 billion. It needs to dumpt a lot of people, contracts, and pensions. 25 billion from the government doesn't change that.

 

If it's really possible for GM to enter bankruptcy and get out of it resembling a profitable business--by swallowing some bitter pills--I'd rather have that than the 25 billion down the drain. I have no confidence whatsoever that 25 billion will make any difference.

[DC Tom]

I agree with both of your posts. But I like the idea that under Chapter 11, GM has a lot more options than it has when it just gets a loan of 25-50 billion. It needs to dumpt a lot of people, contracts, and pensions. 25 billion from the government doesn't change that.

 

If it's really possible for GM to enter bankruptcy and get out of it resembling a profitable business--by swallowing some bitter pills--I'd rather have that than the 25 billion down the drain. I have no confidence whatsoever that 25 billion will make any difference.

 

Alright, let me rephrase my question a different way: can the US economy and the federal budget withstand that much job loss in that short a time right now?

 

Or, to put it another way: even if a bailout of GM makes little sense in corporate terms (which I think we all agree on), would the $25B to keep GM from going in to bankruptcy be a wise trade-off at this time, when compared to the economic cost of (just guesstimating) maybe a million lost jobs?

 

I'm not espousing either option here...just looking for insight. For all I know, the cost to the government and taxpaying public of a GM bankruptcy right now might be far more than the cost of a $25B handout.

[John Adams]

I understand the issue. Beats the !@#$ outta me which is the better choice.

 

When I was a kid, I always prefered to eat all the bad food on my plate first. I feel that way about this whole mess. I want all the sh-- ini the fan all at once so we can rebuild ffrom a stronger base.

 

But that's not a well-thought out rational answer. In the end, it very well might be better to "waste" the 25-50 billion so the rest of the industries advance while GM winds down.

 

Beats me. I'm sure I'll be here to note that someone !@#$ed up once we see how it all plays out.

[GG]

Alright, let me rephrase my question a different way: can the US economy and the federal budget withstand that much job loss in that short a time right now?

 

Or, to put it another way: even if a bailout of GM makes little sense in corporate terms (which I think we all agree on), would the $25B to keep GM from going in to bankruptcy be a wise trade-off at this time, when compared to the economic cost of (just guesstimating) maybe a million lost jobs?

 

I'm not espousing either option here...just looking for insight. For all I know, the cost to the government and taxpaying public of a GM bankruptcy right now might be far more than the cost of a $25B handout.

 

Haven't read the WSJ article, so this may be repeating it, but you need to take a two stage approach. Before you reach bankruptcy, you must determine how you got there and what bankruptcy can fix. In GM's case, it's fairly clear that legacy operations, benefits and dealer network are not sustainable and will forever hamper the company unless fixed. Throwing any amount of capital at the company without fixing the root problem is a sink hole. And that's the primary difference between the financial bailouts vs others. The $ trillions extended to financials around the world went to the root issue of fixing liquidity, all the while jobs were cut and shareholders got wiped out (another result of bankruptcy).

 

The best thing for GM and its current workers is to work out of its past. The Pension Benefit Guarantee Corp took over the steel workers' pensions - it could do the same for the Big 3 as part of a mass filing. More dealerships will have to close, including changing anacronystic laws dealing with franchises. Why can't I walk into a dealership and choose between a Toyota & Buick on the same showroom floor?

 

GM has decent cars. They just don't sell them in the US. The company can be fixed, but not without shedding its past.

[finknottle]

Probably a lot. But handing them $25B with no material conditions (I'd bet heavily on that being the outcome) means $25B in the dumper and an even bigger problem when they come back in 5-10 years with their hands out again.

 

5-10 years? That would be fine if it were so.

 

Ford went through $7.7 billion in cash last quarter. They can last 7 more months at that rate, plus another 4 with lines of credit. GM burned through $6.9 billion, but has less cash in reserve.

 

So what does $25 billion buy? A rosey scenario would have the big three losing only $10 billion per quarter combined - a pretty quick turnaround. That $25 billion gives them only 7 and a half extra months.

[Dwight Drane]

GM can't make dealer incentive payments for this month....just on the boobtube.

[molson_golden2002]

In other words: "It's not that simple."

 

No, it isn't. In the interests of consistency, I maintain the same principle I expressed for the financial sector bailout: I could care less if individual companies fail, except at the expense of the economy as a whole. But IF the auto industry doesn't reorganize (providing the WSJ article was reasonably accurate), dumping money in to them is pouring it down a black hole.

 

And what's the Obama Administration going to do? Make the bailout contingent on dissolving some of those obligations and set a precedent for Federal interference in contract law? Or force the unions to take concessions...like THAT will go over well with Obama's base support. Ultimately, what I suspect will happen is Detroit will get what they ask for, with no incentive to change, thus making the entire auto industry a federal jobs program.

I think you are probably right. I don't have much confindence that an "Auto Czar" will accomplish anything. I was kind of taken aback--and I shouldn't have been--by the UAW's arrogent stand that they would renegotiate nothing to help with this problem. Maybe Obama should just leave this to Bush and the out going congress and let the automakers fail and deal with the mess after inauguration. Perhaps the clean up will be better than trying to stop these dinosaurs from dying. I don't know

[finknottle]

I think you are probably right. I don't have much confindence that an "Auto Czar" will accomplish anything. I was kind of taken aback--and I shouldn't have been--by the UAW's arrogent stand that they would renegotiate nothing to help with this problem. Maybe Obama should just leave this to Bush and the out going congress and let the automakers fail and deal with the mess after inauguration. Perhaps the clean up will be better than trying to stop these dinosaurs from dying. I don't know

 

They have to go under sometime. If nothing is done now and they collapse early in the year, he extends unemployment benefits and gives out some monthly 'stimulus' checks to the poor. He rightfully gets none of the blame, the bar is lowered even further for him economically, and he may even wind up looking good.

 

On the otherhand, if we begin bailing them out now, he will inherit the lose-lose problem. In that case, five to one he has to appoint an Auto Supremo to make and take the blame for whatever unpopular bailout decision results.

[John Adams]

Haven't read the WSJ article, so this may be repeating it, but you need to take a two stage approach. Before you reach bankruptcy, you must determine how you got there and what bankruptcy can fix. In GM's case, it's fairly clear that legacy operations, benefits and dealer network are not sustainable and will forever hamper the company unless fixed. Throwing any amount of capital at the company without fixing the root problem is a sink hole. And that's the primary difference between the financial bailouts vs others. The $ trillions extended to financials around the world went to the root issue of fixing liquidity, all the while jobs were cut and shareholders got wiped out (another result of bankruptcy).

 

You should read the article. It talks about how the only way to solve all of these legacy problems is a good hard BCY filing. Otherwise, all the vultures (like the UAW among others) will refuse to give in enough. BCY is the nuclear bomb that gets GM out of a lot of the awful agreements it made.

 

I hope someone smarter than me is making the call for whether 25 billion or BCY is better for the US. I could give two ***** what's better for GM. They dug this hole with their own shovels.

[GG]

You should read the article. It talks about how the only way to solve all of these legacy problems is a good hard BCY filing. Otherwise, all the vultures (like the UAW among others) will refuse to give in enough. BCY is the nuclear bomb that gets GM out of a lot of the awful agreements it made.

 

I hope someone smarter than me is making the call for whether 25 billion or BCY is better for the US. I could give two ***** what's better for GM. They dug this hole with their own shovels.

 

Interesting game of chicken. That's my guess why the govt is involved in this right now. UAW loses a lot of negotiating leverage once GM files, but the union still needs to approve the contract upon bankruptcy exit. But the real answer is bankruptcy first, $25 bn in govt bankruptcy financing, and govt gets repaid when GM emerges leaner & cleaner two years down the road.

[John Adams]

Interesting game of chicken. That's my guess why the govt is involved in this right now. UAW loses a lot of negotiating leverage once GM files, but the union still needs to approve the contract upon bankruptcy exit. But the real answer is bankruptcy first, $25 bn in govt bankruptcy financing, and govt gets repaid when GM emerges leaner & cleaner two years down the road.

 

Is this based on Revelations?

 

That's a good prediction. I don't see how GM gets out from all these deals without going through bankruptcy. Tieing the 25B to the successful navigation of BCY would give the government an interesting role in the BCY proceedings.