Big 3 Bailout vs Bankruptcy Question

[Midpack]

I am against a bailout, but I take no pleasure in the possibility of the bankruptcy of GM, Ford or Chrysler. Nor do I underestimate the added pain to our economy in such an event. But I believe a bailout prolongs the inevitable (at some expense to taxpayers) and that eventual pain will hit us regardless. The big three have legacy costs that cripple them, we've all known that for decades, and they haven't had the will or ability to deal with it - why now? They got a $25B loan in late Sept, and here we are talking about another $25B less than 2 months later - anyone believe this is the end of a bailout?

Most in favor of a bailout seem to base their position on the inevitability of a complete failure of the auto industry in the US, GM, Ford, Chrysler, all their suppliers, dealers and other associated businesses. That's where I disagree with a bailout...

Could someone explain to me why a complete failure of the entire auto industry is inevitable or even likely if (for example) GM goes bankrupt? I am not aware of the failure of any industry in it's entirety when one of the major players goes bankrupt [except where in markets where a product substitution takes place, ie, slide rules replaced by calculators - we are not talking about the market for automobiles evaporating or being replaced by space ships or teleportation].

If GM goes bankrupt and actually ceases operation, there are still some buyers out there who will then buy a Ford, Chrysler, Toyota or something. So the unforunate demise of one, actually helps the remaining automakers. Same with suppliers, they have already contracted in response to demand at GM, Ford and Chrysler - not sure it gets much worse for them overall. Some will fail, some will hold their place, and some will actually benefit from the failure of others. GM dealers will suffer, but won't that result in a little more traffic in Ford, Chrysler, Toyota, etc. showrooms? This failure of one and consolidation of the remaining players has characterized business/industries for 100's if not 1000's of years, in recessions and even in good times.

 

[Ronstar]

I'm totally against the bailouts. There's already a precedent that will result in an endless line of companies wanting their share. The US doesnt have enough cash to bailout everyone.

I agree - there wont be a complete failure of the auto industry if any of the big 3 go bk. Some company will see a buying opportunity and acquire portions (or all) of GM, etc.

 

[Gumby]

Actually, bankruptcy need not mean the complete demise of GM. Many people equate bankruptcy with liquidation, but most large industrial companies just reorganize. What that means, in a nutshell, is that you legally stiff the creditors (i.e. bondholders); wipeout the shareholders and transfer their equity to the creditors, reject uneconomical contracts, and start over. (you also pay enormous legal fees for the privilege of doing so).

A slight twist comes from the fact that union contracts, pension claims and retiree health benefits enjoy special protection and are more difficult to eliminate. If these liabilities are too large to swallow, even if the other creditors are substantially wiped out, then you could see a liquidation coupled with the sale of some or all of the GM assets.

 

[Midpack]

In of all places, the NYT...http://www.nytimes.com/2008/11/13/business/economy/13bankruptcy.html?bl&ex=1226811600&en=69c9c3988c55907d&ei=5087%0A

A bankruptcy at G.M., with $111 billion in assets, would rank as one of the biggest bankruptcies ever, but would still be dwarfed by the case filed by Lehman Brothers in September.

 

[Martha]

Apart from the auto industry, I think the best thing that should be done immediately is amend the bankruptcy code to make it easier for people to restructure their personal debt. Use the bankruptcy system to deal with underwater mortgages and credit card debt.

 

[haha]

The US doesnt have enough cash to bailout everyone.

The US doesn't have enough cash to bailout anyone. This is being done on credit.

This whole process is totally preposterous.

Ha

 

[haha]

Apart from the auto industry, I think the best thing that should be done immediately is amend the bankruptcy code to make it easier for people to restructure their personal debt. Use the bankruptcy system to deal with underwater mortgages and credit card debt.

As well as alimony and ridiculous levels of child support.

Let's restructure life in its entirety!

Ha

 

[Martha]

Well, you can't restructure child support and maintenance likely has restrictions.

I am thinking that the bankruptcy system is a mechanism already in place to work out the consumers' problems.

 

[Ronstar]

The US doesn't have enough cash to bailout anyone. This is being done on credit.

This whole process is totally preposterous.

Ha

You're right. I should have said "borrowing power" instead of "cash". I'm going to try to boycott all companies that get handouts, but I dont think I'll have the time to figure out who all these companies are.

 

[Walt34]

I'm totally against the bailouts. There's already a precedent that will result in an endless line of companies wanting their share. The US doesnt have enough cash to bailout everyone.

Agreed, and then some. With $10+ trillion debt the taxpayers can't afford to bail out anyone.

I'd take no joy in seeing any of the automakers bankrupt but I see little to be gained by forestalling what appears to be inevitable.

Someone else will buy either the companies or their components and continue making cars and trucks. While the market for new vehicles has shrunk, it is not going to go away.

 

[jug]

If the big three fail, the world will not end. Yes there will be pain, but other stronger companies will buy up the assets, re-tool, and finally do things right for a change.

These are very sick companies, they need to fail. As for the pensions and benefits of workers, I'm sure a fraction of the 25 billion can help cover those liabilities. Better to get them off of our backs
jug

 

[ls99]

All this bailout of carmakers , bankers, Philadelphia etc. got me thinking. (bad news) Most of the global economy is in a bit of a problem. There really is no place to borrow from.

The money for the bailouts can't come from taxes collected on huge spending by the population. It seems the only source of funds is the treasury printing presses. Money made out of thin air. This can only mean that the money supply is increasing.

Increaising the money supply without any fundamental value can only mean that the buck in your pocket is starting to go down in value. Maybe it is worth now 50 cents.

Say it a'int so.

 

[Frugality_of_Apathy]

A debt heavy portfolio comes in handy during hyperinflation.

 

[haha]

Pelosi Confused About Power of Loans

Bush considering "orderly" auto bankruptcy - Yahoo! News

House Speaker Nancy Pelosi said on Capitol Hill that grim new unemployment data heightened the urgency for the administration "to prevent the imminent insolvency of the domestic auto industry."

A loan may alleviate liquidity strains, but I don't know what it could do for insolvency. Entire business has to be right szed- debt, cost strudcture all of it. I don't think this is necessarily appealing to the party in charge of Congress.

Ha

 

[FinanceDude]

I am against a bailout, but I take no pleasure in the possibility of the bankruptcy of GM, Ford or Chrysler. Nor do I underestimate the added pain to our economy in such an event. But I believe a bailout prolongs the inevitable (at some expense to taxpayers) and that eventual pain will hit us regardless. The big three have legacy costs that cripple them, we've all known that for decades, and they haven't had the will or ability to deal with it - why now? They got a $25B loan in late Sept, and here we are talking about another $25B less than 2 months later - anyone believe this is the end of a bailout?

Most in favor of a bailout seem to base their position on the inevitability of a complete failure of the auto industry in the US, GM, Ford, Chrysler, all their suppliers, dealers and other associated businesses. That's where I disagree with a bailout...

Could someone explain to me why a complete failure of the entire auto industry is inevitable or even likely if (for example) GM goes bankrupt? I am not aware of the failure of any industry in it's entirety when one of the major players goes bankrupt [except where in markets where a product substitution takes place, ie, slide rules replaced by calculators - we are not talking about the market for automobiles evaporating or being replaced by space ships or teleportation].

If GM goes bankrupt and actually ceases operation, there are still some buyers out there who will then buy a Ford, Chrysler, Toyota or something. So the unforunate demise of one, actually helps the remaining automakers. Same with suppliers, they have already contracted in response to demand at GM, Ford and Chrysler - not sure it gets much worse for them overall. Some will fail, some will hold their place, and some will actually benefit from the failure of others. GM dealers will suffer, but won't that result in a little more traffic in Ford, Chrysler, Toyota, etc. showrooms? This failure of one and consolidation of the remaining players has characterized business/industries for 100's if not 1000's of years, in recessions and even in good times.

Did the failure of US Steel companies mean there was no more steel? No, and those were HUGE companies back then.

Under a restructuring, GM, Ford, and Chrysler can continue to make cars, the suppliers continue to supply them with parts, etc, etc. However, the bondholders will get stiffed to some extent or totally, the shareholders will get whacked, but at least the company survives to fight another day. Restructuring is the only hope, the Big Three can no longer forcefeed consumers cars that they don't want........

 

[HFWR]

Did the failure of US Steel companies mean there was no more steel? No, and those were HUGE companies back then.

Under a restructuring, GM, Ford, and Chrysler can continue to make cars, the suppliers continue to supply them with parts, etc, etc. However, the bondholders will get stiffed to some extent or totally, the shareholders will get whacked, but at least the company survives to fight another day. Restructuring is the only hope,

Agreed

the Big Three can no longer forcefeed consumers cars that they don't want........

I thought we put this bit of misinformation to bed...

 

[FinanceDude]

I thought we put this bit of misinformation to bed...

I didn't mean that over the past 20 years or anything. However, a nice-looking fuel efficient domestic car was not readily available over that time frame. Folks that wanted that type of car went to Toyota, Nissan, and Honda. The Big Three didn't care because they didn't make money on those cars anyways. As it turns out, they were wrong............

 

[Midpack]

Did the failure of US Steel companies mean there was no more steel? No, and those were HUGE companies back then.

Under a restructuring, GM, Ford, and Chrysler can continue to make cars, the suppliers continue to supply them with parts, etc, etc. However, the bondholders will get stiffed to some extent or totally, the shareholders will get whacked, but at least the company survives to fight another day. Restructuring is the only hope, the Big Three can no longer forcefeed consumers cars that they don't want........

The steel industry was comparable in size. However, there are two aspects that could well make this "different." 1) Steel is a second tier supplier, IOW people do not buy steel directly, it's in products they purchase so the connection isn't readily apparent, which goes hand in hand with 2) there's a fair question as to whether people will not buy cars from bankrupt manufacturers for fear of long term warranty, service and resale concerns. Unlike most products, people have to be confident they are buying from a viable company for a big ticket long term item like a car (unlike an airline ticket). I know I would not buy a car from any carmaker in bankruptcy when there are viable alternatives - why take the chance?

Believe me, I am strongly opposed to an unstructured bailout. And I am convinced the 'as goes GM, so goes the Country' and '1 in 6 people are directly/indirectly employed by carmakers' are unfounded (or at least badly out of date) assumptions - that the UAW and others want you to accept unchallenged. But I wonder if a highly structured bailout package (sweeping across the board, firm conditions and deadlines) much like what Corker was proposing - would be the best alternative. We'll see what the White House does...

 

[lets-retire]

The Big Three didn't care because they didn't make money on those cars anyways. As it turns out, they were wrong............

The Detroit three didn't make much, if any, money on each of the small cars. If they spent their time developing a small car many people wanted they would still have to sell many, many more of them to make a profit than they do with the trucks/SUVs. Really considering their cost structure they did what they had to do in order to survive. In the 80's it was the K car and the Taurus/Sable that saved Ford and Chrysler. In the 90's and up until a few months/year ago it was all about the trucks/SUVs. The companies built what was demanded. The F-series and Sliverado trucks are still the best selling vehicles in the US. Ford tied with Honda for the number of cars in the top five. Ford has the Trucks and Focus. Honda has the Accord and the Civic

 

[ziggy29]

I didn't mean that over the past 20 years or anything. However, a nice-looking fuel efficient domestic car was not readily available over that time frame. Folks that wanted that type of car went to Toyota, Nissan, and Honda. The Big Three didn't care because they didn't make money on those cars anyways. As it turns out, they were wrong............

It's not so much that they were *wrong* but that cost pressures meant they had to focus on high-margin vehicles -- mostly the large and gas-guzzling models. And with a few exceptions, they mostly ceded the small car market to Japan. They couldn't make much of a profit anyway given the price point for small cars and their own costs.

So I would say that a claim that Detroit hasn't "given the people what they wanted" is somewhat simplistic explanation. A better explanation would be that they were giving people what they wanted when the thought of $4 gas wasn't either current events or in recent memory, but now that many buyers are more conscious of fuel economy, their product line is somewhat deficient.

They need to get their legacy costs down if they are going to be able to compete with Japan (and elsewhere) on lower-priced economy models.

 

[HFWR]

Even Toyota is suffering. Too bad they make cars nobody wants...

Toyota Could Post First Operating Loss Since Founding - Automotive * US * News * Story - CNBC.com

 

[FinanceDude]

Even Toyota is suffering. Too bad they make cars nobody wants...

Toyota Could Post First Operating Loss Since Founding - Automotive * US * News * Story - CNBC.com

Oh-oh, I guess they'll be coming to DC to plead their case next.......

 

[Frugality_of_Apathy]

The steel industry was comparable in size. However, there are two aspects that could well make this "different." 1) Steel is a second tier supplier, IOW people do not buy steel directly, it's in products they purchase so the connection isn't readily apparent, which goes hand in hand with 2) there's a fair question as to whether people will not buy cars from bankrupt manufacturers for fear of long term warranty, service and resale concerns. Unlike most products, people have to be confident they are buying from a viable company for a big ticket long term item like a car (unlike an airline ticket). I know I would not buy a car from any carmaker in bankruptcy when there are viable alternatives - why take the chance?

Believe me, I am strongly opposed to an unstructured bailout. And I am convinced the 'as goes GM, so goes the Country' and '1 in 6 people are directly/indirectly employed by carmakers' are unfounded (or at least badly out of date) assumptions - that the UAW and others want you to accept unchallenged. But I wonder if a highly structured bailout package (sweeping across the board, firm conditions and deadlines) much like what Corker was proposing - would be the best alternative. We'll see what the White House does...

I agree except for your decision for a bailout. There was much stronger reason to save the steel industry than there is to save the car industry. It's just a consumer product, if they can't sell their product they are making something no one wants or charging too much and they need to be flushed out of the market. The steel industry effected every other industry 6/6 people worked directly or indirectly for the steel industry and the country didn't collapse and get taken over by russia when it collapsed.

If the government needs to intervene at all in the "Big 3" it should be as trust busting and turn it into the "detroit 300".

 

[samclem]

. . . 2) there's a fair question as to whether people will not buy cars from bankrupt manufacturers for fear of long term warranty, service and resale concerns. Unlike most products, people have to be confident they are buying from a viable company for a big ticket long term item like a car (unlike an airline ticket).

Any consumers concerned about GM's long-term prospects are already spooked. I'd be more confident that they'll be around 10 years from now if they just declared bankruptcy and got the restructuring over with. The longer they screw around with begging for handouts from the government, the deeper their financial hole wil get and the longer this cloud hangs over them (depressing sales). Get it over with.

A solid, large third company supplying a gaurantee of warantee repairs might induce skitish buyers to consider GM. This migt be necessary whether GM actually declares bankruptcy or remains on life support without prospect for recovery (given her current cost structure).

 

[ziggy29]

A solid, large third company supplying a gaurantee of warantee repairs might induce skitish buyers to consider GM. This migt be necessary whether GM actually declares bankruptcy or remains on life support without prospect for recovery (given her current cost structure).

This to me is what part of a "government-engineered bankruptcy" could have done: provided some assurances that the warranties would continue to be honored through the bankruptcy.