Good Auto Bailout Article - NYT:

[FinanceDude]

http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html?pagewanted=1&ref=business

I agree almost 100% with this idea. It wouldn't make Toyota, Honda or Nissan happy, but it's the only way to proceed............

 

[ziggy29]

That actually was pretty good, and I think it was a rather solid and even-handed assessment -- retool the product line, make the UAW enter the world of 21st Century compensation AND kick the incompetent management out. Maybe with a "government-engineered bankruptcy," they'd lose their golden parachutes, too.

The problems with Detroit are not only with management, not only with the union, and not only with the bloated product line that no one seems to want. All of these feed off of each other, and all of them need to be flatlined and rebuilt.

 

[CompoundInterestFan]

What's this? FD linking to (and agreeing with!) an article from the "Treason Times"?

 

[Westernskies]

What's this? FD linking to an article from the "Treason Times"?

The Times, they are a 'changing...

 

[Culture]

Wow. If we are to bail out the industry, this is a very reasonable starting point for the plan. Best idea I have seen so far.

 

[REWahoo]

From the NYT article:

"But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington."

Good proposal. How likely is it that it moves from "quietly making the rounds in Washington" to "the consensus GM bail-out plan with strong bi-partisan support"? We can only hope...

 

[unclemick]

Like that ancient Artie Johnson line: 'very interesting.'

heh heh heh - I guess we'll see when we see.

I suppose when the time comes my GMC is gonna be a used one!

 

[Gone4Good]

How likely is it that it moves from "quietly making the rounds in Washington" to "the consensus GM bail-out plan with strong bi-partisan support"? We can only hope...

Ordinarily I'd say "fat chance". But, the calendar isn't exactly cooperating with GM and Union management. Their guys don't officially run the show until Jan 20 and it looks like they won't make it that long. And right now it seems like the Republicans have a pretty solid "No" vote that will keep anything from happening until the new White House and Congress own the whole thing. Could be the makings of a compromise that actually has a chance at fixing the Auto industry.

 

[FinanceDude]

What's this? FD linking to (and agreeing with!) an article from the "Treason Times"?

Hey even a blind squirrel finds a nut sometime, I guess the NYT got "lucky". You guys all think I am a whacked out Bible thumping righty, but I enjoy the occasional laspe in the media where they actually make sense............

 

[Gardnr]

Agreed. It addresses the two main problems with bankruptcy that I see. The financing, which it obviously extremely problematic right now. And the warranty confidence issue.

So do you think that the congress is holding their feet to the fire, making them sweat, giving the CEOs a public beating, and in the background working on some kind of arrangement such as this? There's a big game of poker being played. I hope they work out a deal such as this. I don't think the market would like the further uncertainty that would result if they don't.

 

[Midpack]

http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html?pagewanted=1&ref=business

I agree almost 100% with this idea. It wouldn't make Toyota, Honda or Nissan happy, but it's the only way to proceed............

Agreed, that's probably the most sensible article I've read on the subject. It's an aside, but while I blame (in no particular order) the UAW ($70/hr is not sustainable), the Management (if they couldn't see this coming...) and the awful car designs (sorry, but they're still nowhere near Toyota or Honda) - the buying public deserves some of the blame too. Everyone now says the big 3 need to make (hyper) efficient cars as a condition of any bailout or loan. But they've all offered Cobalts, Focus, Neon's etc. for years and the buying public walked right by them and bought Explorers, Escalades, Suburbans, etc. I agree the small cars from the big 3 aren't comparable to Toyota or Honda, but I can sympathize somewhat in that the big 3 can't be expected to produce Hummers one day and hypermileage small cars a few months later.

 

[Gone4Good]

Everyone now says the big 3 need to make (hyper) efficient cars as a condition of any bailout or loan.

I'd replace the word "everyone" in that sentence with "politicians". The idea that the auto industry should make high MPG cars has absolutely nothing to do with the companies' near-term solvency or long-term viability. It has everything to do, though, with Washington trying to use private companies as a tool to implement public policy.

No one whose first priority is a viable, privately owned, auto industry gives a rats arse about whether they make efficient cars or not. What they care about is whether the industry can profitably make cars people actually want to buy . . . high MPG or otherwise. Right now the answer is "no". If the government gives them money with the only condition that they increase fleet MPGs, the answer will continue to be "no".

 

[samclem]

. . . the buying public deserves some of the blame too.

I would add another set of car buyers who are to blame--those who buy/bought "American" cars (big and small) for "patriotic" reasons, despite the fact that the cars were crappy. Detroit might have started building good cars 25 years ago, and not be in the fix they are in, if these folks hadn't been subsidizing incompetence and sloth. Toyota makes high-quality trucks and small cars--and they build them in the US, and they make money on all of them.

 

[Gardnr]

I would add another set of car buyers who are to blame--those who buy/bought "American" cars (big and small) for "patriotic" reasons, despite the fact that the cars were crappy. Detroit might have started building good cars 25 years ago, and not be in the fix they are in, if these folks hadn't been subsidizing incompetence and sloth. Toyota makes high-quality trucks and small cars--and they build them in the US, and they make money on all of them.

Interesting point. It's yet another example of the unintended consequences of making decisions based on emotions and good intentions vs. rational economic based decisions.

People still don't understand the power of the global economy and think that they can hold those huge forces with walls or the power of their will. It's like blaming people for seeking out the best prices for other goods.

As if we can just say "buy U.S." and it will solve all our problems and transport us back to those halcyon days of the 50s and 60s when we were the only game in town. Making those choices is a luxury that those with high discretionary income can make, but those scraping by cannot afford to make patriotic statements with their spending when they're trying to feed and clothe the family and save something for their future. Sorry for the drift.

 

[Independent]

I'd replace the word "everyone" in that sentence with "politicians". The idea that the auto industry should make high MPG cars has absolutely nothing to do with the companies' near-term solvency or long-term viability. It has everything to do, though, with Washington trying to use private companies as a tool to implement public policy.

No one whose first priority is a viable, privately owned, auto industry gives a rats arse about whether they make efficient cars or not. What they care about is whether the industry can profitably make cars people actually want to buy . . . high MPG or otherwise. Right now the answer is "no". If the government gives them money with the only condition that they increase fleet MPGs, the answer will continue to be "no".

Right. These "dual goal" public-private partnerships are bound to fail.
The goal of any bail-out is for the company to be profitable enough to repay the loan. This doesn't happen if the gov't forces the company to make cars that people don't want to buy.

 

[laurence]

I would add another set of car buyers who are to blame--those who buy/bought "American" cars (big and small) for "patriotic" reasons, despite the fact that the cars were crappy. Detroit might have started building good cars 25 years ago, and not be in the fix they are in, if these folks hadn't been subsidizing incompetence and sloth. Toyota makes high-quality trucks and small cars--and they build them in the US, and they make money on all of them.

As always, spot on. I think the Big 3 misjudged by trying to essentially hold us hostage for a bail out. "If you don't do it, we are going to take this country down! Millions of lost jobs! Don't make me use this thing!"

Had they come to congress and said, "We have a plan to get right and get in the black by x date, look at this exciting work we are doing..." etc. they'd have had a chance. A month or so ago I read they cut their costs by slashing their R&D budget. Considering their best selling models have been re-hashes of the past I wonder how much that actually saved them.

 

[Independent]

http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html?pagewanted=1&ref=business

I agree almost 100% with this idea. It wouldn't make Toyota, Honda or Nissan happy, but it's the only way to proceed............

I think this is the core compromise. Instead of avoiding bankruptcy, the gov't makes Chapter 11 feasible. They also require a pre-negotiated outline before they go to court.

The basics are:
the stockholders get wiped out,
the bondholders trade all their debt for equity,
the active workers take 90% of what Toyota pays (maybe add long-term profit sharing),
the retirees keep health insurance but pay higher premiums and higher deductibles,
top management goes.

Forget the part where the gov't micro-manages how many brands they keep and what level of gas mileage their cars should get.

 

[kyounge1956]

(snip) Everyone now says the big 3 need to make (hyper) efficient cars as a condition of any bailout or loan.(snip)

(snip) No one whose first priority is a viable, privately owned, auto industry gives a rats arse about whether they make efficient cars or not. What they care about is whether the industry can profitably make cars people actually want to buy . . . high MPG or otherwise. Right now the answer is "no". If the government gives them money with the only condition that they increase fleet MPGs, the answer will continue to be "no".

Right. These "dual goal" public-private partnerships are bound to fail.
The goal of any bail-out is for the company to be profitable enough to repay the loan. This doesn't happen if the gov't forces the company to make cars that people don't want to buy.

But why assume that people don't want to buy high mileage cars? Toyota is selling Priuses faster than they can make them, and I would imagine making a lot of money on them too. Or possibly you think that they have cornered that market and there is not enough demand to allow another profitable high-mileage car?

 

[mathjak107]

no mention of what happens to the gm vendors that are owed 28 billion in this bankruptsey...... what kind of ribble effect would that have

 

[FinanceDude]

But why assume that people don't want to buy high mileage cars? Toyota is selling Priuses faster than they can make them, and I would imagine making a lot of money on them too. Or possibly you think that they have cornered that market and there is not enough demand to allow another profitable high-mileage car?

I wonder what kind of hybrid the American buyer wants, a Prius or a hybrid Tahoe........

Once again, GM misses the boat, the folks buying their Tahoes don't care about gas mileage...........

 

[haha]

No union busting says Barney

Here's what Barney Frank has to say about UnAmerican ideas like bk:


Rep. Barney Frank, D-Mass., disagreed with that, saying choosing the bankruptcy option would like mean abrogation of labor contracts. "We already have too much union busting," said Frank, appearing on CBS's "The Early Show" with Shelby.

http://biz.yahoo.com/ap/081119/congress_autos.html

 

[FinanceDude]

Here's what Barney Frank has to say about UnAmerican ideas like bk:


Rep. Barney Frank, D-Mass., disagreed with that, saying choosing the bankruptcy option would like mean abrogation of labor contracts. "We already have too much union busting," said Frank, appearing on CBS's "The Early Show" with Shelby.

[URL="http://biz.yahoo.com/ap/081119/congress_autos.html"]http://biz.yahoo.com/ap/081119/congress_autos.html[/URL]

The UAW has been one of the strongest unions forever. However, we have reached a point where their pay and benefit scales make teachers look poor by comparison, so I think we are at a tipping point.

 

[Independent]

But why assume that people don't want to buy high mileage cars? Toyota is selling Priuses faster than they can make them, and I would imagine making a lot of money on them too. Or possibly you think that they have cornered that market and there is not enough demand to allow another profitable high-mileage car?

Nobody is suggesting that we forbid GM from selling high mileage cars.

We all know they are playing catch-up. But, they already have an "extended range electric" on the fast track, are trying to bring European cars to the US (e.g. Saturn Astra), are getting a loan from the gov't to do more with high mileage vehicles, and will have to comply with new CAFE requirements.

The way I read the numbers, most Americans have demonstrated that they don't care much about mileage unless gas prices are high. Yes, I know there is a minority who will buy hybrids whether or not they save money with them, but it's a minority. The gov't has a policy of keeping gas prices low. No point in requiring GM to push on a string.

If enough people want to buy high mileage cars for GM to make a profit on them, fine. But I'd leave that decision up to GM's (new) management team.

 

[FinanceDude]

Nobody is suggesting that we forbid GM from selling high mileage cars.

GM has been losing money on their small cars for years, due to legacy costs. But they kept making them because they had to, and lost about $5000 on each one they made. Conversely, Corollas and Civics and Sentras MAKE money for their companies.

We all know they are playing catch-up. But, they already have an "extended range electric" on the fast track, are trying to bring European cars to the US (e.g. Saturn Astra), are getting a loan from the gov't to do more with high mileage vehicles, and will have to comply with new CAFE requirements.

GM needs a HIGH VOLUME car. The VOLT will NOT be high volume.

The way I read the numbers, most Americans have demonstrated that they don't care much about mileage unless gas prices are high. Yes, I know there is a minority who will buy hybrids whether or not they save money with them, but it's a minority. The gov't has a policy of keeping gas prices low. No point in requiring GM to push on a string.

There will always be folks that buy trucks and SUVs. However, GM put "all their eggs in one basket", and thought gas would be cheap for the foreseeable future.

 

[cardude]

From the article, under this "plan" the government will provide:

1. DIP financing for how many billions of dollars? More than 25-50B I bet.
2. Warranty fund. How many billions will it take to fund that?

Also, shutting dealerships will put hundreds of thousands out of work and increase unemployment claims. Hundreds of thousands of GM employees will lose their good paying (maybe a little too good some say) assembly jobs and will rely on the government for unemployment benefits and healthcare and retraining. Plus, the government will lose payroll and income taxes on all these lost jobs. Oh yeah, I forgot about all the suppliers and other jobs that would be lost due to GM no longer having to actually pay them, so that's probably another 500K jobs. What's the price tag to the government for all that? Oh, and then Chrysler and maybe Ford may have to follow suit, so then you get to multiply all this by 3. ARE YOU KIDDING ME??

Instead, the government could float this LITTLE 25B (MAYBE 50B?) BRIDGE LOAN. It could actually work! You never know! It doesn't seem that expensive to try compared to the government sponsored bankruptcy alternative.