We are flying to Hilo today, regular blogging to resume tomorrow. Taking a page from Barry maybe we can get a dialogue going in the comments. I'll give you a topic; the Holy Roman Empire was neither Holy nor Roman. Discuss.That is an SNL bit with Mike Myers from way back.
Should the US government bailout the big three automakers including guaranteeing the warranties?
41 comments:
Yes the federal government should guarantee the auto companies, because they are important.
Homes are also important so people should not have to make mortgage payments any more.
Food is also important so all the food at grocery stores should be free.
It would be embarrassing for a rich country like our for people not to have decent clothing so the government should also pay for clothing.
It seems silly for people to live in fear the electricity would go off so electricity and internet for that matter should also be paid for by the government.
My doctor suggests I should drink wine to improve my cholesterol numbers so I think alcohol should also be paid for by the government.
How can you travel so much and still be available to your employer, clients, and manage their accounts? I realize you don't have to react to the minute by minute developments of the markets, but it does seem like you travel a lot.
Not criticizing, just wondering how you do it? And how is that living modestly and below your means that you are always talking about?
anon 6:30--really? i miss about 1 market day per quarter. I would be less effective in my job if i spent all day, every day, in client meetings as other PMs sometimes do.
whatever your perception about how much i do or do not do anything; well within my means.
Roger, re: automakers
isn't this really a conversation that is circling around the UAW? Somewhere in the testimony yesterday, there were Q&A that nibbled at the edges of the competitive disadvantage that the UAW contracts place on the Big 3. IMO, big unions have done many things, some truly wonderful, some truly awful. Ask Iacocca, or read his last book, and you'll see a clear message that this problem was foreseeable. My FIL has worked for ATK/Thiokol here in UT for near 30 years. They've been sold something like 3 or 4 times in that period, and every time, their benefits package has been watered down - because they have no union, no collective bargaining. But you can bet the execs did quite well in those sales. So - execs manage poorly, get rewarded; labor gives loyalty, gets screwed. OK, ergo, "unions=good". But the UAW? I'm beginning to think they have choked the golden goose with their demands. The average wage differential alone, comparing Big 3 US plants vs. Toyota or Honda US plants, would be enough: $70s vs $40s. Add the legacy costs of first-class pension and health care for retirees (I seem to recall a number around $1500 per vehicle) and I begin to wonder how they've lasted this long. Bottom line, this is not (much) about quality, or fuel economy, or demand. It's about the cost of union labor. So: How can gov't (congress, treasury, or the Fed) do anything to help here without serious moral risk? Can congress force renegotiation of contracts that treat both retired and active UAW members more like average Americans, without totally pulling the rug out? I don't know. I'd like to hear what you think.
Let's see. Bush's economic legacy: housing market in shambles, stock market down 45%, unemployment high and rising. Now, add US auto makers bankruptcy. No, not a good choice. However, the binary options of a bridge loan to 2010 or bankruptcy currently being discussed are not the only options. Bush and the Republicans should provide a bridge loan to about mid-Feb 09; Obama and the Democrat congress can take it from there.
craig- good post - the other aspect of the problem is that the UAW contracts would not be so onerous if it were not for the fact that these companies have had the need to shrink (leaving a smaller and smaller base to pay the costs). Irrespective of the product problems these companies have had, the simple entry of good competition requires the previous players to reduce size as share is allocated and productivity increases.
The decision to allow the worlds competition to come in and in a low cost non-unionized format,without legacy costs, was the decision that said this day would come if the process could not happen at a slow generational rate.
http://www.nytimes.com/2008/11/19/opinion/19romney.html?_r=2&th&emc=th&oref=slogin
Mitt says it better than I.
What will 25bil do for the "big three"? Demand will not improve, efficiency certainly won't improve, and excess will continue. All three CEO's took private jets to the hearings to beg for money hahahha - seriously. They should had everyhting over to the UAW and say "here, you take over and figure out how to cut costs." this is a waste of money. there are furniture stores about to go out of business left and right - save them becasue it affects the timber, textile, and moving truck business. Give me a break. the human cost is so high though - the cars are failing not because of a lack of capital raising, but because they stink as a business. Toyota has the same capital raising issues, but becaue they are a better company they will weather this storm.
The $25b is not really about the car companies. I think about everyone but their employees is ready to let them die.
Perhaps the discussion should be about "saving the big three". It should be about how we feel about double digit unemployment, etc.
I either didn't know or forgot that the automakers had already received a $25b loan package in September to "modernize plants."
Dammit. The Myers thing is a Wayne's World skit, I think, but I can't remember the rock star he posed the question to.
Will the loan simply keep plants running to produce cars/trucks that no one wants or can afford??
They need a root cause soul searching IMHO. Simply benchmark their costs and product to the southern auto plants. The model is broken and must be changed, which can be best done with a judge overseeing it. A prepackaged bankruptcy makes a lot of sense to me. Too many/much of everything, dealers, workrules, executives, brands, perks, wages....etc. Fat and bloated spoiled beggers is what they are. IMHO
Here's the thing I've wondered about.
Many people don't want to bail 'em out. Also, many people say they don't want universal health care.
In theory, the automaker's pension situation is improving. What about their health care costs? What if the Obama administration's first health care move was to create a health plan that takes care of the autoworkers? It gets his Big Idea going, and it removes one of the big money problems the automakers face.
all government employees should
be forced to buy 2 new cars
from the Big 3....
I agree with anon 8:50.
And to add, unfortunately, this is not a black & white issue. The short answer is yes, we should do something because the collateral damage will in fact be catastrophic. BUT, we shouldn't just give them 25b. The auto makers must devise a radical battle plan to not lose the war. Maybe they have to furlough a plant hear or there that makes those models with the lowest demand. Maybe the union has to agree to a cut in pay. After all, having an income is better than the alternative. Maybe the big 3 has to move inventory with a red tag sale and finance all sales at a low percentage rate. Maybe, maybe, and on an on.
How many other viable options are there? I suggest quite a few. So YES, we have to do something. The questions are what, how & when.
Let them fail, I want to see the market down 70% and SPX at 455. I can't wait to stand in line at foor kitchens because my net worth has almost diminished.
Bankruptcy worked great for Delta and Northwest airlines. They did not stop flying, nobody lost a day of work, nobody even lost frequent flier miles.
Bankruptcy would be the best thing for the auto companies. It will not be catastrophic, that is all a lot of BS. The viable plants will keep producing vehicles and the hummers and others will be closed.
Bankruptcy is not only the proper business and economical choice it is the most environmentally friendly choice.
anon 10:07: One of the reasons this is being discussed so much is that the automakers may not be able to get loans/raise money to continue operations like the airlines did. If GM goes into chapter 7 and is forced to liquidate, they won't be continuing operations.
No bailout UNLESS both management and UAW members have real skin in this game. Executive compensation should be solely based on performance ($0 salary as the baseline and no bonuses). UAW members need to take an immediate 25% cut in wages - and future wage increases need to solely performance based. One measure I would use is CR's reliability scores.
I heard Barney Frank interviewed by NPR this morning and almost threw up. According to Frank the $25b is only a starter loan. If Frank and his Socialists comrades in congress like the plan (5 year plan?) the auto makers present in early spring, congress will throw more money down the rat hole. This is a nothing more than a subsidy to keep UAW members employed at inflated wages and benefits.
I'm willing to bet Rep Frank the price of a new Chevy that the big 3will still be producing junk and unprofitable 3 years from now.
Chapter 7 is a scare tactic. It is highly unlikely a judge would let that happen and there is no reason they could not get new loans if the judge put the new loans first in line.
I am sure you will come up with another sky is falling scenario. Fine congress can provide money after filling bankruptcy if needed, which again is not likely.
bankruptcy is the best way for companies to restructure. Restructuring is what is needed not blank checks for bottomless pits which is what they are without the restructuring provided by bankruptcy.
Read Barry's take on the situation:
http://www.ritholtz.com/blog/2008/11/why-a-reorg-is-better-for-gm-than-a-bailout/
Makes sense to me. Too many government handouts already. Automakers need to clean up their own mess.
Congress can pass legislation now guarantying loans AFTER the auto companies file for bankruptcy.
No bankruptcy, and there will be no restructuring. We might as well burn the money or send it directly to UAW members for not working ( Oh I forgot that's what the auto companies frequently do :)
auto industry - bridge loan - NO
let them go into into bankruptcy and restructure and come back out and compete or die.
The peripheral auto business - parts, repair, etc will not collapse. All the autos on the road today need service - support.
thought - While they restructure and renegotiate legacy contracts let the big 3 sell those small efficient cars they sell offshore - no modification
Why help finance $0 Int loans - rebates on gas guzzing autos - gas prices are going back up. When gas goes back up, more $$$ in tank, less spent elsewhere.
They got $25B a few months ago now another $25B -bridge to where? - in another 3 months? forget it.
I do not think we can buy our way out. We need to live within our means, adapt, restructure.
How many here would buy a car from a company in bankruptcy? Not me.
The Mike Myers skit was called "Coffee Talk with Linda Richman". It ran on SNL about 1991-94.
I would have no problem buying a car IN bankruptcy. Then they would clearly indicate if I was going to get or be denied a warranty. Very transparent.
I would not buy a car prior to bankruptcy. Which is where we are now, because who knows how things will be handled. The sooner the bankruptcy the sooner it makes sense to continue buying.
How many would buy a Big 3 car NOT in bbankruptcy? Uh, not me. I've been happy with my Honda
I saw a Yukon advertised this morning for $50,000. I'm not sure who is more of a lune, the CEO at GM or the person that would actually buy this (yes, I know the story line "I have a big family", "It's spacious for my needs"). We're all nuts in this country...a car is only used to go from point A to point B.
According to Cramer, a lack of backing for the auto companies will drop the DOW by 2,000 points.
Even if we get out of this boondoggle, the ensuing debt in the future cannot be paid off.
Goldman under $60, Citi under $7, Ford at one and a little change, and GM $2. Is this possible? What next? Gold $2000.00 !!!!!!!!!
BWJR
Anon 12:11 makes a lot of sense. It is more unlikely I would buy a car from a company whose future I did not know (bankruptcy or not bankruptcy in the future, support warranties or not, survive or not, etc.) than a company in bankruptcy who has a good chance of successfully emerging via a court ordered re-structuring. Chapter 11 offers the best chance for meaningful re-structuring.
The more interesting question is who would buy a Big 3 car whether or not in bankruptcy? My socialist friends who said we couldn't let them fall drive Lexus, Acura... and the little me who think they should go into bankruptcy drive a Ford.
Socialism is great...fewer worries
...the government takes care of you
There should be a way to kill off the car companies and start again. Everyone losing their pensions and healthcare that were way too generous is a nasty thing but is preferable to dragging down the economy for decades to come. The money saved could be used as a safety net for the sick and those without any income or savings and the relaunched car companies can continue to provide jobs and, maybe, start to make decent cars again.
Lost damn near all my retirement this year, thank you America. I am too old to find work.
The chapter 7 and warranty issues are just misdirections.
Chapter 11 was designed for this sort of situation. I put my rump into "bankrupt" airline seats all the time and I bet most folks do it without a concern. Folks have long memories and a non-fix bailout is not going to improve the odds of most people buying an auto from one of these companies. The bankruptcy judge would insist on them retaining and fulfilling their warranty obligation.
I agree with some of your comments on this blog. Will the auto bailout really make a change in the auto industry? In the short run, yes. But, it's a band aid. After the bail out what is the auto industry as a whole projected to be at? They are not addressing the underlying issue; which are the following:
1) Will consumers spending rebound and will consumers buy autos?
2) Will the credit markets improve so that consumers can obtain auto loans?
3) Will the price of autos go down in value in relationship to salaries.
4) Will auto makers make cars that will allow gas tanks to take on more mileage?
If the answer is maybe or no, than the bail out may not be a solution for this industry. I know it's one of the biggest industries but the small business owners who make up a large portion of this economy are not getting bail out money. No one is going to them and saying we know you run a small business here is $100,000 to give you time and to keep your door opens. There is not an equitable distribution on the bail out funds. http://dtrendfriend.blogspot.com
here is the reality - if GM files the DOW will lose another 2000 pts and unleash another round of short to failure on any remaining listed auto related stock or financial companies, trigger Cerberus into default and dissolution - destroying any remaining private equity deals - destroying the remaining pension funds of companies, states, and local governments.....then someday long in the future the reorganization can happen, this is not the time for tough love folks.
it is inconceivable that this $25B doesn't prevent 100x that in losses.
No Bailout for "big" three.
Instead:
(1) Give Toyota (or Hyundai, or Nissan, or BMW) $5B conditioned on their purchasing the majority ownership of GM, PLUS legal freedom from UAW contracts and from Pension Obligations;
(2) give UAW $1B to establish a trust fund for the very soon to be displaced GM workers;
(3) Reserve $9b in PBGC to pay off the pensions of past and current GM workers
(4) LOAN Chrysler $2B, convertible preferreds at a $1->$3 equity warrants in 2 years;
(5) LOAN Ford $3B @ 5%, interest only for 3 years, senior secured.
Use saved $5bn for a fiscal stimulus.
R in NY
PS: Rog, we've broken through Dow 8k, Citi is below $7/share, GE is back below $15 (GMAC seems to be dragging it under the waves...) ... if tomorrow's snap back rally fails to break the high on Tuesday, what keeps us in SPX 700s?
Notice the date of this entry.
http://uk.youtube.com/watch?v=dE-LDfroa1w
why would we give more money to 3 car companies that just came begging for funds needed to address battery technology? what have they been doing for the past 15 years, if not working with suppliers (johnson controls, universities and federal labs?
second question: with the 200DMA being 50% above the SPX, how does one catch the early market move up?
We are not giving money to the Big Three. We are being asked to obligate taxpayers for fat cat union contracts. And the Dems know ALL about those!
Congress needs form an emergency negotiating committee consisting of a union rep, a rep from each auto company, and 2 reps from Congress. The committee has 30 days to come up with an emergency plan to survive....including cutting management salaries and bonuses drastically and to renegotiate union contracts in order to survive. If Congress then finds this acceptable, discussion can begin on a possible loan package.
The claim that financial markets will collapse if auto bailout fails is totally bogus. Glad to see the scare tactics are not working this time around.
Here's a comment from RFerri on bogleheads.org:
"I listened very intently at the Senate and House hearings on US the Big Three over the past couple of days. Ford and Chrysler are in decent shape. They are mainly in Washington to support GM whom may may not survive the year. Ford and Chrysler also want to have access to government funds if needed next year. IMO, there would not be a bailout needed if GM were not in such deep trouble.
I also listened to the CEO of Nissan. That company is more than ready to ramp up production in the US if GM fails. That means hiring workers and going to full capacity at its plants."
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