The devil is in the details though. Auto Industry != GM or even The Big 3

12/5/2008 8:33:04 AM

statepkt, your link would be more useful if it was further divided up by company.

12/5/2008 10:36:58 AM

Isn't it true that Ford doesn't need a bailout themselves? They only went b/c their friends were there or something.

12/5/2008 12:28:10 PM

Quote :

"Not to mention that at any point in this tale the union already has enough cash reserves to buy GM outright and avoid liquidation."

seriously?

can you cite this? not because i don't believe you, but because i'll be sending said link to others

12/5/2008 1:18:04 PM

its concerning that they are saying that we need to bailout the big 3 because we bailed out the financial sector as if the solution is simply an across the board cash infusion for all aspects of the economy, not a case by case decision to help those factors that are critical to capitalism and not those that are simply players.

if the economy is in a recession then the poorly prepared firms will fail, people lose jobs, they get new ones, why isnt that allowable

12/5/2008 2:32:29 PM

Maybe uncle Sam should bail me out of my student loans also

12/5/2008 2:35:24 PM

I don't understand it. I read it on my RSS feed less than a month ago but my google searching of the included sites came up zero.

As such, the only evidence I have as to the size of the UAW pension fund is here:
http://www.talkingpointsmemo.com/talk/blogs/jollyroger/2008/11/why-doesnt-the-uaw-buy-gm-mark.php
Which is a friggin' blog of someone I do not know, and they say the fund has assets of about $104B. As of today, GM's capitalization is 2.45B and Ford is 6.53B.
http://finance.google.com/finance?q=GM
http://finance.google.com/finance?q=Ford+motors

So, as it is the UAW could buy GM and Ford without much fuss and run the companies however they see fit. However, they have turned ripping off shareholder value into an artform, so I don't think they would know how to do anything else, which includes making cars profitably.

12/5/2008 2:38:41 PM

(overall bailout related, not necessary auto industry bailout)

12/5/2008 2:57:11 PM

Quote :

"Which is a friggin' blog of someone I do not know, and they say the fund has assets of about $104B. As of today, GM's capitalization is 2.45B and Ford is 6.53B."

GM has debt on the order of $50B. It's stock is worth so little because it's essentially bankrupt, so the market cap. has little to no meaning other than a quantification of the value of the chance that it remains solvent and someday pays out dividends again.

12/5/2008 3:11:11 PM

^^i've seen the 4 trillion dollar number trotted out a few times. enlighten me again exactly where that number comes from.

not to mention that chart underestimates the cost of the iraq war by a couple hundred billion iirc. and according to wiki (i know i know but it's a quick source), cost of the iraq war is $845B and the estimated cost to the economy is $3T.

so if this is comparing the cost on the economy of the bailout and comparing that to straight federal budget expenditures, then it is comparing apples and oranges.

[Edited on December 5, 2008 at 3:35 PM. Reason : .]

[Edited on December 5, 2008 at 3:37 PM. Reason : .]

12/5/2008 3:34:11 PM

The 4 (and sometimes 5) number is the number that the government has implicitly put itself on the hook for. As in this could cost that much.

The graph is just silly.

12/5/2008 3:58:41 PM

Quote :

"GM has debt on the order of $50B. It's stock is worth so little because it's essentially bankrupt, so the market cap. has little to no meaning other than a quantification of the value of the chance that it remains solvent and someday pays out dividends again."

Not entirely. It has debt, sure, but it also has assets. Robots and intellectual property are not cheap, afterall.

Either way, I was answering the question of whether the UAW could afford to purchase its employers and the answer is absolutely yes. If I were them, I would not do it, but there is no denying that it is well within their ability to become the management they love to blame so much.

12/5/2008 5:52:55 PM

if these folks go bankrupt what does unemployment jump up to?

12/5/2008 6:36:41 PM

not nearly as high as they'd like you to believe.

12/5/2008 6:56:30 PM

sarijoul

http://www.cnbc.com/id/27719011

is one quick source. i've seen others but i'm about to head out for the evening. i'll put up others this weekend if i remember.

12/5/2008 6:58:58 PM

Quote :

"if these folks go bankrupt what does unemployment jump up to?"

Not as high as it will if we bail them out.

[Edited on December 5, 2008 at 10:27 PM. Reason : (in the event of unlikely but possible eventualities; think Iceland)]

12/5/2008 10:26:05 PM

Are you joking? 34 large is pissing in the wind compared to how much has already been poured into the liquidity trap. I can't believe so much time was wasted this week on the auto makers while other more pressing needs needed attending. Unreal.

12/5/2008 10:31:23 PM

the failure of the government to protect our interests in the pat should not be an excuse for them to continue to fail. Unfortunately it appears we're fcked anyway

12/5/2008 11:48:58 PM

isn't the real central issue that the Big 3 are just so LARGE.

a) 1 company should never have the pull on the US economy like these three do. anti-trust laws were designed for a reason.
b) large companies tend to not do as well in regards to innovating as smaller companies, they can't take huge risks and have too much inertia to stay the course or make only small changes. in some industries, this is appropriate; however, in an industry that demands innovation like autos, large companies just can't innovate enough to make the paradigm shifts that are needed.

my personal feeling is that it would do the auto industry as a whole, a lot of good if the Big 3 became the Medium 12-15. this would bring about innovation, more competition, and supply chain diversification.

12/5/2008 11:53:06 PM

Git r dun

http://www.cbsnews.com/stories/2008/12/06/business/main4651796.shtml

Quote :

"Dems, White House Agree To Auto Bailout Pelosi Bows To Bush Condition On Deal Granting $15 Billion In Loans To Big Three"

12/6/2008 9:13:58 AM

Quote :

"House Speaker Nancy Pelosi bowed to a demand by President Bush that any aid come from a fund that had been intended to help Detroit produce more fuel-efficient cars."

Thank goodness for that. They have voted to give the three money they had already promised to give them. In other words: the government is not going to give them any more money. It would have been better to not even give them that, but at least the rate of socialization of losses has been slowed.

12/6/2008 11:05:15 AM

^for now, the end of january is approaching.

I doubt the Big O takes a pass at handing out money....esp unions. I hope im wrong.

12/6/2008 2:25:43 PM

^^ That's assuming there would be losses in the long run.

If it's anything like the Chrysler bailout a few decades ago, the US might actually MAKE some moeny.

12/6/2008 3:02:03 PM

The only reason Chevrolet and Ford are still around is almost every town, city, county, state, federal agency, the military, police departments etc. are basically forced to buy American for their fleet vehicle contracts. Why pay to bailout a company whose business is already heavily based on government contracts?

12/6/2008 3:26:31 PM

Quote :

" If it's anything like the Chrysler bailout a few decades ago, the US might actually MAKE some moeny."

LOL. I suppose we're going to drag Lee Iacocca out and make him CEO again, too. Of all three this time -- that's the way to do it!

12/6/2008 7:12:20 PM

I don't think the role of the government in this instance is "socializing losses." In fact the Big Three don't have viable business models, they are trying to innovate and create new ones (e.g. Chevy Volt), and they are asking for the government to fund their transformation.

In fact the government in this scenario is acting more like a venture capitalist, especially for GM.

Personally I am not wholly opposed to the government acting as the short arm of VC funding. They already do to some extent, in academia with grant money and even indirectly with the real industry by way of funding endowments that invest in VC.

My main opposition to the "bail out" is that the companies themselves don't have the ability to do what they're promising; and it amounts to subsidized competition for smaller and more innovative businesses (like Tesla, current problems notwithstanding).

The government will get more bang for its buck by investing in actual startups, preferably by way of tax incentives rather than grant money. That seems like a better way to reuse infrastructure that already exists (supply chains) and spur innovation -- even if it's more painful now.

12/6/2008 7:31:51 PM

They'd get more bang for the buck by just raising the damn taxes. Hell, they could have done it slowly starting in the mid 80s and we'd all be used to $3 gas a long time ago and the SUV era would have never occurred.

12/6/2008 9:25:36 PM

So correct me if I'm wrong

But the stupid in this thread thinks its a pretty good idea to instantly have a million + unemployed with even more becoming jobless as side industries in the effected states begin to crumble?

LEEEEEEEEEEEEEEEEEEEEEEEEEET

12/6/2008 11:00:57 PM

^well you have to think about the long term affects, not just the short term.

these businesses dont work, american way of life doesnt work, our living standards must be lowered and we must make major changes

in order to do this we need to go through a depression like event if we are going to survive and be leaders in the 21'st century

12/6/2008 11:57:59 PM

No, SandSanta, the stupid in this thread think it is a good idea to tell corporations that tax payers will henceforth forever suffer their losses for them. The stupid are also not smart enough to realize that GM does not represent the entire U.S. auto industry, that bankruptcy and liquidation are two separate behaviors, one does not automatically lead to the other, as has been stated repeatedly, and that any losses due to GM's closure would quickly be filled by renewed production from GM's competitors.

That said, You owe me $100 dollars.

Quote :

"these businesses dont work, american way of life doesnt work, our living standards must be lowered and we must make major changes in order to do this we need to go through a depression like event if we are going to survive and be leaders in the 21'st century"

Absurd. The current 'American way of life' is completely supportable at current productivity levels, especially now that commodity prices have returned to normal. Even if a retrenchment was required a depression like event would only make the problem worse by idling economic activity. However, company profitability is still high, so there is no evidence that wages have overshot productivity.

[Edited on December 7, 2008 at 12:56 AM. Reason : .,.]

12/7/2008 12:47:25 AM

this country is in too much debt, personal, governemnt, and the trade deficit are all killers
we have to realize that with respect to the rest of the world we must compete by making cheaper product and that means lower wages
relying on cheap fuels has driven us to make a lot of bad choices which must be reversed
including city planning, agriculture and more

major changes have to be made and i doubt we would do it of our own free will

12/7/2008 1:53:38 AM

Quote :

"No, SandSanta, the stupid in this thread think it is a good idea to tell corporations that tax payers will henceforth forever suffer their losses for them. "

We can excuse the nationalization of major US Banks, but we can't loan money to the largest manufacturing industry in the country?

Quote :

" The stupid are also not smart enough to realize that GM does not represent the entire U.S. auto industry, that bankruptcy and liquidation are two separate behaviors, one does not automatically lead to the other, as has been stated repeatedly, and that any losses due to GM's closure would quickly be filled by renewed production from GM's competitors. "

I want you to henceforth provide statistics for every assertion you make in this thread. I'm getting kind of tired of reading your self assured garbage without any type of numerical information to back it up save for a paraphrase of the first google hit on whatever topic you happen to researching.

For starters, lets talk about GM employing more in the US then Toyota, Honda, and Hyundia combined. We don't even need to talk about GM suppliers and support industries (Japanese companies have their own suppliers outside of the US, by the way.)

In order for a consumer to buy a product from a bankrupt car company, the price of that product has to be heavily discounted. Nobody will pay invoice on a car that may or may not have parts and service support five years into the future. Likewise, selling under invoice will mean that none of these companies will recover any money meaning they will have to go into liquidation of assets. Selling their current stock won't cover daily operational costs and nobody is going to loan them money to continue manufacturing and building new products. I'm really curious, then, as to how you think these companies will actually survive?

As for big three's competitors...what competitors would those be? I'm quite curious on this point as well. Is toyota going to suddenly ramp up production after its worst sales term in corporate history? Maybe Honda? The company famous for cautious and incremental growth? Or maybe Mazda, a Ford subsidiary will jump in to save the parent company?

Quote :

"Absurd. The current 'American way of life' is completely supportable at current productivity levels, especially now that commodity prices have returned to normal. Even if a retrenchment was required a depression like event would only make the problem worse by idling economic activity. However, company profitability is still high, so there is no evidence that wages have overshot productivity. "

Again, please provide statistics to support this. What exactly are either of you referring to by 'the american way of life' because I can argue with you that the 0 savings rate and debt based consumer spending of the last decade certainly is not sustainable.

Finally, I don't think anyone wants to save the big three for the sake of national pride. Rather, nobody wants to risk a economic cascade that could very potentially happen if an entire industry suddenly changed dramatically.

[Edited on December 7, 2008 at 4:14 AM. Reason : ><]

12/7/2008 4:13:12 AM

Quote :

"Absurd. The current 'American way of life' is completely supportable at current productivity levels, especially now that commodity prices have returned to normal."

Quote :

"ANDREW BACEVICH: Sometime around the 1960s there was a tipping point, when the "empire of production" began to become the "empire of consumption." When the cars started to be produced elsewhere, and the television sets, and the socks, and everything else. And what we ended up with was the American people becoming consumers rather than producers. BILL MOYERS: And you say this has produced a condition of profound dependency, to the extent, and I'm quoting you, "Americans are no longer masters of their own fate." ANDREW BACEVICH: Well, they're not. I mean, the current debt to the Chinese government grows day by day. Why? Well, because of the negative trade balance. Our negative trade balance with the world is something in the order of $800 billion per year. That's $800 billion of stuff that we buy, so that we can consume, that is $800 billion greater than the amount of stuff that we sell to them. That's a big number. I mean, it's a big number even relative to the size of our economy. BILL MOYERS: And you use this metaphor that is intriguing. American policy makers, quote, "have been engaged in a de facto Ponzi scheme, intended to extend indefinitely, the American line of credit." What's going on that resembles a Ponzi scheme? ANDREW BACEVICH: This continuing tendency to borrow and to assume that the bills are never going to come due. I testified before a House committee six weeks ago now, on the future of U.S grand strategy. I was struck by the questions coming from members that showed an awareness, a sensitivity, and a deep concern, about some of the issues that I tried to raise in the book. "How are we gonna pay the bills? How are we gonna pay for the commitment of entitlements that is going to increase year by year for the next couple of decades, especially as baby boomers retire?" Nobody has answers to those questions. So, I was pleased that these members of Congress understood the problem. I was absolutely taken aback when they said, "Professor, what can we do about this?" And their candid admission that they didn't have any answers, that they were perplexed, that this problem of learning to live within our means seemed to have no politically plausible solution. BILL MOYERS: You say in here that the tipping point between wanting more than we were willing to pay for began in the Johnson Administration. "We can fix the tipping point with precision," you write. "It occurred between 1965, when President Lyndon Baines Johnson ordered U.S. combat troops to South Vietnam, and 1973, when President Richard Nixon finally ended direct U.S. involvement in that war." Why do you see that period so crucial? ANDREW BACEVICH: When President Johnson became President, our trade balance was in the black. By the time we get to the Nixon era, it's in the red. And it stays in the red down to the present. Matter of fact, the trade imbalance becomes essentially larger year by year. So, I think that it is the '60s, generally, the Vietnam period, slightly more specifically, was the moment when we began to lose control of our economic fate. And most disturbingly, we're still really in denial. We still haven't recognized that. "

http://www.pbs.org/moyers/journal/08152008/transcript1.html

12/7/2008 10:03:35 AM

so what do the people like hannity and rush want to do or want to happen? i often find their positions ludicrous and the plans they support to be the solution i dont want to happen

12/7/2008 10:50:36 AM

ford buys chrysler and gm discontinues a bunch of stuff, then the gov nationalizes them?

[Edited on December 7, 2008 at 11:32 AM. Reason : sorry i had another thought on the matter]

12/7/2008 11:32:21 AM

Quote :

"so what do the people like hannity and rush want to do or want to happen?"

GM and Chrysler survive, but fire all their workers to punish them for voting Democratic.

12/7/2008 1:00:13 PM

Ah ha! Quote bomb!

Quote :

"We can excuse the nationalization of major US Banks, but we can't loan money to the largest manufacturing industry in the country?"

Who said we could excuse it? I do not believe the federal reserve needed help from congress on this fiasco.

Quote :

"I want you to henceforth provide statistics for every assertion you make in this thread."

A restriction that is not to be placed upon anyone else? Why should I be treated so differently from you?

Quote :

"In order for a consumer to buy a product from a bankrupt car company, the price of that product has to be heavily discounted."

Any statistics on this to offer? No?
People had no problem buying airline tickets months in advance from bankrupt airlines, tickets which become completely worthless in the event of liquidation. Compare that to a car which by the time liquidation actually happens might no longer even be under warranty at all; and even if it is, you would still have a car.
Nevertheless, let us assume you are right. Why do you think consumers are fine buying cars from an almost bankrupt car company with government loans but will demand a heavy discount from an actually bankrupt car company? People are not stupid, even if GM gets a bailout people are going to demand a discount because GM went belly up once, so without immense visible changes people are going to continue to doubt GM's staying power.

Quote :

"Selling their current stock won't cover daily operational costs and nobody is going to loan them money to continue manufacturing and building new products. I'm really curious, then, as to how you think these companies will actually survive?"

The same way all other bankrupt firms that survive survived. Why do you believe a bankrupt GM is so radically different from a bankrupt Delta (2005) or K-Mart (2002)? Very few firms enter bankruptcy with cash enough to cover operating expenses. Otherwise they would not have wiped out their owners by entering bankruptcy. When a firm enters bankruptcy ownership falls to its creditors which vote in a new board and then negotiation begins: an operating GM is worth billions, a liquidated GM is worth millions, as such GM's primary creditors will be faced with a choice: liquidate and get back pennies on the dollar, or put in even more money in hopes of financing a turn-around, which should be easy operating under bankruptcy protection, since you could immediates solve whatever problems dog the company: labor contracts, debt obligations, dealership contracts, etc.
http://www.bankruptcydata.com/Research/Largest_Overall_Non-Financial.pdf

Quote :

"As for big three's competitors...what competitors would those be? I'm quite curious on this point as well. Is toyota going to suddenly ramp up production after its worst sales term in corporate history?"

You answered this yourself. Toyota is facing its worst sales term in history according to you, which means it has lots of idled capacity and recently layed off workers eager to return to work. The same goes for the rest of the industry: if GM cuts production the demand for Fords and Chryslers will jump, instantly saving these firms from bankruptcy.

Quote :

"Again, please provide statistics to support this. What exactly are either of you referring to by 'the american way of life' because I can argue with you that the 0 savings rate and debt based consumer spending of the last decade certainly is not sustainable."

Americans borrow so much because foreigners save too much and have driven down long term interest rates. To put it another way, if China struck big oil 15 years ago and drove the price of oil to $10, would it really be shocking to see Americans consuming a lot of oil? Now, if China and their ilk decide to stop being such ravenous foreign investors then interest rates will rise and Americans will borrow less. It will not take a depression or an abandonment of our way of life, just interest rates slightly higher than we have been accustomed to.

12/7/2008 1:47:59 PM

Quote :

"People had no problem buying airline tickets months in advance from bankrupt airlines, tickets which become completely worthless in the event of liquidation. Compare that to a car which by the time liquidation actually happens might no longer even be under warranty at all; and even if it is, you would still have a car."

Hmmm, a 1-500 ticket meant to be redeemed in the next days, weeks, maybe months, compared to a 15-40k purchase of a no longer supported auto likely at some point to need repairs in the range more than said airlines tickets at some point over its useful life. Yes, let's compare the two.

I know I get annoyed by your pseudo pompous attitude regarding economics in here, and I suspect this might be the same for SandSanta and others. It's certainly clear you know a little bit about economics, but for most of us, when you go into a bit of detail about certain topics, I get the feeling that people know its bullshit because it vaguely smells like it, but they just don't care to take the time to call you on it because it just isn't worth it.

12/7/2008 1:56:36 PM

Quote :

"liquidate and get back pennies on the dollar, or put in even more money in hopes of financing a turn-around"

Creditors won't accept equity, they'll just liquidate. DealBreaker put it best:

Quote :

"Sen. Robert Bennett: Hey, I've got a brilliant idea. Why don't we just have all the debt holders convert all their debt to equity. That would solve the problem of the large debt burdens these automakers have to service, right? And the equity holders would then be able to oversee the business strategy of the auto makers and force them to evolve. And this pretty much sums up Congress' ignorance in these matters. Try to understand: No one wants to own stock in these liquidity black holes anymore, Senator. You really think that the banks want to end up holding the keys here and actively managing these money pits? Ugh."

http://dealbreaker.com/2008/12/live-blogging-the-pitiful-crie.php

It's called the sunk cost fallacy. I assume you've heard of it. Would you throw more good money (or time, or effort, or whatever equivalent) after bad in the vain hope of reviving a fundamentally bad business? Pennies on the dollar sounds good to me.

Let's be realistic. There are two options: outright liquidation and collapse, or government "bail out."

Personally I don't like bailing out any failed company; but you might consider that the second order effects of not bailing out could be worse. If, as probably will be the case, very many people are laid off and their pensions explode in a very short amount of time, the demands for government entitlement programs to "smooth" the "transition" will themselves be insanely costly and come out of public money. The Democratic administration will certainly enable it under the cover of thousands of hard luck stories.

Either way this is going to be very expensive for all of us.

12/7/2008 2:43:15 PM

Quote :

"Hmmm, a 1-500 ticket meant to be redeemed in the next days, weeks, maybe months, compared to a 15-40k purchase of a no longer supported auto likely at some point to need repairs in the range more than said airlines tickets at some point over its useful life. Yes, let's compare the two."

Remember what we are comparing. A car does cost more. But the car does not become worthless in the event of liquidation; worse-case scenario you still have a car minus a waranty, which you can buy from a third party.

So, my question remains: "Why do you think consumers are fine buying cars from an almost bankrupt car company with government loans but will demand a heavy discount from an actually bankrupt car company?"

As I stated on page 3: "It seems to me, people might even feel better after a bankruptcy when they see that the dealerships are still there, warranties are still being honored, and news reports turn to scrapped contracts and improving financial conditions at GM for an emergence from bankruptcy."

Quote :

"Creditors won't accept equity, they'll just liquidate."

Which is demonstrably false, as this would not be the first bankruptcy in American history, a sizeable percentage of which result in just that: an eventual emergence from bankruptcy protection with new owners.

To address your quote:

Quote :

"Try to understand: No one wants to own stock in these liquidity black holes anymore, Senator. You really think that the banks want to end up holding the keys here and actively managing these money pits? Ugh."

And they never do! What can happen is that an insider group offers the pennies on the dollar to those with claims against GM (bond holders and banks) in exchange for the legal right to prosecute these claims. After buying out enough debt holders to get control over the bankruptcy proceedings, they put in their new managers and proceed to manage these money pits back into profitability. And once the company is saved, they emerge from bankruptcy protections, issue new shares in the company, and pocket their billions.

Anyone that has bothered to read anything on this subject knows that the assertion is not that debt holders always liquidate, but that due to broken money markets the normal process of bankruptcy followed by recovery I describe above will be unable to function. For example, if Delta went bankrupt today instead of in 2005 it would have been liquidated instead of emerging from bankruptcy as it did only two years later. And here I respond that even if such liquidity is unavailable nowadays, an assertion I do not accept, such groups usually use their own money anyways, so jammed up money markets would be irrelevant in most cases.

12/7/2008 3:59:22 PM

Lets focus on why a bankrupt auto company is dramatically different then a bankrupt airline. I knew this discussion would try to relate the two but in reality its quite different.

First and foremost, a car costs 100x more then an airline ticket. The economic decision making that comes into play when considering a 20,000$ purchase vs a 200$ one is drastically different. You won't be paying a sizeable portion of your income to fly.

Second point, A retail bankruptcy or airline bankruptcy has different economics then an major industrial bankruptcy. Kmart can sell real estate and discounted wares to raise capital and refocus on profitable stores. Airlines can cut routes, sell planes and lean on profitable routes to maintain daily operations. Car companies can also sell industrial capital and layoff workers but they can't quite easily cut brands and they need a steady flow of cash to continue manufacturing new models.

Now the question that would determine if they could ever come out of bankruptcy or not is whether consumers would buy cars from a defunct company. The answer to that is yes, they will, but will they do that at a price level where the car company in question can recover its costs? Most likely no, not in this environment. The question then is, will a drastically downsized GM, in bankruptcy, be able to build and sell cars at a price point where it could profit enough to come out of bankruptcy? Probably not.

See, there are no real certainties here aside from the fact that consumers don't buy cars from defunct companies (see olds sales after the announcement that the brand was cut) and that three major domestic companies the size of scope of these three failing at the same time would reverberate quite heavily and quite negatively throughout the entire economy.

There's no argument that these companies need to be restructured, that their absurd union contracts torn up and redrawn, and management completely changed. The issue at hand is all of this happening at a time when capital nationwide is quite tight, and there are several side industries that feed off of domestic production that would be quite adversely effected.

I also don't think you quite understand the order the interconnectivity within the auto industry.

GM wouldn't be the only company going under, it would actually be GM and Chrysler both of which are set to run out of cash by january. Ford probably could survive this storm, or possibly couldn't depending on how consumers respond, but seeing that GM is the largest purchaser of domestic car parts, many other small to mid size business would feel the crunch. GM is an economic ecosystem of its own, to say nothing of Chrysler and Ford.

I also find your assertion that Toyota could fill the slack rapidly absurd. Toyota doesn't contract with American parts suppliers nearly as much and would still need a recovery in the Auto market as a whole before being able to grow.

12/7/2008 5:08:28 PM

Quote :

"Now the question that would determine if they could ever come out of bankruptcy or not is whether consumers would buy cars from a defunct company. The answer to that is yes, they will, but will they do that at a price level where the car company in question can recover its costs? Most likely no, not in this environment. The question then is, will a drastically downsized GM, in bankruptcy, be able to build and sell cars at a price point where it could profit enough to come out of bankruptcy? Probably not."

And if you insist on only looking at one side of any equation then it will never balance out. But if you remember from the other large bankruptcies in American history, you will recall the complaints from other airlines levied against firms operating under chapter 11. A company undergoing Chapter 11 bankruptcy is effectively operating under the "protection" of the court, particularly against its debt obligations. And as with airlines, perhaps the largest cost burden to car companies is the debt incured aquiring all the necessary capital investment necessary for operation. Afterall, robotic assembly lines are not cheap, and even with GM's bloated labor costs, labor still only represented around 12% of operating expenses (according to UAW testimony). Well, a company in Chapter 11 bankruptcy no longer needs to make payments on this debt (itself a huge shift of wealth from creditors to the company itself). As such, under bankruptcy GM would be capable of profitably selling cars for substantially less than its competitors which must continue to make payments on their own debt.

This is an explanation as to why Ford went along to help GM gets a bailout: a bankrupt GM and Chrysler, relieved of their debt expenses, would compete too fiercely and bankrupt Ford. None of them would shutdown or liquidate, since at that point they too would be masterful competitors against a Toyota and Honda which are still loyal to their creditors.

12/7/2008 8:27:32 PM

Quote :

" And they never do! What can happen is that an insider group offers the pennies on the dollar to those with claims against GM (bond holders and banks) in exchange for the legal right to prosecute these claims. After buying out enough debt holders to get control over the bankruptcy proceedings, they put in their new managers and proceed to manage these money pits back into profitability."

Nobody in their right mind is going to try the "vulture capital" approach you're describing. It was already tried with Chrysler. Daimler lost over $37 billion selling them off to Cerberus, and everyone sees how that turned out.

The basic problem here is that no matter how much of a fire sale, the car companies cannot actually be managed back to profitability. Great products and reasonable cost structures don't just appear out of thin air. Stop dreaming. If the companies are not bailed out, they will be liquidated because they cannot be managed. It's just common sense; stop twisting in the wind over this basic point.

Quote :

"This is an explanation as to why Ford went along to help GM gets a bailout: a bankrupt GM and Chrysler, relieved of their debt expenses, would compete too fiercely and bankrupt Ford. None of them would shutdown or liquidate, since at that point they too would be masterful competitors against a Toyota and Honda which are still loyal to their creditors."

Masterful competitors? What a joke. This isn't some academic economics problem of price optimization; it's a business problem. The American companies don't have the brand to compete with foreign manufacturers. People don't want American because they think the cars are shit. Making their cars cheaper won't help them in that regard; in fact it'll bolster the brand image problem and hasten their demise. If you believe otherwise, by all means, try to get some funding to develop an iPod competitor based solely on price. Let me know how it turns out.

The reality is that turning around the car companies is a non-linear problem. Even if the companies freed up infinite capital to "innovate" and somehow solved the big cost structure (ie unionization) problems, I'm not convinced they have the talent to remake the brands. Someone suggested that Steve Jobs should run the car companies -- an interesting idea, except I think then he'd die of a heart attack instead of pancreatic cancer.

12/7/2008 9:56:12 PM

^basically what you just argued is for a complete fire sale of GM

if everything you just said is true, then there is no reason for the government to bail it out, its throwing good money after bad, if GM can't be revived then there's no point, sell its assets for pennies and move on

12/7/2008 10:39:10 PM

Quote :

"everything you just said is true. there is no reason for the government to bail it out, its throwing good money after bad, if GM can't be revived then there's no point, sell its assets for pennies and move on"

12/8/2008 1:08:35 PM

Quote :

"The basic problem here is that no matter how much of a fire sale, the car companies cannot actually be managed back to profitability. Great products and reasonable cost structures don't just appear out of thin air. Stop dreaming."

Quote :

"The American companies don't have the brand to compete with foreign manufacturers. People don't want American because they think the cars are shit. Making their cars cheaper won't help them in that regard; in fact it'll bolster the brand image problem and hasten their demise."

Quote :

"The reality is that turning around the car companies is a non-linear problem. Even if the companies freed up infinite capital to "innovate" and somehow solved the big cost structure (ie unionization) problems, I'm not convinced they have the talent to remake the brands. Someone suggested that Steve Jobs should run the car companies -- an interesting idea, except I think then he'd die of a heart attack instead of pancreatic cancer."

Genuine question, here - it seems like given all the above statements, you imply that in essence American auto manufacturers are doomed to failure. Even if they were granted completely new management and a broad line of credit, they're going to fail.

Ergo, what exactly do you expect this bailout to accomplish, other than to keep them upon life support and delay the inevitable?

12/8/2008 1:26:27 PM

12/9/2008 8:16:40 PM

Quote :

" Ergo, what exactly do you expect this bailout to accomplish, other than to keep them upon life support and delay the inevitable?"

Well, either the Big Three will get on the dole and pay their bills, or they will be washed up and hundreds of thousands if not millions of people will lose their jobs.

So, let's say the latter happens -- the Big Three disappear. We're not living in LoneSnark's fantasy land where they will be saved by White Knights in the private sector; it's just not going to happen. Then the Infrastructure Building President isn't going to let a heavily blue state with a big union establishment slip into 20% unemployment on his watch (it's already at 10% pre-bail-out).

What will the bail out accomplish? For the industry, probably nothing more than preserving status quo. Politically, it might be cheaper than the "stimulus" package that will inevitably follow if they wash up. It's easy to see how such a situation will justify all manner of entitlements and "transition" and "infrastructure" programs; the cost of which is totally unquantifiable compared to the cost of a straight bail out.

Personally I don't support either type of program; the bail out makes me sick. But it may be better than the alternative. Unfortunately we don't have the government we did a few years ago so the calculus has changed somewhat for the taxpayer.

12/10/2008 1:13:29 AM

Quote :

" What will the bail out accomplish? For the industry, probably nothing more than preserving status quo. Politically, it might be cheaper than the "stimulus" package that will inevitably follow if they wash up. It's easy to see how such a situation will justify all manner of entitlements and "transition" and "infrastructure" programs; the cost of which is totally unquantifiable compared to the cost of a straight bail out."

But that's my point, right? If we assume the problems of the Big Three are insoluble, then all the bailout does it buy time. The same outcome inevitably occurs, by this logic then - it's simply a question of when.

Thus, the bailout pre-supposes that the problems of the Big Three are not insoluble, and that the current management has the will to implement the necessary reforms (should suitable enough reforms even exist). If this isn't true, why even bother? (Other than for solely political reasons.)

12/10/2008 1:17:07 AM

Saw this post on another forum I'm on -- I think it sums up why the bailout shouldn't go through and why these corporations should die a natural death.

Quote :

"I'm in favor of letting them go bankrupt. Why? Because Honda and Toyota make most of their cars in the US and they don't ask for a bailout. Why? Because the UAW criticizes states that lure foreign car makes to their state to create jobs. They wouldn't be critical if they workers were UAW workers, but since none of them join the UAW, then the UAW is critical of them. The guy who lives besides me is a UAW employee and is a super nice guy. We get along fine... He believes in the UAW, but doesn't "preach their kool-aid" like some do. Anyway, he puts parts in a machine that bends them and puts the parts in another bin. He makes $38/hour doing this "task". If he goes early (while 3rd shift is on) then he gets paid 3rd shift differential pay all day and will make sure to work overtime (12 hour) that day. All in all, he made $106,000 the other year (from what he told me). He gets 6 weeks vacation a year, plus two week "shutdown pay" in July for plant retooling and two weeks "shutdown pay" at Christmas also. Recently I noticed he was at home a lot and asked if he was just taking a bunch of time off... Nope, he took "voluntary layoff" and gets paid 95% of his normal pay through the GM Job Bank to stay at home. I told him that was the reason that a new Chevy Tahoe (with all the options) cost $55,000 was because of stuff like this.... he agreed with me. Now I can't blame him because he's just making money off the system that is in place (by their contract.) But the UAW is just "getting fat" off this and now they support the "bailout" of giving the Big 3 BILLIONS of Dollars? just so they can continue the gravy train... I say let them go bankrupt. I own a Chevy Tahoe, a Honda Accord and an Acura TL. The Honda and Acura require very little maintenance. the Chevy Tahoe with only 65k miles on it has been in the shop more times than my Accord with 230,000 miles on it. The Tahoe is about to go back to the shop for a problem with the suspension and the front differential is leaking bad. will prob need rebuilt. This on a truck that only has 65,000 miles on it. The reason people aren't buying American autos is that they can't match the quality and durability compared to other manufactures and the price on the American auto is too high for something that falls apart too easily. Let them go bankrupt. It's a natural cleansing of the 'herd'."

12/10/2008 1:45:31 AM