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Saturday, December 6, 2008

Stuck in the Middle: the Auto Bailout: Trying to Please Everyone Pleases No One

It appears that we are close to an agreement for a bailout for the automakers.

Facing massive job losses, the White House and congressional Democrats are
working to provide about $15 billion in loans to prevent Detroit's weakened auto
industry from collapsing.

After yielding to President George W. Bush on a key point, House Speaker
Nancy Pelosi said the House would consider legislation next week to provide
"short-term and limited assistance" to the U.S. auto industry while it undergoes
"major restructuring."

"Congress will insist that any legislation include rigorous and ongoing
oversight to guarantee that taxpayers are protected and that resources are
directed to ensure the long-term viability and competitiveness" of the industry,
Pelosi, D-Calif., said in a statement. The Senate is also scheduled to be in
session next week.

Now, I know that generally most folks find compromise in politics to be some sort of pure and uplifting process but I have generally found that most compromises ultimately please no one and accomplish little. Now, I know the Great Compromise, that which created two houses of Congress, was a great compromise, and this continues to be raised as the beacon of the power of compromise. That said, most compromises are no Great Compromise and they usually wind up the way of the compromise on immigration brokered by McCain and Ted Kennedy. In such, by trying to please two divergent sides, it pleased no one and became a mess.

That, unfortunately, appears to me to be where this compromise will go. I pointed out last week that Congress was playing the very dangerous game of being a venture capitalist. The autos came to Congress and said they need $34 billion. Now, it appears that Congress will only give them $15 billion. Furthermore, this will come from the so called green fund. So, the question needs to be asked, can this money be spent on anything or just on alternative energy vehicles. If it can b spent on anything, the people have been scammed. Congress presented this fund solely to create green technology in autos. If, on the other hand, Congress says this can only be spent on green technology, that is just asinine. There is first a debate whether or not the autos do or do not do enough on green technology and an even bigger debate as to whether or not spending more will save them. Either way, if this money goes only to spend on green technology, these autos will still fail and it won't be a year until we are here again, only the tax payers will be $15 billion lighter.

Here is how dire the situation appears to be.

A teetering General Motors Corp. says it needs $12 billion in cash -- a third of it by the end of this month -- and a $6 billion credit line to make it into next year.

Would it be enough?

Chrysler LLC, its monthly sales off worse than GM's, says it will need "immediate liquidity support" of $7 billion to reassure customers, encourage dealers and make it into next year. Would it come soon enough?

And Ford Motor Co., Detroit's darling of the moment, says it's OK for now. But it wants the ability to access up to $9 billion in government credit should, say, GM fail and take the entire domestic auto industry down with it in one cataclysmic collapse.

As such, $15 billion would go to meet their current unpaid liabilities and there would be little if nothing left to deal with long term sustainability. All this bailout does is keep people employed in a failed operation for a few months more. If Congress is so determined to keep auto employees employed, they should offer them government jobs. Financially, there is no difference between simply putting them on the government payroll and giving these stop gap fixes.

This compromise is entirely political. Congress doesn't want to be seen as doing nothing while millions lose their jobs so they give the automakers just enough to continue to fund operations for a while at least. The fact is that Congress doesn't know anymore than those running the companies how to fix them. Furthermore, they refuse to take on the UAW in order to create the kind of structural changes necessary for long term viability. Furthermore, they all know that most folks hate this bailout. So, they will cut it by 60% in some sort of ridiculous attempt to look fiscally responsible.

The reality is that giving the autos $15 billion now from the green tech fund no less is nothing short of ridiculous waste of money at a time when we should pinching every penny. By the time the autos catch up on bills, there will be nothing left from this lifeline. They will still have done nothing to create a profitable business. As such, it will be months before the bills pile up again. All they are doing is kicking the proverbial can down the road. That's why Congress should get out of the business of venture capital because they are even more clueless in that endeavor than in the one they are supposed to know something about.

1 comment:

Gail said...

Only bankruptcy will give our automotive companies the opportunity to crawl out from under the oppressive thumb of the unions. That is the only hope for survival for our automotive industry.

It is unions that prevent real progress and that created the market for foreign cars. Without the American unions, Japan and other Asian countries would never have broken into the automotive market.

Unions, like any parasite, if left unfettered by pestacides and antibiotics will not stop destroying their host until it is dead and gone.

It is as simple as that. Any bail out will only feed the parasites, not the industry.

Best regards,
Gail S