A $15 Billion Jumpstart for the Big Three?
Why a likely-to-be unsuccessful bailout for the auto industry is still better than the bank rescue.
The numbers the automakers want are big to be sure, but not compared to those of the banking industry. Yet, Congress is transferring the caution they should have employed in determining the Troubled Assets Relief Program to the auto industry.
The American auto industry's lifeline is less than a fraction of what it cost to bailout AIG alone. And no one from AIG had to face the Senate Banking Committee to get its $152 billion rescue package. Indeed, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) thought that the automakers made a better case for federal help than the financial industry did. Of course, Wall Street had the Treasury Secretary and Federal Reserve Chairman batting for them, whereas the automakers were on their own. Unfortunately for auto execs, Detroit's poor business model is far more transparent than Wall Street's. With Wall Street, the lack of clarity helped bag the money.
So what's the problem? Well, unless the economy turns around within the next three months or Americans spend their last bits of credit on D-3 cars, merely getting government loans and cutting expenses won't be enough to stave off the next request for dough—way before March.
That's why Sen. Richard Shelby's (R-Ala.) question to the execs, "How are you going to pay it back?" was spot-on. So was the one about why the execs were only asking for $34 billion, rather than the $75 to $125 billion that the automakers said they'd ultimately need to avoid bankruptcy.
Bankruptcy is a scary thought. But there's a scarier one: the dreaded, risky, murky, unregulated financial instrument known as credit default swaps. When GM's CEO, Rick Wagoner, said, "there's a significant amount of credit default swaps that would be triggered in a bankruptcy, in addition to credit lines with major institutions," eyebrows raised.
Still, the only thing that will fix a cash flow problem is cash flow. Ford is considering the sale of Volvo, but the problem is a lack of buyers. Every car company is hurting. Every private equity company, even those that own car companies, is watching from the sidelines.
So, maybe the conversation in Congress should have centered on trying to figure out a way to make money out of existing inventory. If languishing vehicles are part of the problem, let's make them part of the solution, too.
Subsidizing low-cost consumer driven purchases would move current inventory and pre-establish a set of buyers to switch into the new lines of more fuel-efficient cars when they come about. This would ensure present and future cash flow. Otherwise, layoffs, UAW concessions, not funding off-book health care plans, closing plants, and the fire sale of brands, just won't plug the dam of losses. That said, trillions of dollars hasn't stopped the fallout from Wall Street, either.
Photo by flickr user Mike Licht, NotionsCapital.com, used under a Creative Commons license.
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The 15 billion ought to go free universal medicare, edu. and stop foreclosures.
WHERE is the Pied Piper of Wall St. taking US?
GET THE FACTS BEHIND THE NEWS
Elizabeth Warren head of the oversight panel setup by Congressto monitor the Federal Bailout says, “THE GOV’T STILL DOES NOT SEEM TO HAVE A COHERENT STRATEGY FOR EASING THE FINANCIAL CRISIS despite the billions it already spent in that effort”. “ Instead the gov’t seemed to be lurching from one tactic to the next without clarifying how each step fits into the overall plan. The overall impression is one of confusion by a leadershp(?) that does not know what it is doing.
One of the reasons for Ms. Warren’s observation is the US does not have an economic strategy or for that matter a strategy for many other important areas.
Professor Michael Porter distinguished Harvard Business School Professor has written in the Nov. 10 issue of Business Week an article explaining why he believes the development of a economic strategy is critical.
Professor Porter notes the American political system as it has evolved with piecemeal reactions to current events. Each candidate during the election presented a set of disconnected policy proposals for their political appeal. Each “approached the the economy with long held ideologies and policy positions, many of which no longer fit with today’s reality. I believe Professor Porter would like to see an organized approach to policies that promote long term growth and competitiveness
Professor Porter has measured the US economic effort against other countries. The US is not in the top 10 as a free market economy in many important aspects. MORE ON THIS.
The Big Three lacks imagination .As American companies they can appeal to the now dormant " America First" and appeal to the pentup desire to keep the money home. Pickup guys aren't going to buy those " green things" they are going to buy F150's and Sierras not also ran Tundras. Let's get real patriotic screw globalization.
