Friday, December 5, 2008

Auto Industry Bailout - Supplement III

As my readers know, in my previous recent posts on this subject, I have very mixed feelings about the appropriateness of a federal bailout, but believe that a highly conditional loan based bailout is inevitable, given the clear support of the majority of members in Congress, the Bush Administration, and Obama's transition team. From a pragmatic perspective, I think it's a reasonable option under present circumstances. I want to make several more points that I think are called for at this point.

1. The three U. S. auto companies (GM, Ford, and Chrysler) don't deserve a bailout of any kind, certainly not the management team, the board of directors, or the stockholders. One can argue that the non-management employees deserve some government help. The industry's problems are not really their fault. It's a question of whether bankruptcies or properly structured loan packages best serve the interests of the country and the needs of our national economy, given our worsening recession and fast increasing unemployment numbers.

2. In my view Chrysler should preferably be required to be rescued by its controlling shareholder, Cerberus Capital Management, or to be acquired by Ford or GM, given its much smaller size and more urgent and serious problems. That would eliminate the need to look at CEO Nardelli's request for a $7 billion loan by the end of the month and probably another request next spring. It would also provide an opportunity to remove excess overhead expenses from the industry.

3. Our senior government spokespersons supporting a conditional bailout should remind the public and their critics in government that what's being considered is not a grant or an equity infusion, but a loan and/or line of credit with interest that is expected to be repaid within several years.

4. In event that Chrysler is not initially rescued by Cerberus or acquired by Ford or GM, Cerberus should be required to inject new cash equity of at least $1 billion into Chrysler, reducing the company's need to no more than $6 billion, and should find acceptable private sector guarantors for any loan by the government for the remainder. This might convince Cerberus that a sale to Ford or GM might be preferable.

5. I was not impressed with CEO Wagoner's statement in presenting his plan to Congress that GM may trim its lineup of cars and trucks from 60 models to 40. I would think a much smaller number of models, say 20 or 25, would be much more sensible in terms of improving manufacturing efficiencies and minimizing overhead.

6. Government bailout financing should be collateralized by acceptable assets to at least 50% of the credit commitments made to reduce the risk. Interest rates and commitment fees should be similar to what a major bank would charge for similar risk. The loans and lines of credit should be senior obligations repayable before any other loans or bonded indebtedness. The financing should also be subject to a formal credit agreement like any bank would require.

4 comments:

wondarwie said...

This auto bailout crisis is all about dinosaurs. Our manufacturing industry is no different than anything else that can no longer function in a new environment. United States manufacturing had a nice run in the 20th century, but the 21st century brings what is clearly an "extinction event" for this industry. The rest of the world understands that the U.S. is now a service economy. Most Americans concede this as well. So why drag this out? How many heartaches can we bear as we gather around the dying? Let the manufacturing sector die in peace and let's move on. Yes, you can cut auto wages from $73.20 an hour to Toyota's median of $48 an hour. Yes, you can cut executive wages 40 percent. Yes, you can make fewer models of cars. But NO, you can't breathe life into an extinct dinosaur. No bailout! Let's bury our dead and move forward.

Viking Views said...

I think it's a little premature to identify our auto industry with dinosaurs, though some drastic restructuring, strategic, and key management/board changes are needed. While the U. S. is clearly becoming more of a service economy, we still have some rather notable manufacturing niches where we seem to be doing quite well with players like Boeing, HP, Intel, Amgen, Merck, Altria Group, and Pepsi, among a great many others.

JimT said...

The sad truth is this bailout will do nothing but delay the inevitable. Thousands of jobs are going to be lost regardless simply because the US auto industry has not been able to compete for almost 30 years now. The current strategy of bailout, rate cuts, bailout, rate cuts, etc. is only going to put further strain on the economy in the long-run. We need to STOP the bailouts and increase rates to encourage savings and discourage more risky borrowing...this pertains to both corporations and consumers/homeowners. We need to take our medicine now as a nation or feel a much worse pain later on...i.e. Great Depression #2.

Viking Views said...

I agree with several of the comments made by Jim T, but not all of them. It is definitely correct that as a country we need to encourage a much higher savings level, in part by increasing interest rates, and we need find effective ways to discourage high risk borrowings and high debt levels for companies and individuals, as well as governmental sectors. However, the immediate, higher current priority need, is to create confidence, unfreeze the credit markets and create new jobs to help stabilize the economy and position it for growth over the next six to nine months. Otherwise we incur a serious risk of sliding into a deeper recession and possibly even a depression, and that must be avoided at almost any cost. There are meaningful risks with this strategic path as well, but the frank point is that we've gotten ourselves into a deep hole and there is no set of solutions that will solve all our problems and make everyone happy. In fact, it's likely that very few people will be personally happy with all the probable outcomes of current government action plans, perhaps including higher taxes down the road for many of us. In part it's the "nature of the beast."

Jim indicated we should take our medicine now and require that our government not provide any bailouts. In more normal economic times, I'd agree with that. But a great many people who've at this point suffered a lot with home foreclosures, job losses, and huge dents in their investment and retirement portfolios would loudly proclaim that they've already "taken their medicine," and a significant percentage of these likely feel as if they're still on a level of life support just hoping to survive.