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US Auto Bailout Failure : What’s Next ?

December 12th, 2008
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Yesterday the US Senate voted against passing the Auto Industry bailout plan which not only left the markets and the US Dollar dropping significantly but also asks the bigger question : What impact will this have on the recovery of the US and other global economies and of course what does it mean for the US Auto Industry altogether ?

This post looks into some of the prevailing arguments from leading experts, who do not agree on the level of impact.

ABC News comments in their latest article on the subject, “The good, the bad and the ugly : Auto Bailout Alternatives”  that:

The president-elect yesterday expressed support for an emergency loan package from Congress, but whether he would support using TARP money for an auto bailout remains unclear.

Without immediate aid, the automakers may not survive long enough to benefit from an Obama decision. General Motors has said that it could go bankrupt before the end of the year, weeks before Obama takes office. The same could be true for Chrysler, experts say. Ford is widely regarded to be in better financial health than its crosstown rivals.

The article goes on to quote auto analyst Craig Fitzgerald who firmly believes that this vote will mean that 2 if not all 3 of the Three Big will file for bankruptcy:

“If you take at face value what Chrysler and GM have said, I don’t know how they avoid a near-term bankruptcy,” said Craig Fitzgerald, an auto analyst at Plante & Moran PLLC in Southfield, Mich. “They’ve said they’re running out of money and can’t access external capital markets … I don’t see any alternative if the bridge loan does not come through and the situation is as dire as GM and Chrysler have said.”

Rebecaa Lindland, another analyst, argues that the real problem for the automakers is now the lack of confidence that the US Consumer has in any of the three big and concludes that :

“Part of the reason that we don’t see that recovery is really viable is that people have consistently said they would not buy a car from a bankrupt company,” Lindland said.

Mike McMillan says he is not at all surprised to see the US Auto Industry in shambles, on the contrary :

Nobody likes an “I told ya so.” In fact, it’s a good way to get punched in the throat. But after years of the Big Three shuffling sub-par vehicles to increasingly wary consumers, they’ve netted the likely outcome: Few are interested in shelling out their hard-earned tax dollars to companies that sold them problem-laden Citations a generation ago.

In fact, I’m surprised the Big Three have lasted this long. If it wasn’t for the patriotism of the car-buying public — which was shamelessly abused by Detroit execs — they would have collapsed following the exploding-Pinto years. It hasn’t been the first time we’ve propped up the auto industry, either. Chrysler Corp. nearly collapsed in the late ’70s, buoyed by a $1.5 billion Uncle Sam loan that was repaid following the introduction of the K-car in 1981.

McMillan does see a chance for a come-back for the industry if proper action is taken but he is disappointed and concerned over what he sees as an ignorant dogfight by politicians, too strong unions and the executives of the automakers and concludes:

What troubles me more is the politicizing this issue has received. It boils down to the Democrat vs. Republican war that deadlocks the issue and accomplishes nothing. In the end, thousands of jobs are in peril thanks to clueless execs and politicians and greedy, power-hungry unions.

I say the Big Three, with the right leadership and deals, could return to prominence. The greatest stories ever told stem from some seemingly insurmountable obstacle. But without some kind of action — the type that involves each side of the debate — we’ll be left in a far stickier situation.

Reuters quotes in their article Kim Jae-eun, economist at Hana Daetoo Securities in Seoul. for saying that this no vote by the Senate has far bigger implications than ‘just’ the US Automakers:

“If any one of them fails, it will create an endless vicious circle in the global economy as the auto sector hires so many and there are so many industries that rely on the sector,”

And is joined by Lim Ji-won, an economist at JPMorgan Chase. who agrees on such dire predictions:

“Everybody knows that a failure will badly hit the economy and financial markets. That will need much bigger stimulus packages to avoid more shocks,”

New York Times quotes Republican Leader and Senator Mitch McConnell for saying after the no vote was a reality that:

“We have had before us this whole question of the viability of the American automobile manufacturers. None of us want to see them go down, but very few of us had anything to do with the dilemma that they have created for themselves.”

Mr. McConnell added: “The administration negotiated in good faith with the Democratic majority a proposal that was simply unacceptable to the vast majority of our side because we thought it frankly wouldn’t work.”

The article goes on to quote what Nancy Pelosi, House Speaker, said in the minutes after the bailout plan was voted down:

“Senate Republicans’ refusal to support the bipartisan legislation passed by the House and negotiated in good faith with the White House, the Senate and the automakers is irresponsible, especially at a time of economic hardship,” Ms. Pelosi said in a statement.

She added: “The consequences of the Senate Republican’ failure to act could be devastating to our economy, detrimental to workers, and destructive to the American automobile industry unless the President immediately directs Secretary Paulson to explore other short-term financial assistance options. Senator George V. Voinovich, Republican of Ohio, and a supporter of the auto rescue efforts, said: “I think it might be time for the president to step in.”

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Filing For Bankruptcy - The Smartest Way To Avoid Going Bankrupt ?

December 11th, 2008
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Financial headlines are full of stories of huge corporations world-wide who are very close to or already at the level of bankruptcy, yet many of these have now discovered a last resort: filing for or threathening bankruptcy and thereby drawing the governments to the negotiation table to save the pieces.

This post looks into some of the more high-profile bankruptcy files and threats and also asks the question if this is the way forward or if indeed it is a short-term solution that will in fact leave the companies as well as the global financial markets worse off down the line.

It all started with the USD 700 billion US emergency fund package which to many large US corporations was an open invitation to ask for bail-out funds, threathening massive lay offs and foreclosures if not obliged.

MarketWatch looks into one such case with GMAC, the once-mighty financial arm of General Motors, and states:

Desperate times call for desperate measures. So when the government offered up $700 billion in emergency funds to keep money flowing through the nation’s banks, GMAC decided to tap into that cash by recasting itself as a bank holding company.
To qualify as a bank, however, GMAC needed to show the Fed it has at least $30 billion in regulated capital. So it offered its creditors a massive debt-for-equity swap.
The plan went over like a lead balloon. Fewer than 25% of GMAC’s creditors signed up for the swap when closer to 75% were needed to make its bank plan work. This means the marketplace just declared GMAC yet another subprime borrower.
The article finishes off by saying that it is, however, unlikely that GMAC will succeed in their attempt to use filing for bankruptcy as a way to resolve their financial crisis:
GMAC is fast running out of options. General Motors is itself begging the government for billions of dollars to see it through the next few months. Cerberus Capital Management, the giant private equity firm that bought 51% of GMAC from GM in 2006, is in the same boat, asking Uncle Sam for money to keep Chrysler, another of its recent albatross acquisitions, from collapsing as hordes of credit-starved consumers, struggling to meet mortgage payments, have stopped buying cars.
GMAC said Wednesday it would extend its debt-equity swap through Friday in hopes of drumming up more interest. But in this economic Big Chill, the likelihood that more investors are going to step up seems remote, at best.
With the threat of bankruptcy looming ever larger, this mess is looking increasingly like yet another case of reckless lending practices coming home to roost and sets up the next episode in the ongoing restructuring of the U.S. mortgage market.
Don Boudreaux argues in his latest article “Bankruptcy doesn’t equal Death”, that whilst he personally disagrees with the fact that should the US Government not bail out the Three Big (auto manufacturers), they will disappear altogether, he argues that the same auto industry could use the process of bankruptcy to get more competitive - if not voluntarily then by force :

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can’t use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

As it happens, I doubt that GM, Ford and Chrysler will all stop operating without a bailout. Firms that together produce close to half of all new cars and trucks sold and leased in the U.S. each year are unlikely to find the market for their products suddenly too small to justify continued operations. (And if they do, what would this development say about the quality of those firms’ products and about the efficiency of their operations?)

And he goes on to conclude that if the auto industry as it looks today isn’t meant to be then so be it:

Restructuring under Chapter 11 will oblige Detroit’s Big Three to shrink, and perhaps even to merge together or with other automakers. This will unquestionably cause hardships to some workers and suppliers, but hardships no different than those suffered routinely by workers and suppliers in other industries whenever economic change reduces consumer demands for some products.

If Washington gives no special subsidies to workers and suppliers outside of the auto industry, why treat GM, Ford and Chrysler differently? Are their workers or owners more worthy? Not at all. The jobs and good pay that they’ve enjoyed were made possible by the very economic openness that now requires significant restructuring of these three firms. Their shareholders, workers and suppliers have no moral or economic claim on special treatment from government.

Donald Trump recently argued that the survival of General Motors, Ford and Chrysler is important to the long-term health of the United States, and continued :

It would seem to be that they should Chapter 11 it and the country should put up the financing,” said Trump. “You have to save the car industry in this country. General Motors can be great again. Ford can be great again. And Chrysler could be great.”

 Dismissing arguments that bankruptcy filings would spook consumers, Trump noted that a number of other major U.S. industries have survived, and even thrived, after court-ordered reorganizations.

 ”If you look at the airlines, I mean, I’d rather buy a car than fly in an airline that is in Chapter 11,” said Trump. 

The same article from MoneyNews.com quotes President-elect Barrack Obama for supporting the auto industry bail-out, however, he emphasizes that he wants to see change within the industry for the future:

“I think that the big three U.S. automakers have made repeated strategic mistakes,” Obama told reporters.

 ”They have not managed that industry the way they should have, and I’ve been a strong critic of the auto industry’s failure to adapt to changing times — building small cars and energy efficient cars that are going to adapt to a new market.”

Walter E. Williams of The washington Times argues that just because a company files for Chapter 11 it does not mean that their assets disappear into thin blue air but would most likely be re-purchased by other entities who would re-employ these and most likely to better use too:

When a firm routinely fails to turn a profit, there are bankruptcy pressures. The firm’s resources, workers, building and capital become available to someone else who might put them to better use. When government steps in with a bailout, it enables executives to continue mismanaging resources.

And he is certainly not shy to conclude on his views on bailing out The Three Big :

How much congressional involvement do we want with the Big Three auto companies? I would say none. Congressmen and federal bureaucrats, including those at the Federal Reserve Board, don’t know any more about the automobile business than they know about the banking and financial businesses they’ve turned into a mess.

Just look at the idiotic focus of congressmen when the three auto company chief executives appeared before them. They questioned whether the executives should have driven to Congress rather than flown in on corporate jets. They focused on executive pay, which is a tiny fraction of costs compared to $73 hourly compensation to 250,000 autoworkers. The belief that Congress poses the major threat to our liberty and well-being is why the Founders gave them limited enumerated powers. To our detriment, today’s Americans have given them unlimited powers.

Finally, this link gives you access to what Bloggers have to say about the Bail-Out vs Bankruptcy issue and provides an interesting insight into the tax payers and consumers’ minds so check it out.

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