Bailout Nation 2: General Motors

[editor]

I saw a UAW guy on TV the other day talking about the concessions his group is going to make and how the days of making $72/hour might soon be over.

Umm... excuse me? 72 dollars an hour? I had to back up the DVR to make sure I heard it right.

Sorry, I lost all sympathy for the auto workers at that point. If you're making more in an hour than most people make in a day, then you should have saved a few dollars for the rainy day that is now arriving.

[RedScare]

I saw a UAW guy on TV the other day talking about the concessions his group is going to make and how the days of making $72/hour might soon be over.

Umm... excuse me? 72 dollars an hour? I had to back up the DVR to make sure I heard it right.

Sorry, I lost all sympathy for the auto workers at that point. If you're making more in an hour than most people make in a day, then you should have saved a few dollars for the rainy day that is now arriving.

That is a myth. Worse, it is a myth known by the reporters who continue spouting it.

http://mediamatters.org/columns/200811250012

The $70 is the sum total of ALL labor costs, divided by hours worked by CURRENT workers. It includes base pay, benefits, healthcare and pensions for current workers AND retired workers. Base pay for a line worker is about $28.

[TheNiche]

Sub, you have to understand. The Big 3 is considered Domestic. Even though some of my beloved Nissans and those gawdawful Toyotas are built in places like Smyrna,Tenn. and San Antonio,Tx. they are still considered Foreign cars.

Firms with domestic assembly plants source parts from domestic and international suppliers (who source their parts from other domestic and international suppliers, and so on). The firms all also own foreign assembly plants which source parts from domestic and international suppliers (who source their parts from other domestic and international suppliers, and so on). The firms are all publicly traded on stock exchanges to domestic and international investors (which are backed by other domestic and international investors, and so on).

Logistically, there really isn't a distinguishing characteristic between Big 3 or "Foreign" manufacturers. They are all multinational companies. The only difference of consequence between any of them is where their executives and union leaders go to sleep each night.

There is no such thing as an American-made or a Japanese-made or a German-made car. Corporate entities have transcended the national entity (and nationalism). Your thinking is outmoded.

[barracuda]

White House, Democrats reach deal on $15 billion auto aid:

http://www.reuters.com/article/topNews/idU...20081206?rpc=64

[TheNiche]

Laughable. Maybe if the banks DID THEIR JOBS and would actually LEND the money that the US government has given them, some against their will - GM, Ford, and the rest would not need US Govt funding! At least our domestic car companies would DO SOMETHING with the money, MAKE something vs. a bunch of pencil-pushing, neck-tie wearing accountants/banks who take the money, hoard it - don't do anything with it - and hence don't really add any value. Why the US Govt sees it as imperative to give an order of magnitude more money, without any meaningful strings, with little question, to the non-sweating finance industry vs. the backbone of our manufacturing industry - that actually produces - is beyond me. All that is being asked is for consistency: lend to them all, or lend to none.

Oh revered and brilliant guru of high finance! I implore thee to settle my great curiosity: what happens to money spent in M&A activity? Where does it go? Who benefits? Or upon executing the transaction, does it just disappear? And why would the banks do such an outrageous thing as to buy other banks; and why is it outrageous?

You clearly have a sound understanding of the ways of money, as only a true hater of pencil-pushing, neck-tie wearing accounting professionals would. And your sweating fetish is clearly a divine omen of vast genius. But it begs the question from us lesser minds: what is the purpose of financial institutions? Oh, please do not strike me down! I mean no insult. I only want to learn from the almighty.

All hail BryanS. All hail BryanS. All hail BryanS.

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Get a clue. <--And I'm only using this phrase because the first one got edited away by a moderator. And please address my reply to you about these jobs loss projections that you're throwing around:

Not me. You don't have to disagree with me to make you an America-hater (which I say with some hyperbole). It's sending 3 million people to the unemployment line, which would cost us significantly more than any bailout, that's the issue. We added 500K last month. What's another 1, 2, 3 million more? We have the option to avoid that catastrophe. Just letting it happen would be tragic and un-American: because we would have just given up. That kind of attitude in 1940 and we'd all be speaking German and Japanese right about now.

And I know. We'll still have "domestic" auto production in this country after Detroit falls. All those workers could re-locate to the South and build BMWs, Mercedes, and Toyota Tundra trucks. Pathetic that it would have to come to that... because there was nothing wrong with the American products... or the workers that built them.

[Subdude]

Laughable. Maybe if the banks DID THEIR JOBS and would actually LEND the money that the US government has given them, some against their will - GM, Ford, and the rest would not need US Govt funding! At least our domestic car companies would DO SOMETHING with the money, MAKE something vs. a bunch of pencil-pushing, neck-tie wearing accountants/banks who take the money, hoard it - don't do anything with it - and hence don't really add any value. Why the US Govt sees it as imperative to give an order of magnitude more money, without any meaningful strings, with little question, to the non-sweating finance industry vs. the backbone of our manufacturing industry - that actually produces - is beyond me. All that is being asked is for consistency: lend to them all, or lend to none.

Not me. You don't have to disagree with me to make you an America-hater (which I say with some hyperbole). It's sending 3 million people to the unemployment line, which would cost us significantly more than any bailout, that's the issue. We added 500K last month. What's another 1, 2, 3 million more? We have the option to avoid that catastrophe. Just letting it happen would be tragic and un-American: because we would have just given up. That kind of attitude in 1940 and we'd all be speaking German and Japanese right about now.

And I know. We'll still have "domestic" auto production in this country after Detroit falls. All those workers could re-locate to the South and build BMWs, Mercedes, and Toyota Tundra trucks. Pathetic that it would have to come to that... because there was nothing wrong with the American products... or the workers that built them.

That is correct. Even if the "Big 3" fail we will have domestic auto production. This is a huge market that all auto manufacturers want to succeed in. Cars designed for America are for the most part unique to the American market, so it makes sense to manufacture in America. Furthermore, production in the US helps manufacturers hedge currency risk and saves transport costs. No matter what happens to US-based companies, this will remain a major auto manufacturing center. So what does it matter if the manufacturers are based in other countries? Witness the UK. Most of the local car firms folded years ago, yet Britain remains a major center for car manufacture and design. It may be a painful short term adjustment for the workers, but there is no reason to think that total automobile employment needs to decrease in the long run.

Back in the 1980s a lot of old airlines failed: PanAm, Eastern, TWA etc. I'm sure it was painful at the time, but are we worse off for it now? Isn't it fruitless in the long run to prop up companies like GM?

A lot of businesses are owned by foreigners, just like American companies have a lot of overseas subsidiaries. What is wrong with that? What on earth is so pathetic about American workers building BMWs or whatnot? I would be willing to bet they're glad for the employment.

This can't be compared to the bank bailout. That was unpleasant, but banks are central to the economy. Car companies are not.

We are not "GIVING" any tax dollars to GM, Ford, or Chrysler. We are giving them a LOAN... that they must PAY BACK.

First of all, since when is the Treasury supposed to be the bank of last resort? Second, I don't want to give them loans. I want equity. If we are going to socialize industry after industry then do it right. If taxpayers need to save GM then we should own it and at least get whatever benefit may accrue. Making loans gives the car companies too much leverage to say they can't repay and demand better terms or longer repayment.

And by the way, no, I'm not an America-hater.

[barracuda]

Firms with domestic assembly plants source parts from domestic and international suppliers (who source their parts from other domestic and international suppliers, and so on). The firms all also own foreign assembly plants which source parts from domestic and international suppliers (who source their parts from other domestic and international suppliers, and so on). The firms are all publicly traded on stock exchanges to domestic and international investors (which are backed by other domestic and international investors, and so on).

Logistically, there really isn't a distinguishing characteristic between Big 3 or "Foreign" manufacturers. They are all multinational companies. The only difference of consequence between any of them is where their executives and union leaders go to sleep each night.

There is no such thing as an American-made or a Japanese-made or a German-made car. Corporate entities have transcended the national entity (and nationalism). Your thinking is outmoded.

That's all true, but I think there is a significant level of R&D and other corporate investment that takes place primarily in the home country. I don't imagine that foreign automakers would absorb most of the white collar workers and other domestic employees in the event of a Big Three collapse. There's also the matter of where the profits and tax revenue goes (when the profits actually exist).

I always enjoy Jon Stewart's perspective on issues, whether he's right or not...

http://www.thedailyshow.com/video/index.jh...tic-explanation

[Subdude]

That's all true, but I think there is a significant level of R&D and other corporate investment that takes place primarily in the home country. I don't imagine that foreign automakers would absorb most of the white collar workers and other domestic employees in the event of a Big Three collapse. There's also the matter of where the profits and tax revenue goes (when the profits actually exist).

As I said, most American cars are unique to the American market, so there is every reason to think that a lot of R&D and other investment will remain in America. Toyota etc aren't dummies - they have a vested interest in being successful in the US market. As for the profits, what profits? And if they were profitable they wouldn't be begging the government to bail them out. If some Chinese firm wants to have a go at selling Saturns I say let 'em at it. If they can manage to make a buck at it then they deserve the profit.

[TheNiche]

There's also the matter of where the profits and tax revenue goes (when the profits actually exist).

I readily admit that our tax policy is messed up. Issues such as this should have no implication on tax revenues.

[barracuda]

Back in the 1980s a lot of old airlines failed: PanAm, Eastern, TWA etc. I'm sure it was painful at the time, but are we worse off for it now? Isn't it fruitless in the long run to prop up companies like GM?

I think many would argue that airline service is much worse than in the 80's

I don't think anyone is arguing that GM and Chrysler (the two in need of a bailout) should be propped up indefinitely. If they can't create a sustainable business model, they should be allowed to fail. The problem is that we are going through unusual circumstances. Even though GM and Chrysler have made many a bad decision over the years, it's the credit crisis and recession that are driving them over the ledge. People simply aren't buying cars right now, in part because of the recession, and in part because they can't get car loans unless they have a perfect credit rating. And, because of this dire situation, no financial institution will loan money to these behemoths.

With most any other industry, a company in this situation would be heading straight to bankruptcy. But the domestic auto industry is entrenched and the impacts would be devastating to the economy. That is the only reason I support a bailout with conditions.

Here is what White House spokesperson Dana Perino said of the bailout.

We hope to continue to make progress toward assistance for the automakers based on important principles

[TheNiche]

I don't think anyone is arguing that GM and Chrysler (the two in need of a bailout) should be propped up indefinitely.

Living in Texas, it is easy to underestimate the intentions of the UAW.

The problem is that we are going through unusual circumstances.

The business cycle is a normal circumstance.

And, because of this dire situation, no financial institution will loan money to these behemoths.

Standard & Poors rates GM's bonds as CC. Moody's rates them Ca. And we've been talking about their potential demise for a long time, now, during economic peaks and troughs. This isn't a temporary circumstance and the private sector won't give them money because the companies suck.

With most any other industry, a company in this situation would be heading straight to bankruptcy. But the domestic auto industry is entrenched and the impacts would be devastating to the economy. That is the only reason I support a bailout with conditions.

Entrenched. What does that mean? How are they "entrenched" and Toyota is not "entrenched"? Are you entrenched? Am I? If not, what can I do to become entrenched that the government will make a BS loan to me that I can squander away in the name of Americanism?

I have enough faith that, done right, this bailout will provide enough life support for these companies to fix their s*it and start paying us back once the economy improves.

Do you plan on buying any of GM's, Ford's, or Chrysler's corporate bonds if the bailout occurs? If you're willing to put your money where your mouth is, and you're right, you'd be set for life.

[Subdude]

I think many would argue that airline service is much worse than in the 80's

I don't think anyone is arguing that GM and Chrysler (the two in need of a bailout) should be propped up indefinitely. If they can't create a sustainable business model, they should be allowed to fail. The problem is that we are going through unusual circumstances. Even though GM and Chrysler have made many a bad decision over the years, it's the credit crisis and recession that are driving them over the ledge. People simply aren't buying cars right now, in part because of the recession, and in part because they can't get car loans unless they have a perfect credit rating. And, because of this dire situation, no financial institution will loan money to these behemoths.

With most any other industry, a company in this situation would be heading straight to bankruptcy. But the domestic auto industry is entrenched and the impacts would be devastating to the economy. That is the only reason I support a bailout with conditions.

I'm sympathetic with what you're saying. The problem is that a sustainable business model is one that carries you through bad times as well as good. They obviously haven't been able to do it so far; why should this be different? How do we determine if a business model is sustainable if not through the test of a downturn? Since they have shown they haven't been able to create a sustainable business model, as you say they should be allowed to fail. If they hadn't made bad decisions over the years then the credit crisis mightn't have pushed them over the edge. Remember - Chrysler has been bailed out before. How many times do they get to return to the trough? Furthermore, we don't know how long the financial crisis will last. Nobody knows, but it could easily be two years or more before the economy recovers. It is no big secret that the amount of money they are being offered won't see them through that long. How long before we are asked to pony up again to prop them up?

To my earlier point, if the bailout is to come with conditions those conditions can best be enforced if we take an equity stake, not give them loans.

[barracuda]

Entrenched. What does that mean? How are they "entrenched" and Toyota is not "entrenched"? Are you entrenched? Am I? If not, what can I do to become entrenched that the government will make a BS loan to me that I can squander away in the name of Americanism?

Entrenched in that they have a large manufacturing infrastructure with thousands of suppliers and millions of jobs dependent on their existence. They are essentially a huge industrial ecosystem that cannot simply be reabsorbed by other companies. Different suppliers manufacture parts specific to these companies. It's not realistic to believe that foreign automakers will start ordering from these suppliers overnight if one of the big three fail. These suppliers would go out of business, and hundreds of thousand of jobs could be lost as these failures ripple throughout the economy and affect interdependent businesses.

Do you plan on buying any of GM's, Ford's, or Chrysler's corporate bonds if the bailout occurs? If you're willing to put your money where your mouth is, and you're right, you'd be set for life.

I don't have any direct investments in manufacturers as they tend to be slow growth. I'd be interested if one of them introduced game changing technology and became a true leader again. This is what GM is now saying they will do; if they really do follow through I would certainly consider investing.

[TheNiche]

Entrenched in that they have a large manufacturing infrastructure with thousands of suppliers and millions of jobs dependent on their existence.

I'm one person completely dependent upon the state of the economy and only one job depends on me. And my industry sucks too. But then I'm not asking for billions and billions of dollars.

Where's my money!?

They are essentially a huge industrial ecosystem that cannot simply be reabsorbed by other companies. Different suppliers manufacture parts specific to these companies. It's not realistic to believe that foreign automakers will start ordering from these suppliers overnight if one of the big three fail. These suppliers would go out of business, and hundreds of thousand of jobs could be lost as these failures ripple throughout the economy and affect interdependent businesses.

How many times has Chrylser traded ownership? GM is looking to sell Saab. Ford sold its stake in Mazda and is looking to sell Volvo.

I'm sorry, but I find it exceptionally difficult to believe that any of these companies are just going to *poof* go away.

I don't have any direct investments in manufacturers as they tend to be slow growth. I'd be interested if one of them introduced game changing technology and became a true leader again. This is what GM is now saying they will do; if they really do follow through I would certainly consider investing.

pfft. Excuses, excuses.

I'm talking about buying corporate bonds for which the price has become ridiculously discounted based upon other people's doubts that the company is a going concern and will default without any residual value. When you prove them wrong by GM very simply not going bankrupt, the price of the bond adjusts upward and you probably end up making back many times the amount of your original investment, all in the span of a year or so. Slow growth my ass!!!

[jm1fd]

As I said, most American cars are unique to the American market, so there is every reason to think that a lot of R&D and other investment will remain in America.

Really? A guy in Tokyo can't design a water pump that will work just fine in a car built for the USDM?

Toyota spent a ton on R&D to build the Prius, which is of course sold here. Why didn't they do the R&D for that car here in the US? I mean we're consuming 60% or more of their units produced. Every reason to think the R&D would be done here...

[RedScare]

I don't have any direct investments in manufacturers as they tend to be slow growth.

This statement made me laugh.

[barracuda]

I'm one person completely dependent upon the state of the economy and only one job depends on me. And my industry sucks too. But then I'm not asking for billions and billions of dollars.

Where's my money, bitc*!?

If you declare bankruptcy it's not going to affect millions of people.

How many times has Chrylser traded ownership? GM is looking to sell Saab. Ford sold its stake in Mazda and is looking to sell Volvo.

I'm sorry, but I find it exceptionally difficult to believe that any of these companies are just going to *poof* go away.

I didn't say the company would go "poof", but there will be massive job losses. Even the Japanese automakers are fearful if one of the big three fails, as this would cause failures of parts suppliers and result in parts shortages for major manufacturers with facilities in the U.S.

http://www.time.com/time/world/article/0,8...1864667,00.html

pfft. Excuses, excuses.

I'm talking about buying corporate bonds for which the price has become ridiculously discounted based upon other people's doubts that the company is a going concern and will default without any residual value. When you prove them wrong by GM very simply not going bankrupt, the price of the bond adjusts upward and you probably end up making back many times the amount of your original investment, all in the span of a year or so. Slow growth my ass!!!

I have at least 25 years until retirement, so bonds aren't really my focus. Besides, I'm not sure how that's really relevant to my original point, which is that I don't want the economy to implode further.

[barracuda]

This statement made me laugh.

I think you know what I mean. Car manufacturing is a 100 year old industry, and it's not exactly a high growth industry. Demand is not going to dramatically swing upwards like, say, a company that sells iPhones. It's rather boring from an investment perspective, although I would have thought it to be a safe and steady investment before the recent crisis.

[N Judah]

We've been subsidizing the car-dependent lifestyle from top to bottom for the better part of a century. Why stop now?

I think everyone is just mad because they missed their chance to take a stand re: the bank bailouts and are trying to make up for it.

[RedScare]

I think you know what I mean. Car manufacturing is a 100 year old industry, and it's not exactly a high growth industry. Demand is not going to dramatically swing upwards like, say, a company that sells iPhones. It's rather boring from an investment perspective, although I would have thought it to be a safe and steady investment before the recent crisis.

I agree that the auto industry is boring from an investment perspective. Why buy GM, which dropped from $93 in 2000 to $4 today, when you could buy something exciting like Yahoo or Sun Microsystems, which dropped from $253 in 2000 to $3.50 today. Now THATS excitement!

[Subdude]

Really? A guy in Tokyo can't design a water pump that will work just fine in a car built for the USDM?

Toyota spent a ton on R&D to build the Prius, which is of course sold here. Why didn't they do the R&D for that car here in the US? I mean we're consuming 60% or more of their units produced. Every reason to think the R&D would be done here...

Fair point, but I wasn't saying that no R&D work would vanish. Of course some would. I was only pointing out that because of the uniqueness of the American market other manufacturers have every motivation to maintain a footprint larger than just a sales and distribution.

I also agree that now is an awful time to spring that kind of unemployment on the economy, although I think recovery could be faster than people expect. I would be much more comfortable if taxpayer money were used to tide over the unemployed with generous assistance, rather than trying to keep dinosaurs alive. I suspect this would be cheaper for the taxpayer as well. I know this sounds like typical heartless capitalism, but right now a little "creative destruction" seems to be in order.

[houstonmacbro]

I agree that the auto industry is boring from an investment perspective. Why buy GM, which dropped from $93 in 2000 to $4 today, when you could buy something exciting like Yahoo or Sun Microsystems, which dropped from $253 in 2000 to $3.50 today. Now THATS excitement!

I think one thing to remember in investing is that eventually ALL bubbles burst. When the prices are at their high, and do not seem to be moving upwards any more, that is probably the time to get out.

Think about oil. Before its recent slide it hit a high of around $140-$145 ... it wasn't moving much and started small slides downwards. That was probably time to get out of that market (like now is probably the time to get in).

[TheNiche]

If you declare bankruptcy it's not going to affect millions of people.

That's why I'm not asking for billions of dollars. I only want my fair share of the loot.

I didn't say the company would go "poof", but there will be massive job losses. Even the Japanese automakers are fearful if one of the big three fails, as this would cause failures of parts suppliers and result in parts shortages for major manufacturers with facilities in the U.S.

http://www.time.com/time/world/article/0,8...1864667,00.html

If it is that threatening to their supply chain, then you would expect that automakers would have motive to buy and operate all or peices of the Big 3 immediately upon their entering bankruptcy. They may very well do this anyway, once all of the labor and pension obligations have been unsaddled and the Big 3 actually have the opportunity to turn a profit.

Either that, or the necessary suppliers are going to have to raise prices to stay in business. If the suppliers go under, then they will no doubt sell--or more likely reorganize and continue operating--their divisions that are still producing parts that are in demand. There's more than one way to skin a cat, but I guarantee you beyond a shadow of a doubt that if there is demand for an automotive part that is currently being made, it will continue to be made.

I have at least 25 years until retirement, so bonds aren't really my focus. Besides, I'm not sure how that's really relevant to my original point, which is that I don't want the economy to implode further.

This is a speculative play in junk bonds, not a core investment. There's a reason I'm using junk bonds as the investment proposition, which is that their pricing is much more closely aligned to short-term cash flow and default risk than that of a stock (especially for a company that has no assets). You claimed that you believed that the government bailout would be successful, making them able to avoid bankruptcy, and an investment in GM corporate bonds affords you the opportunity to multiply your investment many times over in very short order (and since retirement is at least 25 years away, that is the kind of high-risk high-reward investment that should be on your radar--I don't care what Suze Orman tells you).

It sounds like you don't really have a good understanding of how bonds work. You should not invest beyond your level of competency. More to the point however, you should not put out BS financial forecasts when you have zero practical understanding of corporate finance.

[Subdude]

More to the point however, you should not put out BS financial forecasts when you have zero practical understanding of corporate finance.

And you should stop using this board to flame other members.

[N Judah]

A GM bailout would be better categorized as being part of Obama's forthcoming massive infrastructure investments. We want to add jobs, not reduce them.

[TheNiche]

A GM bailout would be better categorized as being part of Obama's forthcoming massive infrastructure investments. We want to add jobs, not reduce them.

I've got to agree with Subdude. I'd rather see elevated unemployment levels and increased unemployment benefits from the government than efforts by the government to prop up unhealthy companies. That approach yields a stronger economy with more secure jobs in better-capitalized firms once the labor market shakes out.

No matter what happens, there will still be a demand for cars, and the demand will still be fulfilled. Maybe we need to produce fewer cars. And maybe the laid off labor could be used elsewhere in the economy to better effect.

It would be a huge mistake, however, to view employment as an entitlement or as a component of 'the American dream'; much as it was a mistake to view homeownership in the same light. Jobs are not an end unto themselves.

And you should stop using this board to flame other members.

I'm only calling it like I see it.

[plumber2]

Why do they have to undo their labor and pension obligations? These pensions are historical costs that a mature industry accumulates over years. Will Toyota be allowed to unload it's pension obligations in several years when it too becomes squeezed by outside market forces?

And thank you Red Scare for clearing up the myth that UAW autoworkers make $72 per hour. That's one of those 'News Bite" quotes that just gets uninformed peoples attention. As an example, I was approving an invoice the other day from a group of consultants on one of my projects. The invoice included $250.00 per hour for a principle to review a $150.00 per hour engineer. I could make the case that these guys are not worth $50.00 per hour, which in reality is closer to what that person is actually getting paid. The "billing" dollars have all kinds of overhead and burdens included in it, just like the $72.00 per hour autoworker wage.

[TheNiche]

Why do they have to undo their labor and pension obligations?

To become more competitive relative to foreign firms which are not burdened by a legacy of labor cartels.

[Fringe]

Had to share this:

[TJones]

Better idea !!! Take the $25 to $35 billion that they want, and simply have the Govt. BUY $25 to $35 billion in Big 3 product, an even split among the big 3. The Govt. can then pick through what it needs for their fleets, and the rest can be used in a lottery of sorts for we the taxpayers. You have to actually pay taxes in order to benefit from the lottery. If you win the car lottery, you will pay a flat tax only on the car. It would still be a loan to the big 3 though, and they would have to pay back the money over a 10 year period.