Paulson's Message to Detroit: Drop Dead

Treasury Secretary Henry Paulson delivered tough talk directed at Congress rejecting any notion of allocating one penny of his $700 billion Troubled Asset Relief Program [TARP] towards the relief of the battered U.S. automotive sector. Mr. Paulson's testimony is a death blow to Detroit, Michigan and the Rust Belt at-large. The Heartland, a region decimated by the collapse of U.S. manufacturing, is indeed on life support. Mr. Paulson must reason that America shall function normally while its midsection remains under cardiac arrest.

The Big Three are lobbying Washington for an additional $25 billion from the Treasury - double the original $25 billion package approved to meet environmental directives implemented at the behest of the Energy Department. Says Paulson, "there are other ways" to resuscitate the dying industry - intimating that bailout package dollars shall be exclusive to financial companies. Paulson, a Democrat, has emerged to lead a group of hawkish, free-market Republicans that have dismissed rescuing Detroit from a debacle that is of its own doing.

The Motor City has made its own bed, and shall lay in it.

Pity Detroit. Kwame Kilpatrick, former Mayor and married man has been jailed for abusing city telecom services to send explicit text messages to a government aide that led to an obstruction of justice fiasco, the Detroit Lions football franchise are on the verge of mailing in a 0-16 winless season, the locale maintains the highest crime rate in the nation, and Motown property investments have produced nothing over the past decade. Indeed, Detroit, Michigan is the most miserable city in America.

Now this.

Congressional testimony, Wall Street, and the international consumer have exposed a Big Three group marred by mismanagement, fiscal irresponsibility, and impossibly curious product lines. General Motors (GM) stock has plunged to an outrageous $3 per share and a return to 1946 levels. Adjusted for global inflation, a $10,000 GM investment held for sixty years, would be able to purchase one flat panel television at today's prices.

Great.

The situation is beyond desperate. Awkward design and shoddy reliability have produced a lineup of vehicles unable to compete within the world's marketplace. All of Detroit's top selling models are gas guzzling beasts: Ford (F) F Series, Chevrolet Silverado, Chevy Impala, and Dodge Ram. Irrespective of any credit debacle, the sales outlook would be grim - reliant upon consumer behavior still smarting from $150 oil. This is a disgrace.

But it is our disgrace.

Detroit should be revered as a National Treasure, rather than despised as a has-been Oliver Twist untouchable street urchin. The embrace of the U.S. auto industry shall equate to more than nostalgic memories of horsepower, Corvettes, and Route 66. The embrace of Detroit is essential to the economic fabric of America. Today's credit bust shall serve as testimony to the grandiose risks associated with a gross Western commercial imbalance that is the consequence of accepting paper financials at the expense of real property, plant, and equipment.

Let us evaluate the footprint of General Motors. General Motors lists approximately 250,000 employees, globally. We shall assume an American workforce of roughly 200,000 jobs that are in danger of elimination. Critics will argue that the bulk of these jobs will be absorbed by international competitors and the heckling will intensify with onlookers arguing that the worst-case scenario loss of 200,000 jobs in a nation of 300 million people will be hardly noticeable. The informed will reason that statistics can always be massaged - investigating further.

First, General Motors manufacturing operations are centered within the Rust Belt at locales such as Lordstown, Flint, Toledo, Mansfield, and Ypsilanti. Foreign auto making operations are primarily within the Deep South at Greenville, Tupelo, and Georgetown, KY. Obviously, Upper Midwest citizens will not relocate to Dixie on whim - naively following the hope and prayer of landing auto industry employment. Secondly, General Motors lists over 1,000 suppliers that are also located within Middle America. Logically, these suppliers also have suppliers and must function in heavily populated Rust Belt states vital to the health of America.

Michigan, Ohio, and Indiana boast a U.S. Census estimated combined 2006 population of 27,887,169 - nearly 10% of the U.S. Hence, I would argue that the General Motors supply chain and its network of dealers carries a footprint of at least five million jobs, alone. The large influence is a characteristic of heavy manufacturing that employs legions of workers to build product, rather than computer algorithms to rearrange paper.

The fallout of allowing Detroit to fail far exceeds the price tag of an additional $25 billion in tax payer dollars. The consequences of inaction would be apocalyptic.

Granted, the words of Hank Paulson are the testimony of a persecuted statesman destined to be shown the door shortly at the behest of a new Obama Administration. Still, our intent remains purposeful. Our duty is to educate the general citizenry in regards to the importance of saving Detroit from its own self.

Stock position: None.

Comments

[Toolman:]

There are two underlying messages in this. 1) A bailout of American auto makers means a bailout of the UAW, and thankfully, they're NOT in favor of that. 2) Perhaps if these 3 "businesses" weren't sending all their jobs overseas, the argument about saving American jobs would hold some water.

File Chapter 11, and instead of re-tooling, they can re-open the doors to employees that WANT to earn their paycheck, not have it handed to them under the protective umbrella of the UAW.

UAW = Mob of the 21 Century = Organized Crime

2008 Nov 19 04:52 AM

[PeteK:]

Chapter 11 is the best way to start anew.
Many companies did that and are now doing well.
Toolman, you are right on the issue. For long term success,
Something must be cleaned up.
Chapter 11 means second chance, not death sentence.
Most Americans don't want to see GM gone but at the same time
don't want to see GM keep going on the same old failing path.

2008 Nov 19 05:46 AM

[Toolman:]

I just read another article and really had to laugh. The subtitle of the article read "Higher car prices, the end of incentives and vehicle shortages could occur if GM and other Big Three automakers don't get a bailout, according to experts."

What a load of BS! Have these "experts" left the confines of their cubicle lately? Shortage? Drive past a dealership sometime. Higher car prices? It's MUCH more advantageous to buy a good used car these days, as opposed to a brand new car losing up to $5,000 in value as soon as it leaves the lot. Shop around, don't buy brand new. And dealer incentives??? Please, the "BIG 3" seem to be in the farming business, raising sheep, because they certainly have gone out of their way to pull the wool over EVERYONE'S eyes.

The author of that article, and the apparent experts that were quoted, were fearful that we would see a flood of foreign cars hitting the streets of America. Wake up people, "domestic" cars are PRACTICALLY foreign cars any way! Made in Mexico, Made in Canada, Made in China is prominently stamped on most of the individual parts of a "domestic" car.

Do you really want to reward the "BIG 3"? Throw them a bone if they truly work to bring American jobs back to the US. Imported parts have done as much to hurt the US consumer, not to mention the unemployment rate, as the UAW has done.

2008 Nov 19 06:17 AM

[elsancudo:]

Shall we keep the UAW employed with wages, health benefits, retirement and health benefits after retirement that almost no one except for corporate CEO have while the rest of his fall into abject poverty? Sorry...come join us in our misery fellas.

2008 Nov 19 06:53 AM

[John Spencer:]

Looks to me like the government is going to let them go into bankruptcy. Comments were made that a lot of the parts in cars are made overseas anyway, which is somewhat true, but not a majority of the parts. That aside, so we let them go bankrupt, and then we have zero, no US based auto companies, only foreign car companies. Then we will complain that there is no competition and we are sending money overseas. Ok, fine, go ahead, let them go bankrupt and see what happens with what will be a huge experiment.

2008 Nov 19 08:10 AM

[epeon:]

Bailing out the big 3 by giving them cash is like bailing out an alcoholic with vodka. The big 3 are not businesses, they are social institutions designed to maximize employee returns, not stockholders and nor customers. And, that is the problem. Until these companies are fundamentally restructured, meaning that the UAW contracts are relegated to the dustbin of history, these companies will not be profitable. Giving them money will only delay the inevitable, it will not prevent it.

2008 Nov 19 08:12 AM

[Toolman:]

Open the driver's door of a "domestic" auto sometime and read the sticker on the inside of the door edge, "Assembled in Mexico". The Ford truck plant in Virginia has been shut down to move the assembly process to Mexico. MANY of the parts are made overseas, which only takes American workers out of the job, THEN the American auto industry can ensure that "mean time to failure" is maintained because they're made with lower quality.

Chapter 11 does NOT mean going out of business, it essentially wipes their slate clean of debt. There will still be American car companies, they will still be supported in the parts bins, warranties honored, etc. Employees being paid upwards of $25 an hour does not instill any pride in the job they do, it's just a paycheck every two weeks. The caring that goes in to the product that they're rolling out is gone. Why? Because the UAW has taken the intent of unions to a new level. Unions were formed to watch out for the safety of the employees, not to tell the company how to run their business. It's like paying millions of dollars to "professional" athletes to play a game, the public pays for it in the long run because their tax dollars keep the stadiums up and their dollars foolishly pay for the tickets, but THAT'S another blog all together.


On Nov 19 08:10 AM User 301276 wrote:

> Looks to me like the government is going to let them go into bankruptcy.
> Comments were made that a lot of the parts in cars are made overseas
> anyway, which is somewhat true, but not a majority of the parts.
> That aside, so we let them go bankrupt, and then we have zero, no
> US based auto companies, only foreign car companies. Then we will
> complain that there is no competition and we are sending money overseas.
> Ok, fine, go ahead, let them go bankrupt and see what happens with
> what will be a huge experiment.

2008 Nov 19 08:23 AM

[Kofi Bofah:]

Toyota just announced they will be cutting production today. I don't think the foreign automakers will pick up all of the slack.

Yes, Detroit has destroyed its own self. But, the situation is even more dire now because people that actually WANT to buy cars cannot get financing. The lending units of the Big Three are shackled, unable to access credit markets for short-term financing in order to function efficiently.

Who in their right mind would loan to these guys?

The U.S. Government is the backstop. The only institution with the cash, credit, and willpower to rescue Detroit.

Chrysler is private, and there is speculation that they will 'merge' with GM.

What do you think would happen to the Midwest without the auto industry? The Rust Belt would be the new Appalachia - without the scenery.

You all bring up many good points that I indeed agree with. But, I think that many are underestimating the fallout from the collapse of the Detroit.

2008 Nov 19 01:26 PM

[BlackyBlack:]

How come no one is talking about the credit derivatives written with GM as the reference entity? Something tells me that a GM bankruptcy would mean a massive payout on a lot of credit derivative contracts. Hmn, that might bring the financial system down. Again. So why isn't anyone talking about it?

2008 Nov 19 02:38 PM

[Mister Jimmy:]

You'll all likely get your wish and the Detroit 3 will fall. You thought 2008 was bad? You ain't seen nothin' yet.

2008 Nov 19 05:13 PM

[the_watcher:]

I'm just happy to be alive to witness all of this unfold. If I had read in a history text of:
1.)a white house that would turn its back on its own people while funnelling billions overseas;
2.)a wall street alum treasury secretary who swooped to save his buddies from their stupidity but said 'screw yall' to the manufacturing heartland;
I would not have believed it. This is better than any situation comedy / scary movie I've ever seen.

2008 Nov 20 08:37 PM