Let's Buy Detroit Outright

U.S. automakers are after a bridge loan that amounts to more than their entire net worth in terms of market value. If Uncle Sam is entitled to AIG's assets (NYSE: AIG) in exchange for a bailout, then why shouldn't we also take conservatorship of the auto industry. After all, the best collateral is asset ownership.

This way, with proper oversight, we can ensure sincere effort toward reform from automakers and the UAW. The reward would be eventual recapitalization of a leaner, meaner and more competitive auto industry. That would mold a survivor that wouldn't drift precariously at every economic trough. It would be one that would employ Americans at lower average pay, yes; however, it might also employ more Americans as the companies regain market share and find more reason to produce cars at home. Still, be careful, because it's the net assets we would own. The only way we could defend a loan over ownership is if we anticipate future bankruptcy as highly possible, and ensure first lien. It's clear that the government does not want bankruptcy though, so let's buy Detroit!

What Makes Them Different?

Rescue from the brink should come at real cost. The government, via the Treasury especially, has not offered free money (or near free) to other firms, so why should Detroit get preferential treatment? One might argue that Citigroup (NYSE: C) got a sweet deal, but Citi was not about to go under just yet. Lehman Brothers couldn't say the same, and it is nonexistent. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) were taken under conservatorship for the sake of America! Bear Stearns and IndyMac shareholders lost everything, and the shareholders of Wachovia and Washington Mutual didn't do much better.

Because Chrysler got a bridge loan back when Lee Iacocca led the company's rise from the depths of peril, automakers have precedent to stave off lost equity interests. Do they deserve it though? One thing is for sure; if they get it, AIG's former CEO and one of its largest shareholders, Maurice "Hank" Greenberg, would have the right to cry bloody murder! The man lost a great portion of his entire net worth because of how things unfolded around the insurer's government led resurrection. What makes Greenberg any less worthy of salvation than Cerberus Capital?

Beggars Can't be Choosers

If you don't like it, tough luck. You should not have gotten your company so precariously close to decimation then! Beggars can't be choosers. The question keeps coming up, what can these companies put up for collateral for such a "bridge loan?" While General Motors' (NYSE: GM) market cap is currently about $2.7 billion, its enterprise value is estimated at $32.25 billion and book value is negative. However, its assets hold immense value.

GM is asking for a $12 billion loan while it aggressively cuts costs so it won't need more. Theoretically, it could be acquired for that much or less, based on market cap, which is of course impacted by its precarious situation and current cash flows. Would you lend a company money that you could buy outright control of for equal or less value? I wouldn't, unless I was the government. The worst case scenario for an equity acquisition is bankruptcy, liquidation and loss of investment.

Here's Why You Might Lend to, Instead of Own, GM

As a creditor with a likely first lien on assets, bankruptcy does not likely result in worst case loss of total investment. Liquidation of assets would return the lent money back to the government in some form, and maybe even in whole. The government could tie the loan to specific assets as well, but an overriding first lien works best. Still, that might violate other interests, driving lawsuit. But, when you're the government, you can guarantee those other covenants are insured. Maybe you're worried that GM's liabilities are greater than its assets? Well, much of those liabilities are debt that would be subsidiary to the government's. Aha! we hear you saying...

I say, if we are really serious about keeping these companies from bankruptcy at all cost, then our acquisition of them commits us to it. While it might cost us more in the end, it would also likely reward taxpayers more. GM's 52-week high this year was 6.5X more than it's current value. "But Greek," you're screaming, "that contradicts everything America stands for; that goes against capitalism!"

What if the government just keeps its GM afloat until economic recovery? While it might take until the 2011 time frame that Ford (NYSE: F) points to, wouldn't auto demand eventually recover to at least prior levels? Well, capital should be harder to come by for unqualified borrowers who are no longer able to still get a car, as they might have in the past; so there's not a clear yes answer to that question. However, overriding global development and growth seems to ensure it. In that case, maybe massive shrinking of the companies doesn't make so much sense. In normal economic conditions, the Detroit three wouldn't be as ready to leverage operations to exploit demand when the time came. Maybe employee union concessions and some other fat cutting might be enough. Or maybe they just got too big. More asset sales or resizing really seem necessary.

GM's plan offered up to Congress also speaks of another 20K layoffs. Is that why we're giving them money, so they can fire more folks? Well, 20K lost jobs is still far better than 1 to 3 million. We will have to shrink these companies, and we will have to undo some of the gains made by the UAW, the strongest union in the world.

When a US automaker makes more than some folks who sacrifice years of their lives to schooling, not to mention the debt they burden themselves with to do so, well, that sure seems out of balance to me. Why would I bother going to school or reading one book if I could land a job on the line. To this question, I hear a lot about how hard these guys work, and the sacrifice born by their bodies. I don't think the 65 hour work weeks I put in without overtime or big bonuses were easy either. I think a lot people work hard at great sacrifice to their physical and mental health, but not everybody has as strong a union as the UAW behind them. Also, everybody thinks they make less than they're worth. At least executive compensation needs inspection. My goal is not to belittle another man's work, nor judge him by the size of his paycheck. I'm just making a point that auto workers have done pretty well in recent years, and that's a great testament to their union. However, it's helped to create a competitive cost advantage for foreign rivals.

Okay, okay, those sweet deals are gone now, I know. They've been grandfathered to some, but weeded out of more recent contracts due to UAW concessions already made. Still, the cost advantage Toyota Motors (NYSE: TM) and Honda Motors (NYSE: HMC) still enjoy are not because of child labor cheating. More UAW concessions are necessary and they're coming. The UAW understands it has to do its part for the sake of the industry's survival.

The only way to ensure 3 million employees keep their jobs, for the most part, and to be certain these companies have enough bargaining power with the union, is to buy them outright (or controlling interest). As socialist as this sounds, it may be the best way to protect the industry from itself. Would the union fully grasp the levity of the situation and give back enough otherwise; and would management think enough about the employees or the greater good otherwise? Their actions have been questionable in the past. Heck, automakers fought against the turn signal! The turn signal! I think many of us would agree that they've put profits before safety and fuel efficiency often enough.

So, as it turns out, Main Street isn't much better than Wall Street is it... Gosh, the ugly side of capitalism has never been so exposed. If only people could regulate themselves, maybe greed wouldn't ruin us. But it's not capitalism I blame. I'm a pure capitalist! It's not guns that kill people; people kill people. Look inside yourself and ask, "am I proud of what I've become? Would my father be proud of me and my actions..." Ask those questions of yourself, whether you're on Wall Street or Main Street Detroit. Right now though, it's time for poor old Uncle Sam to say, "I'm your daddy!"

I'm looking forward to your comments, and please don't direct your anger at me (target my opinions freely though). I'm just looking for answers and progress, same as you.

Comments

[Pork:]

Markos, How much do you make sitting on your butt telling your opinion? You should try to work the line in a auto factory, I doubt you could last an hour. When you want to talk about the pay and benefits of the auto workers why don't you tell everyone what you make. And it's people like you that don't really understand the consequences to the economy if the autos go under. Also if you really want to see the government take them over and run them, you should go live in a different country.

2008 Dec 05 05:08 AM

[Tim H.:]

Markos I don't actually disagree with your point. If it forces the auto makers to produce a profitable company and tax payer money involved that saves millions of jobs. Then yes the government has every right to put in place restrictions etc... Even to point what you suggest until at least the loans are payed back. I call them loans. One thing about the workers. Analyst keep bringing up the health care costs of UAW versus costs of say Toyota per car sold. I think it's what $1600 versus $200. But Markos (I like see a reply) a company like Toyota healthcare costs are not as high because the government of Japan and other foreign government has some kind of national health care program that takes the burden of health care costs off their companies backs unlike here in USA. So if this country would reform it's healthcare it would help all USA companies would it not. It sure would help the automakers. Unlike previous post I am not disparaging you Markos. You offered an idea and I just pointed out a problem in this country related to the costs of healthcare in that agrument about the costs per car. This goes for all american made products versus foreign competition. This country is at a disadvantage competing in the world economy because of health costs burdens on american companies. Instead of bailing out companies like BIG 3 automakers. maybe billions of that bank bailout should be used to reform healthcare which would not be a direct bailout but indirectly help ALL american companies would it not?

2008 Dec 05 07:15 AM

[hiho tonto:]

Here's an idea: Why doesnt the oil industry bail them out...Cars and oil..oil and cars...The oil industry has been receiving record profits due to the big three's ignorance on making cars that get the same mileage for the past twenty years...or maybe, the two are more related than we know.
I believe the citizens of our country should receive the entire bail out and we can decide which companies make it and which do not. The American people have been getting 'stiffed' by the banking and auto industry for years. Now we have to use our tax payer money to bail them out becuz even after they screwed us they can't make their business profitiable. So this is like getting screwed twice as hard. They get more of our money...so then they will overcharge us again to "borrow' our money.
I believe our entire system needs overhauled. Starting with congress...I strongly believe those people should make the median income in that state no more no less. You can only have two terms at office and you are done! No more living off the taxpayers for your entire life. This way more people would have to become aware of all this corupt law maker policies.
Second, your bring our troops here to guard our borders and quit letting aliens in our country to live off tax payers, make them go home or let them be 'removed'. Next, you clean out all of the convicts setting in jail, eating and getting on the net with tax payers dollars....How much has Manson wasted in prision(tax payer money) That, my friend so skim off enough tax payer money to ensure free health care to all American Citizens.

2008 Dec 05 07:48 AM

[The Greek:]

I should make one point first. I believe the auto industry should not go bankrupt. I beiieve it should be supported, but through acquisition or signficant cost and assurances of reform and restructuring. And I agree, health care reform is welcomed by me.

Answering the comment of "Pork" again, where he assumes I couldn't last on the assembly line.

I'm pretty darn sure I could last on the line, as anyone who knows me can attest. From age 11 through college, I worked with my father in construction. I lifted cement blocks that weighed more than me, and towed bags of shingles up ladders, and wheeled carts of cement through mud.

I didn't buy luxuries with income, I bought stocks, and I started my career learning investing lessons the hard way from age 16. My first job as a mutual fund accountant, started at $19,500. After grad school (financed with more loans), I started as a stock analyst at $53K, and after working my tail off and becoming the 2nd best stock picker of 90 global analysts in my firm (over five years of free picking) I was finally making $153K (with bonus included), and that's very low for Wall Street (and my performance), very low.

In my life, I've delivered pizza, washed dishes, bused tables, cooked, dropped leaflets. After college and grad school, I worked four to five to six hours longer than 99% of my peers on Water Street (before 9/11 - 3 hrs after), Saturdays and often Sundays, so even sitting on my butt, I worked my tail off. I've been tired my whole life, but I never quit. I could handle the assembly line with my eyes closed and legs tied, but that's not saying it's easy to do my friend.

Now, you were interested in how much I make now. Well, running my blog and building my businesses, I do the jobs of ten people, working from sunrise to well after most go to bed, for very little reward, as all start up businesses see. I'm a blue collar kid who got everything in his life the hard way. NEVER assume... God bless.

My point is, Detroit needs fixing, or it wouldn't be where it is. A lot of fat has been built into our economy, from Wall Street to Main Street. We've got some hard years ahead of us here, and a big challenge. We have to get back to basics of hard work, honest wages and we need to take a good look at ourselves and instill ethics and moral values back into our lives, our country and mankind.

2008 Dec 05 11:57 AM

[The Greek:]

I've been listening to the testimonies off and on today. "hiho tonto" indicated that he thought the oil industry should drop some change the way of the autos, since the two were in bed together.

Heard a Congressman mention funding possibly coming from energy allocated funds, those earmarked for alternative energy auto development.

On this topic, I think it is noteworthy that the circle of consumption and demand between SUV and gas guzzling vehicles, the lack of hybrid development or fuel efficiency high bar setting, and gasoline demand have certainly benefited both industries. The oil industry's time is coming, especially for those who ignore or are passive to alternative energy development.

We can save ourselves some dough in the long run if we insure the auto industry puts forth more real effort toward new technologies to run the power train.

Greek

2008 Dec 05 01:19 PM

[303820:]

WHAT IS GM GUILTY OF FOR THE LAST 100 YEARS? PAYNG IT'S WORKERS GOOD WAGES? TAKING CARE OF IT'S WORKERS HEALTCARE? PENSIONS BENEFITS FOR MILLIONS OF WORKERS AND THEIR SPOUSES? MILLIONS OF DOLLARS TO CHARITIES? MILLIONS $ TO CITY SCHOOLS? $5000 REBATE TO COSTUMERS AFTER 9/11 TO KEEP THE ECONOMY GOING? HELPING THIS COUNTRY DURING WWII?
SHAME ON YOU AMERICA! SHAME ON YOU WASHINGTON!

THE QUESTION IN WASHINGTON THIS WEEK SHOULD NOT BE, WHAT CAN DETROIT BIG THREE DO TO BECOME VIABLE. IT SHOULD BE, CAN THE HYPOCRITES (POLITICIANS) MAKE DETROIT VIABLE BY CREATING JOBS!

THEY THE POLITICIANS SHOULD TRADE PLACES WITH THE BIG THREE C.E.O.S... THEY THE HYPOCRITES CREATED THIS MESS BY SHIPPING OUR JOBS TO SLAVE LABOR COUNTRIES....WAGNER SHOULD ASK THEM ....WHAT ARE YOU DOING FOR ME? WHAT ARE YOU DOING FOR MY WORKERS.

2008 Dec 05 03:54 PM

[303820:]

WASHINGTON HAS DESTROYD THE AMERICAN AUTO INDUSTRY BY SHIPPING OUR GOOD PAYNG JOBS OVER SEAS,

2008 Dec 05 04:07 PM

[The Greek:]

I hear you. There's no doubt something must be done. But, let's face it, that the truth is somewhere in the middle of the extreme arguments for and against. CEO compensation has gone too far for one, hasn't it? Congress brought up the vast gulf that exists between Japanese and US executives. It's huge. Even with all the media scrutiny, liability risk, etc, hasn't it just gone too far? Isn't compensation simply beyond worth; and on the other end, hasn't media stepped over its bounds, and turned free press into freedom to ruin. We all need to take a close look at ourselves, and how we have pillaged and raped and destroyed by perverting the freedoms taken for us by our founding fathers, by their blood. We need to be like them again, or at least like their vision for us.

2008 Dec 05 11:19 PM

[Matthew J:]

Wallstreet greek'
You lost me at




























Wall street greek, You lost me at "I lifted cement blocks that weighed more than me". Manipulation of the yen, foreign government support and utilizing "right to work" laws that prey on unprotected workers make up most of that difference. I'm glad you love the transplant/WalMart model of business so much. You know, the one where you use up a worker for 30+ years, then kick 'em back to Uncle Sam to take care of them after that.

2008 Dec 06 12:43 AM

[rffrydr:]

AIG is a paper house; GM anything but. You sure you really want to own all that? It's heavy....heavier than your cement blocks way back when.

Yeah, it'd be great if we could make cars like we make ipods. Get real, my man. You're right--way to much time in blogosphere.

2008 Dec 10 10:00 AM

[The Greek:]

You're right about that. We traded jobs for profits dangerously. Too many jobs are now based in a country I'm not sure will always be our friend. And you're right about child labor. And you're right about the unfair marketplace. Be careful though, because protectionism turned a recession into the Great Depression. We should learn from our mistakes. There's a welcomed dependence between the U.S. and China, because of trade and money. In the end, that may be the thread that keeps the two from war. Or, it may be war that unravels a illusory link. I've been warning of this to friends for some time. I know America understands the dependence between global trade partners AND the horror of war, but I'm not sure China does, or more importantly, its leadership. I know Russia does not. God bless America. I want the best for Americans. I want the American dream for everyone. I'm on your side of the argument as much as I'm saying, we need to bite the bullet to get through this.

Jan 19 08:55 AM