When discussing the Auto Bailout I think it's important that we frame the discussion properly, and recognize the fact that Detroit is asking the government for a loan (a loan they might've been able to get from the Private Sector if it weren't for the credit crunch), meaning that they're alleging that they'll be able to pay the loan back.
Meaning: that we shouldn't view this in the same manner as the original TARP program (buying toxic assets from the bank that may or may not increase in value some day), nor should we see this as a gift to auto executives per se as any funds received from the government will undoubtedly save the jobs of taxpaying citizens.
BUT
The fact remains that they're still asking to borrow money to prop up not only a broken system but arguably THE most broken system in American Business; any funds received will be used to buy Detroit time and enable business as usual more than it will be used to completely revamp the way these companies operate.
At the end of the day, Detroit's problem isn't the quality of the cars, the way the cars look, etc, etc, as General Motors (GM) and Ford (F) are still #1 and #3 in terms of market share in the U.S. The true problem is that Detroit is bloated and inefficient, hence the reason that they can lead in market share and yet make a fraction of the profits of competitors (if they even make money) with a fraction of the market share. Close the efficiency gap between Detroit and its foreign competitors and GM, Ford and Chrysler would all be profitable right now, even with the current economic downturn.
Can you name any other industry where the companies that are #1 and #3 in terms of market share are struggling to survive, whilst significantly smaller competitors have no problems generating several fold more in profit? Detroit sells more than enough cars to be profitable, they're just not structured in a way that allows them to be.
Detroit isn't asking for a loan to fund a major operational paradigm shift. They're asking for a loan to maintain their status quo of ineffective turnaround plans and bad overall management, and from a mathematical perspective it appears that the amount being asked for will only delay the inevitable for a couple of quarters (at best).
Just think about it: Detroit had a collective burn rate of $17.6 billion in Q3 of this year and is probably going to burn through a similar amount this quarter, so even if Detroit were to receive a $25-$35 billion cash infusion in January it's quite likely that any cost cutting measures (current and future) would be too little too late to prevent them from running out of cash sometime in 2009. After all, the economy is likely to worsen in 2009, these are companies that were losing money during the credit boom, and it's rather unlikely that demand will "return" to credit boom levels after the economy recovers.
Any efforts to save Detroit should be focused around closing the efficiency gap. Lending Detroit money to perpetuate or "tweak" their broken system will not accomplish this goal. Detroit isn't asking for this money to make key investments into their companies, they're asking for money so they can buy some time while they struggle to come up with a solution for their problems or the market "magically improves".
In short, my objection to Detroit's request for a loan from the Government is that all it will do is delay the inevitable, and there is no point in pumping money into a drainage ditch just so we can keep Detroit "alive" for another quarter or two.
The discussions in Washington shouldn't be focused on the terms of a loan package, they should be focused on how to facilitate some sort of "gentle bankruptcy" for Detroit, which minimizes the impact on the economy and Detroit's workforce. At this juncture, bankruptcy is the only way that Detroit can truly restructure and free itself from the myriad liabilities that are an impedance to profitability.
Anything less than this wholesale restructuring will only delay the inevitable at best, and waste precious resources at worse. It's time for Detroit and Congress to collaborate on a solution that fixes the underlying problem, as opposed to wasting taxpayer money on a delay tactic.
Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.
