Vote on Auto Bailout Sparks Senate Debate

The legislative powers in Washington D.C. believe that they have reached an agreement in principle to a sweeping bailout of the auto industry. Word is that the vote passed in Congress already Wednesday morning with little trouble. The newest iteration of the plan has the government loaning the auto makers $15 billion initially, giving General Motors (GM) and Chrysler time to stave off bankruptcy while a long term restructuring and loan package is determined. The plan also calls for the initiation of a new “car czar” to oversee the whole process, and this czar will have far reaching authority to lead the restructuring effort. Of course “czar” has been used to describe other leaders at the forefront of government initiatives, but never has it seemed more appropriate than as the head of a quasi-socialist bailout program such as this. The auto bailout should pass with little trouble in the house but could meet significant opposition from Senate Republicans, who are pushing for amendments.

A few significant issues come to mind, not the least of which is the question of how much will this actually change the industry for the better? In the media coverage of this initial $15 billion loan, there has been little discussed about how the companies are going to reign in labor costs: the Achilles heel of the industry. The United Auto Workers union has begun to make statements that they were willing to work with the automakers in order to restore their solvency, but is this simply a ploy in the short term to keep the gravy train from derailing? Also, how will this bill treat emissions standards proposed by the government? Here you have an industry that cannot make it another quarter without a bailout from the government; it’s probably not the time to be implementing emissions standards that will further prohibit profitability. Let’s make sure that the company can survive before we start imposing restrictions on their business.

We continue to be in favor of a Chapter 11 restructuring that would allow a bankruptcy judge the ability to cast away the labor and other contracts that are making these companies uncompetitive. However, now that a bailout (possibly with some additional tweaks) looks inevitable, it might be the automakers not participating in the bailout that truly benefit. As everyone who has followed this saga has undoubtedly heard, if these American automakers were allowed to fail (assuming Chapter 11 could not turn them around), it would cost hundreds of thousands or even millions of jobs throughout the country. The resultant unemployment could worsen the recession into a full blown depression, so the logic goes. It would affect not only plant workers, dealerships, and white collar jobs but also the industries that support these would have to cut back such as maintenance and service shops, parts suppliers, etc. you see the point.

This bailout from the government should serve the purpose of at least ensuring more jobs are safe, which is of course of great importance, but if the American automakers are allowed to remain bloated and ultimately uncompetitive this will only stand to benefit Honda (HMC), Toyota (TM), Kia, and other foreign automakers making cars here in the states. Consider the alternatives from the foreign auto company’s perspective; when choosing between feeble competitors in an economy that is weak but unlikely to remain that way forever, or the world’s largest auto market in depression. It makes for an easy choice.

Chrysler and its private equity owners (whose investment is Chrysler and GMAC account for only 7% of their total assets under management) are not turning down the injection of capital, but they are not willing to open up their books for inspection from lawmakers (link). How can they have it both ways? When news of this spreads, Chrysler will surely catch a lot of heat, as well they should. Interestingly, Ford (F) is not seeking a loan, at least not in this initial package, which could be a brilliant move. This should make them less subject to the car czar’s authority, and also should turn the ire of the many Americans against the bailout away from Ford at least for a while.

At the end of the day, this will hopefully bring to a close the dog and pony show on Capitol Hill replete with public relations stunts from opting for a drive from Detroit to D.C. (switching vehicles in the last few miles to show off the Chevy Volt) instead of time saving corporate jet trips and executives “selflessly” taking $1 salaries this year. It is all a big joke, winning the PR battle has become the battle, instead of figuring out how in the world to make these companies viable competitors in the global auto industry. It appears the CEO’s of the Big 3 have done their jobs securing a bailout. Can any rational observer believe that these executives will be around too much longer after the bailout begins. They did not create the troubles their companies are going through, they inherited this mess and my guess is they will likely move on to greener pastures before the dust settles.

Please pardon the cynicism but government should not be in the business of well, business. After the government’s recent history of botching and reconstituting TARP, we are not convinced that those in leadership are not just making it up as they go along. That is a strategy that has never and will never work in business, even if you can print money with 0% financing from the Fed.

We have included our ratings charts for both GM and Ford (obviously we do not cover Cerberus), but we must caution you that each one of these stocks receives our “sticky note of death”. We have integrated these post-its on our web reports to help our clients understand that just because something is undervalued compared to historical norms, that does not mean that it makes a suitable investment. Our chart for the entire Automotive sector is on the right and we have highlighted those that receiving this sticky note with a red circle. Notably not circled in red are Daimler, Nissan, Tata Motors, and Toyota.

Comments

[John Eickholt]

From listening to some of the southern states senators against the big three bail out.The northern don't have Hurricanes and heathquakes.Why should we pay for them.


Who Killed Detroit?

by Patrick J. Buchanan (more by this author)

Posted 11/21/2008 ET

Who killed the U.S. auto industry?

To hear the media tell it, arrogant corporate chiefs failed to foresee
the demand for small, fuel-efficient cars and made gas-guzzling road-hog
SUVs no one wanted, while the clever, far-sighted Japanese, Germans and
Koreans prepared and built for the future.

I dissent. What killed Detroit was Washington, the government of the
United States, politicians, journalists and muckrakers who have long
harbored a deep animus against the manufacturing class that ran the
smokestack industries that won World War II.

As far back as the 1950s, an intellectual elite that produces mostly
methane had its knives out for the auto industry of which Ike's treasury
secretary, ex-GM chief Charles Wilson, had boasted, "What's good for America
is good for General Motors, and vice versa."

"Engine Charlie" was relentlessly mocked, even in Al Capp's L'il Abner
cartoon strip, where a bloviating "General Bullmoose" had as his motto,
"What's good for Bullmoose is good for America!"

How did Big Government do in the U.S. auto industry?

Washington imposed a minimum wage higher than the average wage in
war-devastated Germany and Japan. The Feds ordered that U.S. plants be made
the healthiest and safest worksites in the world, creating OSHA to see to
it. It enacted civil rights laws to ensure the labor force reflected our
diversity. Environmental laws came next, to ensure U.S. factories became the
most pollution-free on earth.

It then clamped fuel efficiency standards on the entire U.S. car
fleet.

Next, Washington imposed a corporate tax rate of 35 percent, raking
off another 15 percent of autoworkers' wages in Social Security payroll
taxes

State governments imposed income and sales taxes, and local
governments property taxes to subsidize services and schools.

The United Auto Workers struck repeatedly to win the highest wages and
most generous benefits on earth -- vacations, holidays, work breaks, health
care, pensions -- for workers and their families, and retirees.

Now there is nothing wrong with making U.S. plants the cleanest and
safest on earth or having U.S. autoworkers the highest-paid wage earners.

That is the dream, what we all wanted for America.

And under the 14th Amendment, GM, Ford and Chrysler had to obey the
same U.S. laws and pay at the same tax rates. Outside the United States,
however, there was and is no equality of standards or taxes.

Thus when America was thrust into the Global Economy, GM and Ford had
to compete with cars made overseas in factories in postwar Japan and
Germany, then Korea, where health and safety standards were much lower,
wages were a fraction of those paid U.S. workers, and taxes were and are
often forgiven on exports to the United States.

All three nations built "export-driven" economies.

The Beetle and early Japanese imports were made in factories where
wages were far beneath U.S. wages and working conditions would have gotten
U.S. auto executives sent to prison.

The competition was manifestly unfair, like forcing Secretariat to
carry 100 pounds in his saddlebags in the Derby.

Japan, China and South Korea do not believe in free trade as we
understand it. To us, they are our "trading partners." To them, the
relationship is not like that of Evans & Novak or Fred Astaire and Ginger
Rogers. It is not even like the Redskins and Cowboys. For the Cowboys only
want to defeat the Redskins. They do not want to put their franchise out of
business and end the competition -- as the Japanese did to our TV industry
by dumping Sonys here until they killed it.

While we think the Global Economy is about what is best for the
consumer, they think about what is best for the nation.

Like Alexander Hamilton, they understand that manufacturing is the key
to national power. And they manipulate currencies, grant tax rebates to
their exporters and thieve our technology to win. Last year, as trade expert
Bill Hawkins writes, South Korea exported 700,000 cars to us, while
importing 5,000 cars from us.

That's Asia's idea of free trade.

How has this Global Economy profited or prospered America?

In the 1950s, we made all our own toys, clothes, shoes, bikes,
furniture, motorcycles, cars, cameras, telephones, TVs, etc. You name it. We
made it.

Are we better off now that these things are made by foreigners? Are we
better off now that we have ceased to be self-sufficient? Are we better off
now that the real wages of our workers and median income of our families no
longer grow as they once did? Are we better off now that manufacturing, for
the first time in U.S. history, employs fewer workers than government?

We no longer build commercial ships. We have but one airplane company,
and it outsources. China produces our computers. And if GM goes Chapter 11,
America will soon be out of the auto business.

Our politicians and pundits may not understand what is going on.
Historians will have no problem explaining

2008 Dec 10 03:41 PM

[Thadeus Thornton III]

What else is the US government supposed to do? They allowed, over the years, all the deregulation to occur in the financial sector and now that it has crashed how are businesses, especially very LARGE businesses, supposed to keep doing business? Don't you realize that the auto industry, dealers, suppliers, etc, use ongoing credit to maintain inventory, buy raw materials, etc? Shut that down and, of course, money leaks out of the bottom of the bucket before it can be replaced. Ad to that the loss of credit to even good potential customers and this is what you get.
Congress has to do something for the auto companies after favoring the financial guys. Geez, that's the real outrage!!! This auto thing is just a smoke screen diversion to the real problems. All the bogus financial dealings over the last 5 to 7 years are the fault of this. There may be no real fix for any of this. All of the finance and business courses you folks have had in the last 30 years has brought us to this point. Most of what was taught in colleges and universities in business and finance has been bogus and developed a mind set that allowed this to happen. Ever think about that???

2008 Dec 10 03:44 PM