How to Deal with the Automakers' Crisis in Confidence 35 comments
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Without sounding too preachy, I’m going to do my best to make my points concisely.
I have said in the past that:
- I think the carmakers should be allowed to fail.
- I think that the (big) insolvent banks should be nationalized.
And I’m going to modify that position slightly here, because I believe the automakers’ current predicament is part of a “spillover” crisis in confidence that is largely the result of factors beyond their control, and because I believe that the derivative impacts of allowing all domestic automakers to fail would be beyond what the economy could handle at this point.
I agree with the incremental approach that Treasury is taking towards “nationalization” or taking equity in big banks (if I am reading that correctly) that don’t pass the soon-to-be implemented ”stress tests.” I think it’s absolutely the right thing to do. Give the banks the best possible chance to make it as private companies/publicly-traded corporations, and if and when they fail to meet certain pre-determined hurdles, the government takes another piece of equity. It’s only right.
With respect to the automakers, my previous stance was that a failing company should be allowed to fail, period. Having given more consideration to the matter, I’m modifying my stance so that I can now say the following:
Just as we the taxpayers have de facto agreed to protect the money center banks because we consider them essential to the economy, subject to new/tougher regulatory standards going forward, I believe that the same protection should be extended to at least one of the automakers.
And, as un-educated as I admit to being on the auto industry, I’ll provide my rationale here, subject to your feedback, which I hope you will share:
- Just as a second, post-Lehman financial failure would pose a problem for our economy for which we’re not currently prepared, the same is true of the prospective failure of all American automakers.
- Just as we cannot afford to bail out every failing bank, we can’t afford to bail out all of Ford (F), Chrysler and GM.
- I believe the same “stress testing” and incremental equity investment (by the federal government) approach that we appear to now be taking with respect to the big banks can be applied to save exactly one major US automaker.
It’s pretty easy to play armchair QB on these very large, make-or-break economic issues that we’re dealing with, but I also think it’s hard to dispute that we need innovative solutions to the unprecedented problems that we face.
I would suggest that, while there is precedent for major developed countries’ governments nationalizing banks (Britain, among others), at the same time the strong sentiment in the US against nationalization of industry is also a healthy thing. Recent opinion polls have shown 2:1 preference for not saving the automakers. Let’s be honest: with unionized labor and more than half of labor expenses at these companies coming from unrealistically/unsustainably fat pensions for retired auto workers, this can safely be called a broken business model.
Whatever guiding principles were recently used to make the decision to shutter Saturn and other lines, I believe that whichever automaker shows the best score on the sustainability/viability test should be kept alive by incremental equity investments not to max out at more than 49.5%, and that any support required beyond/before those equity investments should be in the form of Buffett-style preferred investments that 1) draw a high rate of interest for the public/investors, and 2) allow for cumulative deferral of interest payments in the near term, in the event that the interest payments would bankrupt the company.
THAT IS: I believe that taxpayers need to GET OURS in the end, but I also believe in keeping at least one big US automaker alive, and without any consideration of nationalizing the firm/industry. I could point to many reasons why the auto industry shouldn’t be nationalized, but the point is so obvious that I don’t think the point needs to be argued. I believe the point that the entire domestic industry shouldn’t be allowed to fail due to a serious economic recession and a crisis of confidence in the industry based on current “stressed” conditions (GM was arguably making strides toward recovery before the current slide hit) is nearly as self-evident.
Stock position: None.
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This article has 35 comments:
GM is in the shape it's in because of poor management. Chrysler is a private company and should not be supported by the taxpayers.
Since we've decided to go in the opposite direction, it will be several years or perhaps even a generation or longer before our future economic prospects brighten.
As Mrs. Thatcher so eloquently put it, "The problem with socialism is eventually you run out of other peoples money." We ignore this axiom at our peril.
As Franklin put it, "He who would trade liberty for some temporary security deserve neither."
Or maybe our present Fabians can turn history on its head. Wanna bet?
Just take away the retirees pensions?
Economies get into trouble when the "government" substitutes it's own well meaning programs/solutions as artificial additions to the Capitalistic Equation.................
Eliminate BAILOUTS, STIMULOUS', GSE's, TAXPAYERS
1. Ford total debt is $156B vs $97B for GM
2. Ford has $13.4B cash plus credit lines of $10.6B. They burned thru $21.2B in 2008.
3. Ford total liabilities are $234B vs $169B at GM
4. Of Fords total debt, $63B is due in 2009.
5. Ford's pension funds are underfunded by $11.9B. They contributed $1.7B in 2008.
If I were Ford, items 2&4 would greatly concern me. Based on 2008's cash burn rate Ford will run out of money around mid year, at which point they will have to exercise the $10B credit line, adding to their already enormous debt. Secondly, $63B of that debt is due in 2009. I wonder where that money will come from. Not a pretty outlook in this credit market.
The second point I would like to make is that the ideological zealots would have us sit on our hands and do nothing in this economic crisis. That thought pattern is shrinking the Republican party base everyday, I am one of them that has decided that they no longer have the best interests of the country as a motivation. I think it will be at least one decade before the Republicans are a significant force.
I cannot follow the ideology of the Bush administration and just watch it happen.
I think the bigger question is why are all three U.S. auto makers are in trouble? Are all of their management teams stupid and all of the off shore companies are brilliant? Or could it be that this government (both parties) doesn't get that a strong manufacturing base is essential. The governments of Mexico, China, Thailand, India, South Korea, etc. are obsessed with building an auto sector because they understand the huge value stream and wealth producing capabilities that it has. Our government is totally indifferent.
Many in this country believe that we will be just fine by saving Wall Street, banks, and Starbucks. How's that working for you??
On Mar 01 09:30 AM User 366845 wrote:
> Seems to me that Ford is not begging for money so why not support
> them.
> GM is in the shape it's in because of poor management. Chrysler
> is a private company and should not be supported by the taxpayers.
On Mar 01 10:29 AM eddie6442 wrote:
> Capitalism was built on "successful" companies being protiable and
> gtowing. "Unsuccessful" companies are acquired, file bankruptcy or
> liquidate................ PERIOD!!!!!!!!
>
> Economies get into trouble when the "government" substitutes it's
> own well meaning programs/solutions as artificial additions to the
> Capitalistic Equation.................
>
> Eliminate BAILOUTS, STIMULOUS', GSE's, TAXPAYERS
ECONOMIES GET IN TROUBLE WHEN GREEDY CORPORATIONS USE SLAVE WAGES FOR MEGA PROFITS!
I want to also protest the "lavish pension" phrase being tossed around. I read an article recently saying industry standard pensions for those earning 100,000.00 a year amounted to 100.00 a year for years served. I happen to know many years ago the auto workers opted to have half of that amount to go toward paying for health care rather than to their pension. So that "lavish Pension" they will get amounts to 50.00 a year for number of years worked. Not a fortune by any standard.
On Mar 01 11:26 AM dcjj wrote:
> Miken, What data are you citing those numbers from ? They just seem
> a bit off to me as Ford had begun it's restructuring a year or so
> before GM.
> I want to also protest the "lavish pension" phrase being tossed around.
> I read an article recently saying industry standard pensions for
> those earning 100,000.00 a year amounted to 100.00 a year for years
> served. I happen to know many years ago the auto workers opted to
> have half of that amount to go toward paying for health care rather
> than to their pension. So that "lavish Pension" they will get amounts
> to 50.00 a year for number of years worked. Not a fortune by any
> standard.
Instead of shrinking workforce, they should make the cars that people want to buy, and hire more people.
It's not the union that brought GM down, it's stupid management that thinks it needs to shrink.
Incompetent bozos like Wagoner and Lutz.
FMCC is still healthy, so its DEBT is matched with ASSETS.
Guddam, does no one know how to think, anymore??
On Mar 01 10:40 AM Miken wrote:
> Please consider the following re: Ford
>
> 1. Ford total debt is $156B vs $97B for GM
> 2. Ford has $13.4B cash plus credit lines of $10.6B. They burned
> thru $21.2B in 2008.
> 3. Ford total liabilities are $234B vs $169B at GM
> 4. Of Fords total debt, $63B is due in 2009.
> 5. Ford's pension funds are underfunded by $11.9B. They contributed
> $1.7B in 2008.
>
> If I were Ford, items 2&4 would greatly concern me. Based on
GM profit has nothing to do with union wages, which are only 4.5% of gross revenues. That is, if UAW came to work for 10 cents an hour, GM would still be losing money!
<b>WHAT I'D DO:</B> FIRE FAILED GM MANAGERS, AND PUT IN COMPETENT EXEC WHO WOULD DEMAND DESIGN OF CARS THAT PEOPLE WANT TO BUY!
It's no mistake why people are not buying their junker: they are boring, not exciting, no reason to buy yet another junky gas-guzzler.
People want exciting cars, ELECTRIC drive cars, and many have pledged not to buy a new car until it plugs in.
On Mar 01 09:56 AM lazaris wrote:
> General Motors was well on its way to becoming one of the "most profitable"
> car companies in the world as a result of the 2007 agreement with
> the U.A.W. Seeking Alpha finally has someone on there staff that
> gets it. That this mess has been beyond EVERY carmakers control.
> My only question to you is: What would you do?
> Just take away the retirees pensions?
On Mar 01 09:30 AM User 366845 wrote:
> Seems to me that Ford is not begging for money so why not support
> them.
> GM is in the shape it's in because of poor management. Chrysler
> is a private company and should not be supported by the taxpayers.
On Mar 01 01:17 PM Douglas Korthof wrote:
> Any money given to GM must be on condition that ALL current management
> be FIRED and replaced with competent execs.
>
> It's not the union that brought GM down, it's stupid management that
> thinks it needs to shrink.
>
> Incompetent bozos like Wagoner and Lutz.
You seem to have a lot of anger. You should see someone.
And about the EV1, you should really move on.
On Mar 01 11:22 AM 303820 wrote:
> EDDIE...the PROBLEM WITH YOUR CAPITALISTIC SOCIETY IS THAT COMPANIES
> ARE NO LONGER HAPPY WITH PROFITS...THEY WANT MEGA PROFITS...THEY
> ACCOMPLISH IT BY LOWERING WORKER'S WAGES AND/OR BY ELIMINATING THEIR
> JOBS AND SHIPPING THEM TO SLAVE LABOR COUNTRIES. DOING THIS ELIMINATES
> PEOPLE BUYING POWER....IN OTHER WORDS, THEY ARE BITING THE HAND THAT'S
> BEEN FEEDING THEM!
>
> ECONOMIES GET IN TROUBLE WHEN GREEDY CORPORATIONS USE SLAVE WAGES
> FOR MEGA PROFITS!
the Philippinos can't afford what they make at $1hr...
A factory worker in China makes $.33hr...
The idea of free trade was to industrialize third world countries so they could afford some of our products...instead it ended up being a slavery haven for corporate America!
To corporate America slave wages are good wages!!!!!!!!!
wake up!
2)...the Toyota and Honda workers are prospering as much as the Detroit auto workers...on the unemployment line..
3)...Banks don't have unions ...they are collapsing...retailers don't have unions, they are collapsing...there are 10 times more workers with out unions loosing their jobs!
4)...aero space workers went on strike because the company wanted to ship some of their work to central America's cheap labor...
5)....Europe's airbus is unionized (try to take those worker's jobs away)
6)History will tell you that union wages will kip the economy going (wal mart wages don't buy much of anything).
7)UAW always has the same agreement with the Detroit big three auto makers.
8)You love America? Buying 6 Hondas I have my doubts!
Michael A. Grand 03-01-09
Mike123A@aol.com
The USA North American Operations (NAO) Automobile Industry has lost its identity with the American Consumer. Now, after 100 years of industry, it has reached the end of its incubation stage of Industrialization.
Soon, a USA Governmental bankruptcy restructuring plan will allow the Big Three Auto Companies to merge, downsize, restructure, and move ahead into a new industry that will help us emerge from our Global economic crisis.
The economy will bottom out and rebuild itself when the USA Automobile Industry evolves into the Automobile & Space-Frame Housing Industry. The USA North American Operations (NAO) Automobile Industry will re-invent itself and begin to build new factories. The steel mills will pump out the materials that will create new construction jobs. Tooling firms will begin to stimulate the local economy along with the transportation industry that will move the tools and materials aboard trains, trucks, and sea transport.
Homes, not cars, will be the focus of this new industry. There will be a new intent for humanity; and, there will be a new faith in a safe world.
The USA NAO Automobile & Space-Frame Housing Industry will be creating an additional global industry to assist in rebuilding our cities, slums, and suburban malls. Real jobs will be created. This industry will create new jobs globally; and, join science, management and organized labor together to produce the largest industry this World has ever witnessed.
It will happen as I said. The words have been spoken. We need to act and create it.
You said it loud and clear. Right on the button.
Your words represent the feel of many many people.
To ignore that is self-destructive.
Every critic so far has been beating the same drum> "Down with the auto companies"- especialy GM. It's refreshing that one of them finally has discovered that their rantings are nonsense. Manufacturing is key to the future and prosperity of this country and you can't just pull the rug out from under the entire infrastructure.
The answer to this downward spiral is a return fof confidence to buy cars. As long as NoBama keeps spouting the "aint it awful and it's getting worse" party line, then throwing $$ on loans and bailouts is not going to produce the result we need.
Douglas Korthof 33 Comments WebsiteAny money given to GM must be on condition that ALL current management be FIRED and replaced with competent execs.
It's not the union that brought GM down, it's stupid management that thinks it needs to shrink.
Incompetent bozos like Wagoner and Lutz.
Turn off the news and think outside of the televised/Internet box. Stop following and start leading. There is a light at the end of this dark tunnel, but it's truly not coming from the glow of the television or the computer monitor.
To the opposing viewpoints (if I read you right) of, for example, Paul Killinger and Betsy, I'd just say:
1) I fully agree that "bailouts" are, 99% of the time, not the answer. But as alluded to at the end of the post, GM's operating loss narrowed meaningfully from 2005 to 2006 (not to mention the question of how they were losing money in the 2006 economic environment). Combine that with the severity of this crisis (exogenous to the auto industry) and the concept that it is arguably a strategic industry, and I think you can make an argument for keeping one of the automakers alive until we get past this crisis.
2) If you read the last paragraph of the post, I'm not taking a tone of undue skepticism toward the automakers. I'm just making the argument, which I'll stick to, that the industry cannot survive in the global marketplace whilst paying more than 50% of its labor expense to pensioners. If you look at the 2006 results for these companies (F and GM), and note that they were losing billions of dollars in a good economy, and then consider that we may not see that kind of economy for several years, that fact is self-evident. So I think we need to compare our country's automakers' business practices to those of global auto firms that have been consistently profitable.
I'm as proud of our country as anyone, and I mean anyone. But I think that the way to move forward is to take a look at our business mechanisms that's as sober as only this kind of economic crisis can provide cause for, and MAKE HARD DECISIONS, MAKE REAL CHANGES that lead to an American auto industry that is not only viable, but that's poised to take a position of global leadership emerging from this economic cycle.
To be honest, I believe we NEED an American auto industry, but I also think many of our auto workers will need to be retrained in the field of renewable energy. In the interim, those jobs will have to be created by a public/private partnership, which will have a lot to do with the stimulus package. Thank you all for reading and commenting.
What I suggest to pensioners is: compare the likely pension payout in a bankruptcy situation to something like 60% of what the current/historical pensions have been, and negotiate the 60% if 1) it's better than the bankruptcy scenario and 2) that gives the firm a better shot of making it through this economic cycle.
I don't pretend to know F and GM's situations well enough to say which is better-positioned to lead going forward, I just note that Ford is not asking for government assistance, and that GM doesn't appear to have been served well by its management for some time.
As an (industry) outsider looking in, I'd like to see a competent "car czar" appointed, and see that person broker a merger of F and GM, with the government making loans to keep the combined firm afloat, and drastic measures taken to make the combined firm more efficient/viable. I think some current asset sales should be used to reduce the need for government loans, and certain assets should be earmarked for sale to any/other/internationa... firms when the economy improves, in order to accelerate the repayment schedule.
More specifically, I would compare Lincoln and Cadillac, and select one of those to be one of the lines that's "earmarked for sale in a better market." This is the kind of painful choice that I'm not qualified to make, but that can serve as an example of how parts of both companies might be kept alive during a downturn through which they otherwise might not.
Lastly, I don't think the car czar should be a permanent position, I think it should be a temporary job that's done by someone who can value assets, and who's seen as being impartial. Hell, Buffett could do it. If this were to happen (it won't), there would have to be a government "transparency" site posting all relevant documentation and soliciting public comment at each critical juncture, along the lines of recovery.gov and financialstability.gov...