Political Currency Can Save GM and Ford

The auto industry is seeking $50bn in government loans over three years to help modernize its factories and develop more fuel-efficient vehicles. Although Congress authorized a $25bn loan package in last year’s energy bill, it has yet to fund this program. Faced with tight credit markets, weak sales, and high gas prices, GM (GM) and Ford (F) are spinning this issue as an investment in alternative sustainable energy efficiency and national security instead of a corporate bailout.

The truth of the matter is that the Titanic, aka the American Economy, is in danger of sinking and like Wall Street’s biggest banks, they want to secure a life boat or life line of their own for added protection. Borrowing from the government at 5% vs. a 15% rate from banks saves $100mm on every $1bn borrowed. $25bn to $50bn in government loans could generate $2.5bn to $5bn savings in borrowing costs. When faced with the prospect of drowning, no one gives second thought as to whether the life boat comes from a capitalist or a corporate socialist.

In the midst of election season 2008 and August’s unemployment rate busting at the seams at 6.1%, lawmakers will be hard pressed not to lend some sort of lifeline loan to GM and Ford. In the interest of preserving jobs of the American consumer who happens to represent a broad political constituency, a compromise will be made on corporate welfare. The footprints of auto manufacturers are embedded in so many states that the alignment of mutual interests is dictated. President Bush has indicated his opposition to this proposal, but given the tenuous state of the economy, Republican support of the president on this issue would seriously damage McCain’s bid for the White House.

The stakes are very high. GM’s CEO, Wagoner, is well aware of this and that’s why he went to Capitol Hill to speak before the Senate’s energy committee. Someone once asked why do people take advantage of others and the answer given was "simply because they can". In addition to this, GM and Ford’s interests are not only aligned with American consumers but also our nation’s military industrial complex. Both companies provide vital infrastructure support for the defense industry and are therefore vital to our national security.

GM and Ford are too big to fail, but not for just industry or competitive reasons. The value of their political currency is built upon inseparable tentacles intertwined in the economic and national defense components of American Capitalism. The saying that "as GM goes, so goes the nation" may not carry the same weight that it once did as our economic base has transitioned to services derived from proprietary technology and intellectual property, but it it still counts for something. The recent price performance in both stocks reflects this. September 2008 month-to-date, GM is up +30.10% and Ford is up +10.09%. The real question is "how many points are you going to charge me, Sam?"