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Foolish Thoughts on the Detroit Bailout

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November 11, 2008 – Comments (9) | RELATED TICKERS: GM , F , TM

We've been writing (and I've been editing) a lot of coverage on the potential bailout of the Big Three automakers.

The hard part of these types of debates is that any end result is pain.  No matter what we do.  There's no Hail Mary pass we can throw, no "this might be just crazy enough to work" solution.  

If we let them bail them out, we get the short-term gratification of saving jobs and pensions.  And we can pretend that everything's going to be okay.  But in the long-term, we're spending valuable resources keeping uncompetitive companies alive.  If we don't, well, a lot of people are going to suffer.

If we don't bail them out, we get the awful images of families out on the streets and grandparents losing the pensions they'd worked for all their lives.  But we eventually recover as we focus on new opportunities...perhaps even new car companies that can compete with the Hondas and Toyotas of the world. 

Most Fools I talk to, including me, prefer the latter.  The hugs and kisses of socialism always sounds better in theory than the selfishness and brutality of capitalism, but the results don't coincide with the theory.  

Morgan Housel explains how the financial bailout is a different animal than an auto bailout:

Why We Shouldn't Bail Out Detroit 

Tim Hanson takes the bailout frenzy to its logical conclusion:

Satellite Radio: Too Big to Fail  

Bill Mann shows how we're ignoring the lessons of Japan's lost decade:

Failing Like Japan  

 -A 

 

 

9 Comments – Post Your Own

#1) On November 11, 2008 at 5:48 PM, outoffocus (23.18) wrote:

Im sorry but I am a harsh capitalist. I say let them fail.  We need to keep America competitive or we are going to lose our superpower status. But considering the fact that I'm the minority in this subject matter, we will probably lose our superpower status anyway. It is so disheartening how socialist this country has become. We have become so focused on sustaining the unsustainable rather then letting the chips fall where they may and start over. Its especially disheartening for the young people who graduated college hoping to participate in all this capitalism only to watch the people who've come before us sacrifice our futures to preserve their present.

Let capitalism work. You will thank it later. 

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#2) On November 11, 2008 at 5:59 PM, reepicheepo (51.52) wrote:

I think the big 3 should be allowed to fail. Instead of spending money bailing out the companies, money should be spent helping the resulting laid-off workers find new employment and retraining in more competitive fields. Additional support could also be given to those that lose their pensions.

This would be better for the economy as a whole than just prolonging the inevitable collapse of worthless companies.

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#3) On November 11, 2008 at 6:43 PM, rd80 (97.66) wrote:

"If we let them bail them out, we get the short-term gratification of saving jobs and pensions."

I'm not convinced a bailout saves any jobs or pensions compared to going through bankruptcy.  The downsizing, debt reduction, labor contract overhauls, management changes, etc. that need to be made for auto makers to thrive are essentially the same either way.  Since a Ch 11 proceeding would probably lower labor costs, it's very possible a bankruptcy would save more jobs than gov't intervention. 

Same process either way.  Just a matter of who pays for it - taxpayers alone or taxpayers along with creditors, unions and management.

Taxpayers are probably on the hook for the pensions regardless.  If the companies go bankrupt, the pension plan assets and obligations probably shift to the PBGC and taxpayers cough up any shortfall that PBGC can't cover.  Taxpayers could be on the hook for some of the debt with all the gov't guarantees floating around the financials.

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#4) On November 11, 2008 at 6:58 PM, TDRH (99.52) wrote:

outoffocus, I agree with you, but I am going to play devil's advocate briefly.   During WWI and WWII American manufacturing sector is what allowed build the war machines.   When GM, Chrystler and Ford go the way of the Dodo bird, what domestic manufacturing can we draw from? 

This is the mindset that has protected these institutions in the past, but it may be time for them to fade.   The question is what do they take with them, and who benefits from the vacume?

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#5) On November 11, 2008 at 7:23 PM, DemonDoug (34.83) wrote:

who benefits from the vacume?

Any well-run automaker.  I'm guessing Honda and Toyota as well as Hyundai would soak up some assets at firesale prices and put at least some people to work.  Yes, the jobs won't pay like GM or Ford, but it appears the employment/wage system of those companies was completely unsustainable anyway so that we see the results - everyone out of a job.

I also bet that there will be certain executives of the car industry that will start up their own operations - call it the Phoenix Theory.  From the dust of the Big 3 will rise at least 1 if not 2 or more decently run automotive companies that are US headquartered.

I keep thinking about it, like what if greenspan hadn't inflated back in 2002-2003?  We would have had a deeper recession, but we wouldn't have had a housing bubble, and there would have been less malinvestment.  We wouldn't have the issues we have now.

Go through the pain now, get through it, and get back to more sound fiscal and tax policy.  The sharp recession in the early 1990s and more progressive government policies of less war, more money for cops and students, and more taxes on the rich with less taxes on the poor and middle class, showed that when you do these things, you can come out of it with some real positive results.

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#6) On November 11, 2008 at 8:00 PM, johnw106 (60.67) wrote:

You people just dont get it. We can not let GM and Ford fail and it has NOTHING to do with making cars. I could give a rats ass about GM and Ford in and by them selves. If it was just about making pick up trucks versus econo box's I would agree and say let em fail.

It is the thousands of small companys and suppliers that I think about,not to mention the trucking industry. We can not place something as vital as our supply chain in the hands of foreign companys like Toyota and Honda. Who do you think services the millions of medium and small trucks that run America? Who do you think sells and services the millions of cars and trucks that make up our nations fleets? Our bus lines? Our military vehicles for non-combat use?

This is an issue that can ruin America and destroy us if we are not extremely careful. I fail to understand why the Government is hesitating on this matter at all. If no one can see the long lasting ripple effects of a failure of GM and Ford then our country is doomed anyway.

Maybe its time to move to Mexico or perhaps Peru.

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#7) On November 11, 2008 at 8:14 PM, TMFLomax (44.09) wrote:

Fail -- I nominated them (well mainly GM, but I was talkikng about the Big Three) for failure back in August when the rumblings about a Big Three bailout began:

http://www.fool.com/investing/international/2008/08/27/fool-blog-uncle-sam-please-let-something-fail.aspx

Hello, creative destruction (and DemonDoug's Phoenix Theory). In the short term, bailouts feel "good" and "safe" but in the long run how can they do anything but breed are more failure and mediocrity? Yeah we need that like a hole in the head and we are getting it in spades.

Excuse me for butting in, but I just get so... frustrated. Haha.

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#8) On November 11, 2008 at 8:36 PM, rd80 (97.66) wrote:

"When GM, Chrystler and Ford go the way of the Dodo bird, what domestic manufacturing can we draw from?"

Bankruptcy doesn't mean they go the way of the Dodo bird.  Since there are viable underlying operations, the most likely bankruptcy would be reorganization, not liquidation.  In that scenario, the operations continue, the jobs are still there, the suppliers still supply stuff.  Debt holders and other creditors take a serious hit, the pension plans probably end up with the PBGC, some assets get sold off, union contracts get renegotiated, management's bonus pool gets zeroed out, etc.  But, the operations continue and the companies have a chance to come out the other side.

Bankruptcy laws are in place for exactly the situation automakers are in - let the system work.

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#9) On November 11, 2008 at 8:38 PM, StockSpreadsheet (72.39) wrote:

JohnW,

I think your assumptions are wrong.  Allowing/forcing GM/Ford/Chrysler to go bankrupt does not mean that they won't be around afterwards to service all the trucks in the trucking industry that you say runs America.  Look at the airlines.  Many of them has been in bankruptcy multiple times and they are still around.   We are talking about letting them go into reorganization bankruptcy, not liquidation bankruptcy. 

As has been said above, yes, the autoworkers would end up making less, (bringing their wage scale down to near the levels that the Toyota/Honda/Nissan plants in the U.S. currently pay).  However, without the bloated wage scale that the Big Three currently pay, they might be able to make small cars and make money on them, instead of only making a profit on large trucks or SUVs.   (I'm also hoping that the pay scales of the upper management could also be lowered at that time and most of the current leadership could be fired for incompetence, but am not as sure that will be part of the bankruptcy outcome, since most of the leading jokers would get to plot the automakers courses through bankruptcy and would therefore still get to set their own pay scale.  However, if the government did the investment thing AFTER the bankruptcy, coming in then with financing and getting warrants in return, then the government could mandate that the current crop of clowns gets fired.  I think this is a better way to handle any government aid given to the Big Three.)

With a lower wage scale, the Big Three could profitably make more cars and trucks, which could mean extra work for all of those suppliers that you are worried will get wiped out.  The Big Three could also still supply all the military vehicles that they currently produce.  Once they are profitable again, (though smaller), then they could go after any production that they think they could make money at, (electric or hybrid vehicles, for instance, as well as tanks or other items).

Also, in case of a war, the U.S. government could commandeer any production assets in the U.S., regardless of ownership.  Therefore, all the Toyota plants could be told to make tanks if we needed them for the war.  If Toyota refused, we would nationalize the assets, (a la Bear Stearns, AIG, etc.), and just transfer ownership to someone, (such as GM), that would make what we needed.  That is the great thing about manufacturing plants here in the U.S..  It is very hard to move them, at least in a short time, so they are available for our use when needed.  Same thing with the planes owned by the air carriers or UPS.  If the military needed cargo transports, they could get them from FedEx or UPS.  Do you think those companies would really say no?  And if they did say no, don't you think that their assets would be nationalized in a heartbeat?  (A lot of the planes were bought by government funds anyway, and UPS has agreements to turn them over during wartime anyway, so this point is rather mute, but it serves as an example anyway.)  

In fact, since most of the auto plants built in this country by Toyota or Honda were built fairly recently, they are probably a lot newer and more efficient that the older factories owned by GM, etc., so would be better for any war production that was needed.   (Yes, I know that GM et. al. have retooled a lot of their factories so they are not still using equipment from 1930, but there might be some limitations that come with retooling an old factory as opposed to a more efficient design of a new factory.  After all, there are limitations on how many walls or ceilings you could knock out of an old factory to make room for new equipment it more efficient without having the structure collapse.  Newer factories could have their structures designed with the new machines in mind, so would not suffer as much from structure restraints.)

So I don't think that letting GM declare bankruptcy is an issue that can ruin America or destroy us any more than letting United Airlines declare bankruptcy ruined us.  In fact, I think the bankruptcy would be the savior of a lot of our domestic manufacturing base as it would allow the companies to once again become profitable, which would allow them to retain more workers and keep more factories open to keep more production. 

The alternative as you would suggest would be to nationalize the companies, (which would be cheaper than having to bail them out again after they run out of the current loans they are asking for, as the loans would do nothing to fix their lack of competitiveness).  I prefer to stay away from the socialistic path.  Let them become profitable or let them fail to make way for someone who can do it right. 

Who knows, maybe we should consider firing the current management of the Big Three and bring in the Vice Presidents of Toyota America and Honda America to run GM and Ford.  At least they know how to build cars profitably in America.  Also, I read recently that Toyota builds more vehicles in America than GM does, so keep that in mind.

My two cents for the discussion.

Craig 

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