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TMFBomb (91.62)

Is the government bailing out GM and Ford?

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August 05, 2008 – Comments (4) | RELATED TICKERS: FNMA , GM , SIRI

First, the government teamed up with JPMorgan Chase to bail out Bear Stearns.  Then IndyMac needed help.  This was right around the same time as the Fannie Mae and Freddie Mac bailouts.  Leaving moral hazard issues for another day, I at least get all of those moves.  When banks fail, the credit market dries up, and the whole economy suffers. 

But bailing out the likes of bumblers GM, Ford, and Chrysler?  Really?   

Bloomberg reports that a Michigan Congressman is seeking to speed up the implementation of a $25 billion loan program for the U.S. automakers.  That figure’s eerily similar to the combined quarterly losses reported by GM and Ford recently.  Sorry, dad, I crashed the car (company).  Can I have money for another?   

Okay, I know this plan to help GM et al convert some of their factories over to alternative-fuel vehicle production was put in place back in December.  But the U.S. carmakers’ fortunes weren’t so rosy back then, either.   

Under the plan, the government would lend $25 billion for up to 25 years at Treasury rates.  How much of a discount is that?   Well, the market thinks GM debt is so risky that it charges GM almost 13% more than comparable Treasuries.  Compare a rate in the high teens to what you pay on your mortgage.  Talk about a subprime loan!   

It seems like free competition has a very subjective definition these days.  While the government has been socializing losses among its chosen children, it took 17 months to allow Sirius and XM to merge into Sirius XM.  Unlike these other folks, the satrad guys weren’t asking for a bailout or a handout.  They just wanted the government to acknowledge what we all knew – that two companies that are bleeding money while competing against free alternatives (terrestrial and Internet radio) and the mighty Apple does not constitute a monopoly. 

I know I'm combining the actions of a lot of different government agencies here, but I can't discern any semblance of an overall game plan.  It feels very arbitrary and reactive.  As a guy who generally favors more government regulation over financial landmines like derivatives, investment banks, and hedge funds, these latest movements make me wonder how forward-thinking and skillful that regulation would be. 

Full disclosure:  I own shares in Sirius XM (a candidate for my personal “worst investment ever”).

4 Comments – Post Your Own

#1) On August 05, 2008 at 6:44 PM, DemonDoug (78.88) wrote:

Is the government bailing out GM and Ford?

The short answer is yes.

The slightly longer answer is that bailing these guys out doesn't stink as much as the ag bill, BSC bailout, ABK/MBI/FNM/FRE bailouts, because with GM and Ford, at least we are producing something tangible, as opposed to just moving paper around.

Granted, I would prefer everyone to fail.  I believe there is enough capital out there that someone could swoop in and buy up assets at firesale prices and be able to build a car company from ground up, or a bank or financial company from ground up.  It would clear a lot of the toxic waste from the system.

But I completely agree with the sentiment, and many many many of us are absolutely appalled at the central planning/socializing/communism that has been going on in the financial markets in the past year.

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#2) On August 05, 2008 at 7:09 PM, IBleedConcrete (77.27) wrote:

Just like with banks, you can look at it from the counterparty perspective.  If GM or Ford went bankrupt then the state of Michigan might eventually follow which would be pretty nasty for the US financial system. Not that I agree with the policy.

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#3) On August 05, 2008 at 9:44 PM, nuf2bdangrus (< 20) wrote:

We always claim not to want to promote moral hazard, but every case in which trouble arises, a bailout arises because it's "too big".  "The repercussions would be too significant".  The umbrella og the Fed gets larger, as does the bill for future generations.

 

I'll support a bailout when the CEO's forego all bonuses, live on a modest salary, and all of the back bonuses are returned back to the shareholders.  

 

DISGUSTING.  And it comes out of YOUR paycheck. 

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#4) On August 05, 2008 at 10:11 PM, Richthofen80 (87.16) wrote:

Heck, why not. Chrysler was of course bailed out once before. See 1979.

http://www.heritage.org/research/EnergyandEnvironment/bg276.cfm

Same story as then, too. Foreign competition eating them up, high oil costs. it's the seventies all over again! of course, no one should be surprised. If they failed to be good stewards then, what makes anyone think they could keep their company afloat long term?

I miss real managers, CEOs and presidents. Do you think Jack Welch would ever need a bailout? Doubt it. We have a generation of terrible corporate leadership

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