It Could Have Been Worse, But It’s Still a Big, Big …..
….. Mistake — and yes, a betrayal:
The White House announced a $17.4 billion rescue package for the troubled Detroit auto makers that allows them to avoid bankruptcy and leaves many of the big decisions for the incoming Obama administration.
The deal would extend $13.4 billion in loans to General Motors Corp. and Chrysler LLC in December and January, with another $4 billion likely available in February. It also would provide the government with non-voting warrants, although the exact amount was unclear immediately. Ford Motor Co. has said it doesn’t need short-term assistance.
The deal is contingent on the companies’ showing that they are financially viable by March 31. If they aren’t, the loans will be called and all funds must be returned, officials said.
The deal generally tracks key provisions of the bailout legislation that nearly passed Congress earlier this month. But it is relatively lenient in allowing the companies to show their viability. It defines viability as having a positive net present value — a way of gauging the companies’ worth, taking into account all their future obligations.
So the money is being provided under less stringent conditions than Congress envisioned. While it appears to be tough with the immediate recall provision, the borrowers’ ability to decide how to prove their own viability negates most if not all of that.
The only hope now is that the incipient recovery signs I noted yesterday generate decent car sales in the coming three-plus months. Yesterday’s barrel-price drop might help with that, bringing gas down to $1.40 a gallon (Update: Today’s drop below $34 might mean $1.35). If the price stays low and reignites SUV and similar-sized vehicle sales, and if GM and Chrysler management have brains (a dubious proposition), they will figure out a way to pay back the government, renounce future borrowing, and then tell the UAW it’s “put up or bankrupt” time.
If there’s a silver lining in this (I know, I’m looking really hard for one), it’s that the situation will probably prevent the Obama administration and the Democratic majority from doing anything really stupid that would cause gas prices to go way up. The linkage to the viability of the two car companies would, I hope, be too direct. (Update: To be clear in response to comment #1, I mean in the first couple of months of the administration, not long-term.)
Expect the “it’s not enough” chorus to begin shortly.
If there’s a silver lining in this (I know, I’m looking really hard for one), it’s that the situation will probably prevent the Obama administration and the Democratic majority from doing anything really stupid that would cause gas prices to go way up.
Dream on there Tom, the cornerstone of liberal economics today is AGW and that means doing really stupid things like hiking the gasoline tax to fund expensive alternative energy and keeping the domestic drilling ban in place to ensure Iran, Russia and Venezuela have plenty of money for trouble making around the world.
The silver lining is Iran, Russia and Venezuela are burning through their cash reserves to subsidize their domestic economies from falling Ruble valuations. http://uk.biz.yahoo.com/27112008/399/russia-opec.html The recession induced low oil prices by sheer coincidence is one of our best foreign policy clubs we can wield against foreign expansionism and terrorism. Ahmajinadad, Putin, Chavez are squeeling like stuck pigs. A delicious case of getting exactly what you wished for, they wanted to knock down the US economy to influence the election, they got it. Do you really think it was a coincidence that oil prices spiked at the crucial timing in the election cycle?
The bottom line is this, Obama has to choose between the promises of future non existant cheap plentiful Green Energy he touts or jobs in current industries. He can’t do both, whether the big 3 survive will depend exclusively on the price of gasoline. The only way the UAW can keep those high paying featherbedded jobs is for the big 3 to make cars profitably and that means gas guzzlers. There is little money in small cars BECAUSE of the UAW work rules and wages.
Comment by dscott — December 19, 2008 @ 2:47 pm
#1, I meant in the first couple of months until March 31 when the GM-Chrysler are supposed to show us how they are going to be viable.
You outlined the reasons why it would be economic but more importantly political suicide for him to have his peeps like Browner force energy prices way up. I think his survival instincts will hold him back. He’ll do what GOPers have done for years and ask his supporters “Where else are you going to go?” Or so I hope, at least on energy.
Comment by TBlumer — December 19, 2008 @ 4:32 pm
#2, I was being sarcastic. but yeah, come March 31, it’s put up or shut up time, however, I suspect the pols are counting on a very short memory of the public to not deal with the inevitable failure IF gasoline prices go up. If gasoline prices stay at current levels, they may just squeek by for another year.
Comment by dscott — December 19, 2008 @ 4:36 pm
…and what of the ‘no-strings attached’ billions to the banking and investment corporations? Or, is that perfectly logical to you?
Comment by mud_rake — December 19, 2008 @ 4:46 pm
to those of you whom think this is a mistake,stop an think of the taxes lost if the big three do collapes.they are tax payers to.i myself work in the automotive industry an pay taxes so we deserve a fair shot at survival.
Comment by donald — December 19, 2008 @ 9:18 pm
#4, you obviously haven’t read this.
Comment by TBlumer — December 19, 2008 @ 11:10 pm
[...] most readers know, since the column went up at Pajamas, a deal was done. It was of course done without what I still believe should have been required admissions before any [...]
Pingback by BizzyBlog » The Auto Bailout: Admissions Required — December 20, 2008 @ 8:55 am
#5, the companies have seen the handwriting on the wall for nearly 30 years. How much longer do we have until the “fair shot” is over?
Comment by TBlumer — December 20, 2008 @ 8:56 am
#5, yes let’s think about this logically, you claim the workers pay taxes, they do but they are not paying 128% taxes, they are paying at most 28% income tax. That means for every dollar given to the big 3, we are only getting back 28 cents. In what universe is getting back less money than you put in a wash? In what universe is getting back less money a profit? In straight forward math terms, we are losing 72 cents on the dollar for every dollar we “invest” of taxpayer money in the big 3. Pardon me for not accepting your point that throwing taxpayer funds at a commercial enterprise whose operating principle is to lose money.
Your premise for loaning money to the big 3 is faulty, you assume they have a sound business model to be self sustaining. They don’t, as evidenced by declining market share for 30 years.
It seems to me your premise is keeping people employed, and that premise is faulty. The sole reason for a business to exist is to make a profit for it’s investors. Employing people is a side benefit as they are a charge against the bottom line no different than the cost of materials, equipment, and transportation, etc. The auto industry is an excellent example of this dynamic. The number of workers needed to produce a car dropped by 30% over a 10 year period even though they made the same number of cars, Why? Automation introduced to offset the rising cost of labor. Even though the big 3 continued to make the same number of cars per year, their market share dropped, Why? The transplants, Toyota, Nissan, Honda, etc. essentially took all the new customers as the market for cars grew in the US. Why? they use 1/3rd of the workers to produce a car than the big 3 even with their 30% drop in employees. The transplants unhindered by onerous work rules and out of line wages made a better, cheaper product that the consumers wanted. This is why the big 3 can not make a profit off of small cars, the very cars the Dems want them to build for their AGW cause. The reason why the big 3 were forced to make gas guzzlers, their costs were so high the only way to make a profit was to make them.
If anyone is to blame here, it is the Dems who screwed over the big 3 by allowing the price of gasoline spiral out of control. They broke their 2006 promise to lower the price of gas. The Dems killed the big 3 with high gas prices. What I find so hilarious is that the UAW supports the very political party that is literally killing them. So what do the Dems do, they throw the unions a bone by offering up card check as a lure to sucking more people into union contracts. As usual, the Dems offer the promise of the future for the incompetence of their policies.
Comment by dscott — December 20, 2008 @ 10:38 am
[...] My prediction on Friday that readers could “expect the ‘it’s not enough’ chorus would begin shortly” had already come true before I wrote it. [...]
Pingback by BizzyBlog » Auto Bailout ‘Laugh, Cry, Or Bang Your Head?’ Moments Ensue — December 24, 2008 @ 9:29 am