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Author Topic: U.S. Treasury Ready to Prevent Failure of Automakers (Update2)  (Read 11438 times)
MicroBalrog
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« on: December 12, 2008, 08:05:12 AM »


U.S. Treasury Ready to Prevent Failure of Automakers (Update2)
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By John Brinsley and Jeff Green

Dec. 12 (Bloomberg) -- The Bush administration dropped its opposition to using the $700 billion bank bailout to provide financing for U.S. automakers, after the Senate yesterday failed to approve emergency loans.

ôBecause Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,ö Treasury spokeswoman Brookly McLaughlin said in an e-mailed statement.

The Treasury has used all but about $15 billion of the first half of the Troubled Asset Relief Programĺs funds since the plan was enacted Oct. 3. Treasury Secretary Henry Paulson has until today repeatedly resisted calls to use the program to aid the automakers.

While the Treasuryĺs one-sentence statement doesnĺt mention the TARP, White House spokeswoman Dana Perino said earlier in a separate statement that the Bush administration is considering using some of the program to keep the auto companies afloat.

ôUnder normal economic conditions we would prefer that markets determine the ultimate fate of private firms,ö Perino said. ôHowever, given the current weakened state of the U.S. economy, we will consider other options if necessary -- including use of the TARP program -- to prevent a collapse of troubled automakers.ö

The administrationĺs shift comes after repeated statements by Paulson that any injection of funds required a plan ôthat leads to viability.ö

Revive Lending

ôThe intent of the TARP was to deal with financial institutions and major systemic issues and getting lending going in capital institutions,ö Paulson said in a Nov. 13 Bloomberg Television interview. ôCongress, I believe, should address the question of the auto industry.ö

Emergency loans for General Motors Corp. and closely held Chrysler LLC were rejected late yesterday after talks failed over Republican senatorsĺ demands that union workers accept a cut in wages next year. GM and Chrysler said they may run out of cash for their operations as sales head toward their lowest in 17 years.

Senator Bob Corker, a Tennessee Republican involved in failed efforts to forge a compromise last night, said providing TARP money without union commitments to restructure and wage concessions would make it ôless likelyö that the companies become more competitive. Such a move would put ôgood money after bad,ö Corker said in a Bloomberg Television interview.

GM Chief Executive Officer Rick Wagoner told Congress last week, and has said repeatedly, that the Detroit-based automaker is trying to avoid bankruptcy at all costs. Lead director George Fisher said last week that GM considered and rejected the option and it was ôway down the listö of alternatives.

GM Shortage

Still, GM also has said it will lack the minimum $11 billion needed to pay bills by the end of this month, raising the prospect of bankruptcy should it fail to win a cash infusion. GM reported having $16.2 billion as of Sept. 30.

An attempt to restructure GM in bankruptcy would end up as liquidation, because sales would plummet as buyers flock to solvent car companies, Wagoner has said.

Chrysler has said it will run out of money early next year. It ended the third quarter with $6.1 billion in cash and needs at least $3 billion on hand to operate, Chief Executive Officer Robert Nardelli told Congress on Nov. 18.

Pressure was mounting on GM and Chrysler this week before the congressional failure as both faced demands from a small number of parts-makers for payments in advance because of the bankruptcy concerns, people familiar with the matter said.

Ford Chief Executive Officer Alan Mulally said his company doesnĺt need emergency U.S. loans, though he predicted last week that the automaker could be dragged into bankruptcy by the failure of GM.

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Jeff Green in Washington at jgreen16@bloomberg.net
Last Updated: December 12, 2008 10:40 EST

From Bloomberg.com

Micro Sez:

Apparently Congress saying 'no' is meaningless for them.
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« Reply #1 on: December 12, 2008, 08:56:18 AM »

My gut tells me that this is one time when it SHOULD be meaningless.

AIG got billions of dollars when their failure wouldn't have had nearly the impact that the failure of one of the major car makers would.

I remember when big steel failed in this country back in the 1970s. The Government did nothing. The effect was devastating in this country. The effects were far reaching. The worst effect was that it helped devastate the coal industry, throwing thousands more people out of work. It was one of the prime reasons why the recession of the 1970s was so deep and so long.
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« Reply #2 on: December 12, 2008, 09:22:24 AM »

My gut tells me that this is one time when it SHOULD be meaningless.

AIG got billions of dollars when their failure wouldn't have had nearly the impact that the failure of one of the major car makers would.

I remember when big steel failed in this country back in the 1970s. The Government did nothing. The effect was devastating in this country. The effects were far reaching. The worst effect was that it helped devastate the coal industry, throwing thousands more people out of work. It was one of the prime reasons why the recession of the 1970s was so deep and so long.

So you think we should bail out domestically based auto manufacturers?  Will we not end up in the same situation when the money runs out in a few years?  A system that's continually losing money won't be fixed by adding a one-shot infusion of cash.

How is that better then letting GM file Chapter 11, cut the union fat in the reorg, and reemerge as a profitable company?
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« Reply #3 on: December 12, 2008, 09:33:45 AM »

If I'd wanted to buy third-rate rolling scrap iron from Detroit unions, I wouldn't have bought a Subaru.

If the governor of Illinois gets caught shaking down the system, he gets publicly humiliated. If union thugs and incompetent car makers do the same thing, they get billions of dollars of our hard-earned money.

Throw them all out of work!
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Mike Irwin
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« Reply #4 on: December 12, 2008, 09:37:58 AM »

You know, everyone is characterizing this as a bail out.

As in, we're going to give the auto makers billions of dollars and that's it.

That's not true.

This is a Chrysler in the 1980s situation.

Chrysler requested LOANS in the 1980s to get themselves back in the black, or go under.

That's what the automakers today are requesting -- LOANS.

Chrysler re-engineered its entire way of making cars in the 1980s, and it was extremely successful at the time. Chrysler paid back those loans in, IIRC, 1/10th the term.

Of course, some people will say "Well, Chrysler HAD their bite at the apple 25 years ago! Let them fail!"

That's a lovely concept.

IF time stands still. IF nothing ever chances. IF no one in management gets old, retires, gives up to a newer generation with newer ideas.

IF the American buying public doesn't mind buying the same model car year after decade.

Quite unrealistic, don't you think?


Yes, there's always an element of danger with a loan to an organization that's in trouble.

That's potential danger.

But the REAL danger, the KNOWN danger, is what will happen if two, or all three, of those manufacturers fold.

Chrysler, Ford, and GM directly employ what, 100,000+ people in the United States?

But the big three don't provide jobs just for those 100,000+ people. The auto industry has incredibly strong linkages (ties to multiple, diverse industries).

Let all three fail, and the steel and coal industries take a huge hit. Again.

Let all three fail, and dozens, if not hundreds, of small to midsize companies that provide supplies to the Big Three are in jeopardy, companies that likely employ just as many, if not more, people than the B3.

Let all three fail, and the independent dealer network folds. Thousands more jobs.

It just goes on and on.

The potential is that, in short order, unemployment in the United States could go up by a million or more in a matter of days, and a huge segment of the industrial base is shuttered.

I don't know about you, but to me, that happening really ends in only one outcome - economic depression, not recession, approaching that of the 1930s.

That's something that's just a bit too frightening to contemplate.  


That's also why I agree with those who are saying that the money MUST be tied to concrete reorganization plans, not the nebulous crap that they're coming up with right now. And, the UAW has got to see reality. They're going to have to give, and give hard, or they'll be just as responsible for the impending disaster as are the managers at the three companies. The rank and file has to see that, as well. I'd love to make $120,000 a year working on an assembly line because my Union is a bulldog and is good at squeezing the blood out of a turnip. But it's not realistic anymore.

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« Reply #5 on: December 12, 2008, 09:46:12 AM »

This is a Chrysler in the 1980s situation.

And where's Chrysler right now?  Right back in DC asking for money again.

I won't argue that the loans aren't necessarily a good idea, but I haven't been convinced that the bailout will really turn them around enough.

From what I've read about the Chrysler bailout, the government dragged them through chapter 11 in all but name.
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« Reply #6 on: December 12, 2008, 09:49:39 AM »

My gut tells me that this is one time when it SHOULD be meaningless.

AIG got billions of dollars when their failure wouldn't have had nearly the impact that the failure of one of the major car makers would.

I remember when big steel failed in this country back in the 1970s. The Government did nothing. The effect was devastating in this country. The effects were far reaching. The worst effect was that it helped devastate the coal industry, throwing thousands more people out of work. It was one of the prime reasons why the recession of the 1970s was so deep and so long.

Mike I'm not a big fan of government bailouts, but I do agree with you. The auto industry is so tied to so many other industries.
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« Reply #7 on: December 12, 2008, 09:50:16 AM »

Quote
But the REAL danger, the KNOWN danger, is what will happen if two, or all three, of those manufacturers fold.

Chrysler, Ford, and GM directly employ what, 100,000+ people in the United States?

But the big three don't provide jobs just for those 100,000+ people. The auto industry has incredibly strong linkages (ties to multiple, diverse industries).

Let all three fail, and the steel and coal industries take a huge hit. Again.

You are presuming that the big three will padlock the doors, tell everyone to go home, file chapter 7 and wait for the liquidators.

That is, IMO, highly unrealistic.  These companies would likely reorg under Chapter 11.  Case in point, United Airlines:

Quote
Unable to secure additional capital, UAL Corporation filed for chapter 11 bankruptcy protection in December. The ESOP was terminated, although by then its shares had become virtually worthless. Blame for the bankruptcy has fallen on the events of September 11, which triggered financial crisis in all the major North American airlines. However, the rise of low-cost carriers, labor disputes, and problems within the management structure of the company also contributed significantly.[citation needed]

United continued operations during its bankruptcy, but was forced to cut its costs drastically. Tens of thousands of workers were furloughed, and all city ticket offices in the US closed. The airline canceled several existing and planned routes, and eliminated its entire Latin American gateway and flight crew base at Miami International Airport after March 1, 2004. In 2003, United abandoned its maintenance hubs in Oakland and Indianapolis, even though maintenance was less expensive in Indianapolis, and transferred work to its San Francisco Maintenance Operations Center. Furthermore, they reduced their mainline fleet from 557 (before 9/11) to 460 aircraft.

At the same time, the airline continued to invest in new projects. On November 12, 2003, it launched a new low-cost carrier, Ted, to compete with other low-cost airlines. In 2004 it launched its luxury "p.s." (for "premium service") service on re-configured 757s from JFK Airport in New York City to Los Angeles and San Francisco. The service was targeted to business customers and high-end leisure customers in the coast-to-coast market.

Financial pressure on the airline was heavy. The SARS epidemic in 2003 depressed traffic on United's extensive Pacific network. The soaring cost of jet fuel ate away remaining profits United made. United implemented several fare hikes on overseas routes, citing rising fuel costs, in 2004 and 2005. Two days after its triumphant first flight to Vietnam, United announced that it would cut U.S. flight capacity by 14% after the holidays and add more international flights, which were more profitable.

United took advantage of its Chapter 11 status to negotiate hard-to-cut costs with employees, suppliers, and contractors, including cancellation of feeder contracts with United Express Atlantic Coast Airlines (which became Independence Air) and Air Wisconsin (which became a US Airways Express carrier).

Most controversial of all, however, was the 2005 cancellation of its pension plan, the largest such default in U.S. corporate history. It renegotiated its contracts with the pilots' and mechanics' unions and the Assosiation of Flight Attendants for lower pay. Criticism was also leveled at the CEO, Glenn Tilton, for demanding pay cuts from employees while receiving the highest salary of any major U.S. airline CEO.[32]

Originally slated to exit bankruptcy protection after 2Ż years in the third quarter of 2005, United requested yet another extension in light of record-high fuel prices. On August 26, 2005, the bankruptcy court extended the airline's exclusive right to file a reorganization plan to November 1, although it also stated firmly this extension would be the last. United announced at the same time it had raised $3 billion in exit financing and filed its Plan of Reorganization, as announced, on September 7, 2005.

The bankruptcy court approved the restructuring plan on January 20, 2006, clearing the way for United to exit bankruptcy on February 1, 2006, and finally return to normal operations.


IMO, this is the best medicine for the big three.
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« Reply #8 on: December 12, 2008, 09:55:02 AM »

I am ok with giving the automakers a bailout loan.  In general, I wouldn't be.  However, it is just stupid that we have given the financial sector up to $1.2 trillion ($1200 in relative terms) but we won't give an industry, that actually procduces (vs. pushing paper), $14 billlion ($14 in relative terms).  It really makes no sense.
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« Reply #9 on: December 12, 2008, 09:55:47 AM »

Chapter 11 worked for the airlines.  I can't see why it wouldn't work for the carmakers.  
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« Reply #10 on: December 12, 2008, 09:56:42 AM »

I am ok with giving the automakers a bailout loan.  In general, I wouldn't be.  However, it is just stupid that we have given the financial sector up to $1.2 trillion ($1200 in relative terms) but we won't give an industry, that actually procduces (vs. pushing paper), $14 billlion ($14 in relative terms).  It really makes no sense.
Apples and oranges.  The economic implications for a failed financial sector are far, far worse than the Big Three having to go through Chapter 11 restructuring.
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« Reply #11 on: December 12, 2008, 10:17:24 AM »

Quote
AIG got billions of dollars when their failure wouldn't have had nearly the impact that the failure of one of the major car makers would

Unfortunately thats simply not true.  AIG's CDS portfolio was enormous - they were the largest single holder of CDS in the US, if not the world, and keep in mind the total notional value of the CDS market is estimated to be between $50-70 trillion (Buffet has estimated it at $70tr, while Bill Ackman of Pershing Sq. Cap. Mgmt. estimated it at $50tr).  The failure of AIG alone had the potential to sink hundreds of banks if their imploded CDO holdings weren't backed by the AIG CDS.  The money loaned to AIG (and it was a loan) was spent on settling CDSs and meeting collateral calls on those CDSs  - not to protect AIG, but to protect AIG's counterparties.

I don't personally know the extent of AIG's dealings with GMAC, but I'd be surprised if GMAC didn't have dangerous levels of exposure to AIG.  Thus AIG's failure, would eventually lead to the failure of the big three, either by way of GMAC's exposures to AIG or the exposure of other lending institutions to AIG (because most people need a loan from some lending institution to buy a car).

So far we've seen the failure of about 170 banks which have drained about 30% of FDIC's reserves (Indy Mac's failure alone pulled almost 15%).  Had AIG failed, the remains of FDIC's reserves would have been quickly exhausted (covering insured deposits at other banks brought down by AIG), leading to bank runs and further deterioration of the US financial system.  In turn, that lack of confidence in the US financial system would then spread to foreign investors and sovereign wealth funds.  Once that happens and they lose their appetite for US treasuries, the US economic system would look a bit more like that of Mugabe's Zimbabwe.
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« Reply #12 on: December 12, 2008, 10:27:24 AM »

"You are presuming that the big three will padlock the doors, tell everyone to go home, file chapter 7 and wait for the liquidators."

No, not unrealistic.

Few businesses survive a chapter 11 with an intact workforce. No, all 100,000 jobs would not be lost. But the losses would still be substantial.

Comparison to the airline industries also isn't viable.

Airlines provide a service, they don't manufacture a product.

What do you think the sales of US autos would be if the company is in reorganization?

Would YOU purchase a Ford, Chevy, or Chrysler if you knew the company was undergoing a bankruptcy reorganization? How confidant would you feel about that 5 year warranty? Most analysts see only one outcome if one or all of the companies go into bankruptcy -- sales fall at a pace far faster than what they're doing now, which only makes the job losses worse.

People continued to fly airlines that are in bankruptcy reorganization because of the high levels of confidence they have in the safety inspections and procedures. They know that an airline that is strapped for cash isn't simply going to fire its whole force of mechanics and fly the planes and pray that they don't drop out of the sky.




"And where's Chrysler right now?  Right back in DC asking for money again."

Congratulations on not reading my entire post and falling into the trap of "well, if we did it X number of years ago, and it worked then, why do we need to do it again?"

But, really... RIGHT BACK in DC?

Jesus, you DO realize that 25 years have passed, don't you? You do realize that since Chrysler used those loans to turn itself around that trivial things like the fall of the Soviet Union, the reunification of Germany, the emergence of the unified European Zone, four presidents, two additional recessions, September 11, three wars, and countless military interventions have happened, don't you?

I'll reiterate:

"Of course, some people will say "Well, Chrysler HAD their bite at the apple 25 years ago! Let them fail!"

That's a lovely concept.

IF time stands still. IF nothing ever chances. IF no one in management gets old, retires, gives up to a newer generation with newer ideas.

IF the American buying public doesn't mind buying the same model car year after decade.

Quite unrealistic, don't you think?"



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Mike Irwin
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« Reply #13 on: December 12, 2008, 10:30:17 AM »

AIG is a holding company.

The "AIG holdings" are held among dozens of smaller related companies.

A complete and total liquidity failure of the kind hinted at was possible, but realistically not very likely.

Even so, an AIG failure wouldn't have the potential to put hundreds of thousands of people out of work or have such a pervasive effect on a very large part of the manufacturing sector.
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« Reply #14 on: December 12, 2008, 10:33:56 AM »

Let's not forget this about AIG...

That's from Wikipedia.

Don't like the source? See the numbers in brackets?

Those are references to the origin of the source -- Reuters, AP, etc.

You'll have to go to the Wikipedia article to click the source reference.

The following week, AIG executives participated in a lavish California retreat which cost $444,000 and featured spa treatments, banquets, and golf outings.[32] It was reported that the trip was a reward for top-performing life-insurance agents planned before the bailout.[33] Less than 24 hours after the news of the party was first reported by the media, it was reported that the Federal Reserve had agreed to give AIG an additional loan of up to $37.8 billion. [34]

AP reported on October 17th that AIG executives racked up an $86,000 tab for a luxurious English hunting trip. News of the lavish spending came just days after AIG received an additional $37.8 billion loan from the Federal Reserve, on top of a previous $85 billion emergency loan granted last month. Regarding the hunting trip, the company responded, "We regret that this event was not canceled,".[35]

An October 30, 2008 article from CNBC reported that AIG had already drawn upon $90 billion of the $123 billion allocated for loans.[36]

On November 10, 2008, just a few days before renegotiating another bailout with the US Government for $40 billion, ABCNews reported that AIG spent $343,000 on a trip to a lavish resort in Phoenix, Arizona. [37]
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« Reply #15 on: December 12, 2008, 10:43:59 AM »

Quote
A complete and total liquidity failure of the kind hinted at was possible, but realistically not very likely.


Mike, not only was it possible, it was so close that the initial $85bn was exhausted on mere collateral calls - every downgrade or slump in their stock price cost them billions more in margin requirements.  I work at a Wall St. law firm and can tell you a quarter to a half-billion  dollar collateral call between counterparties on a single CDO or CDS was not uncommon in the declining market.  Now multiply that by a couple hundred counterparties...

Quote
Even so, an AIG failure wouldn't have the potential to put hundreds of thousands of people out of work or have such a pervasive effect on a very large part of the manufacturing sector.


Well not if you don't consider the complete destruction of the financial system on which the manufacturing sector depends a "pervasive effect".
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« Reply #16 on: December 12, 2008, 10:46:47 AM »

Quote
Let's not forget this about AIG...

Absolutely miniscule in the grand scheme of AIG's troubles. Besides which, AIG secured a loan (at LIBOR + 8.5%) from the treasury.  If they wanted to waste money rather that use it to repay the bridge loan, it was just that much more they'd have to payback at those staggering rates.

I will agree, however, that Paulson failed to put sufficient strings on the loan - but that goes for AIG, TARP, and just about anything else he & Bernancke have done since this mess really started picking up speed.
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« Reply #17 on: December 12, 2008, 12:07:32 PM »

The dims have to protect all those union votes.....................chris3
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« Reply #18 on: December 12, 2008, 12:37:30 PM »

Here's a tidbit found at the Heritage Foundation website - a 1983 analysis of the Chrysler bailout:  http://www.heritage.org/research/regulation/bg276.cfm

Quote
The truth is that the Chrysler Corporation has gone bankrupt by every normal definition of the word. In the past three years, Chrysler has renegotiated its debts and restructured its organization in a way that greatly resembles a company going through Chapter 11 bankruptcy. Its creditors, like those of bankrupt firms, were forced to swallow sizeable losses.

 . . . Chrysler was able to pay off more than $600 million in debts at just 30 cents on the dollar. In addition, the company was allowed to convert nearly $700 million in debts into a special class of preferred stockŚpaper relatively worthless in the financial markets because the shares earned no dividends and were to be unredeemable for several years.  . . .

Chrysler's creditors are not alone in being socked by the company's quasi-bankruptcy. The firm's workers have paid an even greater price. Despite the fact that the loan guarantees were approved by Congress mainly to protect jobs at Chrysler, the company has sent home nearly half of its employees, cutting its white collar work force by 20,000 and laying off 42,600 of its hourly workers since the loan guarantees were signed into law. Many observers, including Senator William Proxmire (D-Wisc.) complain that the number of employees laid off at Chrysler in this period is at least as largeŚand may even have been largerŚthan the number of jobs that probably would have been lost had Chrysler actually been forced into bankruptcy.
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« Reply #19 on: December 12, 2008, 12:48:35 PM »

"Absolutely miniscule in the grand scheme of AIG's troubles."

Not saying it had any effect on the bottom line.

It just made a lot of people sit up and say "Just why in the hell are we doing this in the first place?"


"Here's a tidbit found at the Heritage Foundation website - a 1983 analysis of the Chrysler bailout:"

Yep, pretty accurate.

But, what Proxmire didn't say is that, within two years to three years, Chrysler's resurgence helped add a significant number of new jobs to the overall workforce, both Chrylser's and the supporting infrastructure's, job's that would have been lost for good had Chrysler folded totally at that time.

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« Reply #20 on: December 12, 2008, 02:01:34 PM »

So you think we should bail out domestically based auto manufacturers?  Will we not end up in the same situation when the money runs out in a few years months or weeks?  A system that's continually losing money won't be fixed by adding a one-shot infusion of cash.

Nick, you are an optimist.

Let them go Ch 11 or impose the equivalent of Ch 11 without using the B-word, if the B-word scares people.  It has to be done and tossing money at the current situation will not do any good, since the Big Three will be back in weeks or months begging for more taxpayer dollars.

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« Reply #21 on: December 12, 2008, 02:05:08 PM »

Where exactly does Congress get the authority to bail out automakers?
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« Reply #22 on: December 12, 2008, 02:28:06 PM »

Would YOU purchase a Ford, Chevy, or Chrysler if you knew the company was undergoing a bankruptcy reorganization? How confidant would you feel about that 5 year warranty? Most analysts see only one outcome if one or all of the companies go into bankruptcy -- sales fall at a pace far faster than what they're doing now, which only makes the job losses worse.

And the better option is the make loans with taxpayer money that are so risky/dubious that no financial institution in the private sector is willing to make them?!?

Hmmm... the state pays to keep domestic manufacturing companies making crappy, outdated cars using inefficient manufacturing means.  Where have I seen this before? (*COUGH* Trabant *COUGH*)

Sorry Mike - I still don't get how this is a good idea at all.

Would it suck if they went under?  Yes.  Would it suck hardcore?  Yes.  Does that impact justify redistributing money from those with the means/ability (the US taxpayers) to those with the need? (UAW employees)  Not in my opinion.
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« Reply #23 on: December 12, 2008, 03:30:35 PM »

National Review has a good editorial on the bailout:



http://article.nationalreview.com/print/?q=OTMyNTI3NDY5MDEzMzBjMDJmNjY0NWJmMzUzZDQwYmQ=

December 12, 2008, 1:40 p.m.

Telling Detroit No
By the Editors

The Detroit automakers will not get a bailout from Congress this year, and a handful of Republican senators are due thanks. Senate GOP leader Mitch McConnell left the door open for an eleventh-hour compromise, but Democrats slammed the door in his face when they rejected an amendment, proposed by Bob Corker, that would have required meaningful concessions from the autoworkersĺ unions. The Detroit three and their apologists will now take their tin cups to the White House Ś to Treasury Secretary Hank Paulson and his $700 billion.

President Bush could have burnished his spotty record on domestic policy by following his partyĺs lead and telling the automakers no. Unfortunately, the White House issued a statement today indicating that the president lacks the will to do so.

The Big Threeĺs CEOs, the leaders of their unions, and their taxpayer-funded lobbyists (disguised as lawmakers from Michigan) have done an excellent job of sowing fear and confusion, particularly in the media. The failure of the Big Three would bring about an unprecedented economic calamity, they claim, costing millions of jobs, deepening the recession, and exacerbating the credit crisis. One of Chryslerĺs top executives has warned that it could cause another Great Depression.

To give these complaints a sharper edge, they drew attention to the bank bailouts and protested that they are just as deserving. In fact, neither the banks nor the automakers deserved a bailout, but no economy will survive without a banking system.

Whatĺs more, the failure of one or more of the Detroit car companies would not lead to the total collapse of the industry that some are predicting. Chapter 11 bankruptcy will allow the companies to continue to function so long as they secure ôdebtor-in-possessionö financing, which would allow them to avoid immediate liquidation. If there is a role for the federal government in this, it is perhaps as a facilitator of these DIP loans. But bankruptcy is a necessary condition if the government is to put taxpayer money at risk. Otherwise, the automakers and their unions will not make the painful changes that will allow them to become competitive again.

The Detroit three and their defenders say they have plans to restructure Ś all they need is the cash. But Senate Republicans, in their clumsy attempt at compromise, exposed these plans as shallow fašades. Corker offered an amendment that would have conditioned taxpayer assistance on real change and accountability: The federal ôcar czarö envisioned in the bailout bill would have been given the power, under Corkerĺs plan, to impose a deadline and force the automakers into Chapter 11 bankruptcy if they failed to bring their expenses (average hourly labor cost: $73) into line with those of the foreign transplants Ś factories in the U.S. operated by companies such Honda, Nissan, and Volkswagen, which employ a non-union workforce of more than 100,000 Americans (average hourly labor cost: $49).

This plan was not without flaws. The Big Three really need to settle their fundamental business problems with a bankruptcy judge, not a federal bureaucrat taking orders from Congress. But Corkerĺs proposal at least would have addressed the problem of labor costs, which is why the unions and their allies in the Democratic party rejected it out of hand. Detroit cannot solve this problem on its own, and Congress can only make the problem worse. Bankruptcy court is the place where cooler heads can sort through Detroitĺs Byzantine labor contracts and decide what makes sense and what doesnĺt.

For that reason, the Bush administrationĺs decision to use the bank-bailout funds to rescue the auto companies is both disappointing and wrong-headed. Congress directed the administration to use those funds to save the financial system, not three car companies. Congressĺs intent cannot be misconstrued, especially after it explicitly rejected the automakersĺ pleas for help.

House Republicans stood firm on the auto bailout, with most voting against. Senate Republicans did an outstanding job, with McConnell and Co. taking the heat for blocking the bill even after the Detroit lobby prophesied Armageddon if it didnĺt pass. There is a political party in this country that seeks to nationalize the automotive industry, and it is not the one to which the president belongs. His reversal on this issue is a sad affront to his party and its philosophy Ś not the exit we would have hoped for.
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Regards,

roo_ster

ôFallacies do not cease to be fallacies because they become fashions.ö
----G.K. Chesterton
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« Reply #24 on: December 12, 2008, 03:34:32 PM »

Trabants were awesome cars compared to these.
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