Should the government bail-out include domestic automakers?

[jfelbab]

Another article on the proposed bailout.

A Real Bailout for Auto Makers - Barrons.com

[Len_A]

Originally Posted by jfelbab

Another WSJ article on the proposed bailout.

A Real Bailout for Auto Makers - Barrons.com

More of the same. I do not believe for a minute a prepackaged bankruptcy will work, and there never has been one attempted for a business as complicated as the auto industry.

There are several problems with this idea of a prepackaged bankruptcy.

One) The pension funds are fully funded, and as the side article to the above article noted, the PBGB has been forcing companies to keep their pension plans. The biggest reason the transplants have lower labor costs than the domestics is the retiree medical costs, which shift to a union run trust fund, and as of 2010, the domestic labor costs drop down to the transplants levels. That trust fund is over 75% funded, as of the testimony this week. Unlikely a bankruptcy judge is going to let the creditors stick it to the retirees when the situation is almost resolved.

Two) Too many vendors that the auto companies owe money to on an on-going basis. I don't know if you're aware of this, but cars and light trucks have any where from 9000 to 16,000 separate parts (by the time you break down everything, engines and transmissions included). Those are currently supplied by about 1400 suppliers. Those are called production suppliers, and include steel, glass, and tire companies. The non production suppliers, supplying everything from the tooling for the plants (hand tools all the way to machine tools and robots) to janitorial services, to contractors running various departments in the plants like shipping and receiving and material handling, to office supplies, to the lunch room contractors to landscaping services, to the phone company, to the trucking companies shipping cars to the dealers, to the rail companies, etc.

All of the "big" ones have to be negotiated with ahead of a bankruptcy filing in a prepackaged filing. Several of my neighbors and family here in Detroit work in management for some of these suppliers - having negotiations forced on them in advance of a "prepackaged bankruptcy" will be met with a lot of resistance, because the money the Big Three owe on a monthly basis for parts shipped to the plants, that money is the basis for the suppliers lines of credit. The banks that issued those lines of credit can, and basis on previous bankruptcies will, call the loans in if the receivables of the suppliers (the car companies payables) get tied up in court. No lines of credits for some suppliers means no raw materials to keep making parts. Shut down.

Three) Dealers are protected by the fifty states franchise laws. They have no incentive to participate in a prepackaged bankruptcy, and most state statutes of limitations run five years, where as the new bankruptcy law calls for a definite exit date, which I think can't be more than three years after the filing. That leaves two years after the end of the bankruptcy, assuming they don't liquidate, to screw the auto company in state court.

Four) A lot of state and local government pension funds have investments in GM, ford, and Chrysler bonds, which a C11 filing would likely render worthless. It's unlikely that these investors are going to walk quietly into a prepackaged or conventional bankruptcy negotiation and just roll over. In fact, they have to meet their fiduciary responsibility to the pensioners and fight like hell to get as much as they can get.

A bankruptcy filing by any of the Big Three would have repercussions that would extend into all of car manufacturing in North America, and there's another complication - all three companies have assembly, and some engine manufacturing, in Mexico and Canada, and those countries are not bound by our bankruptcy laws.

[Len_A]

Various news on a short term deal:

White House, Democrats reach deal on $15 billion auto aid - Yahoo! News

Democrats Plan Short-Term Rescue for Automakers

Looks like losing 533,000 jobs in November scared everyone enough to do something short term, until the new administration and Congress take over in January.

[Len_A]

From Automotive News:

THE AUTO INDUSTRY BAILOUT

Chrysler says legal firm advised against bankruptcy filing

Bradford Wernle
Automotive News
December 5, 2008 - 2:16 pm ET
UPDATED: 12/5/08 6:20 p.m. EST

Chrysler LLC confirmed today that it had hired global law firm Jones Day to assess financial alternatives -- and said the legal firm's analysis supports the auto industry stance that bankruptcy isn't a viable option.

Jones Day was one of several outsiders hired for the review, Chrysler said. Regarding a Chapter 11 filing, Chrysler said, "The results of this evaluation determined the impact to the overall domestic automotive industry would be devastating."

Chrysler CEO Bob Nardelli told Congress today and yesterday that his company could run out of funds during the first quarter of next year if it does not get help. Chrysler says it needs $4 billion of a $7 billion loan package this year.

Without an infusion of funds, Chrysler could be facing liquidation, he said. Chrysler burned through cash at the rate of $1 billion a month in the third quarter.

As part of its submission to Congress, Chrysler stated that a prepackaged bankruptcy or a Chapter 11 filing were not practical solutions to its financial crisis.

Chrysler, in its statement, said it hired several outside advisers, including Jones Day, "in order to provide a comprehensive independent analysis of the various options available to the company."

The hiring of Jones Day was reported today by The Wall Street Journal.

Jones Day lawyer Corinne Ball is handling the Chrysler restructuring, the Journal said.

[Len_A]

Originally Posted by Awsomeshine

Len

Been reading your posts and I am in the same boat as you over in the UK. I am a builder and have had no work now for 4 months, just coming to the end of our savings.

I did however used to waterproof cellars (basements) with a tanking paste that the home owner can do. I'll google this for you and see if it is something you can do.

Steve

BTW, neglected to say, last night, that I'm real sorry to hear about your situation. The economy in Europe is tanking as bad as it here - heard from relatives in Malta how slow everything has become. Hope you get some work real soon.

[Setec Astronomy]

From the New Jersey section of tomorrow's NY Times, an article about the last two auto plants in the state (GM Linden, closed 2005, Ford Edison, closed 2004) which have now been bulldozed into 100 acre tracts of nothing. Money quote:

"We're all connected in this mess, not just the automotive industry," said Mr. Hall, 53, who spent 33 years with GM in Linden and whose late father, Eddie, spent 42 years there. "This country got great through industry, but we've gotten away from what made us great, and we're seeing the effect of it."

[FlowRate]

Originally Posted by Len_A

Bullsh*t. Spoken like someone who doesn't understand, in the slightest, the depth of the problem. Auto manufacturing is 20% of all manufacturing, and is 10% of all economic activity, and that doesn't count the effect auto and auto parts retailing has on the service sector of the economy. A depression, or even a deep recession is counter productive to a healthy economy.

Spoken like someone who didn't bother to take the time to read the article that I posted already... I'm sorry that you can't understand why recessions benefit not only the economy, but society as a whole, in the long run. Unchecked economic complacency leads to stagnated technology and inflated currency.

What the hell is the benefit of HALVING the actual value of your currency by simply printing more fiat money?

The whole purpose of a (somewhat) free market is to ALLOW INSOLVENT/FAILING COMPANIES TO DIE! It's perfectly fine if it affects other sectors, even on a large scale.

Sure, I'll give you that it REALLY sucks for people who are affected by it. Heck, it's affecting my dad because enrollment is down and he's a part-time professor. Also, the sudden inflation of the US currency is causing his Navy retirement pay to mean less and less. I really feel for anyone who's in financial hard times. But that is simply part of life.

Also, why not give the money that the government would steal from the people BACK to the people for purchase of new cars? Sounds like a better idea to me...

[Len_A]

Originally Posted by FlowRate

Spoken like someone who didn't bother to take the time to read the article that I posted already... I'm sorry that you can't understand why recessions benefit not only the economy, but society as a whole, in the long run. Unchecked economic complacency leads to stagnated technology and inflated currency.

What the hell is the benefit of HALVING the actual value of your currency by simply printing more fiat money?

The whole purpose of a (somewhat) free market is to ALLOW INSOLVENT/FAILING COMPANIES TO DIE! It's perfectly fine if it affects other sectors, even on a large scale.

Sure, I'll give you that it REALLY sucks for people who are affected by it. Heck, it's affecting my dad because enrollment is down and he's a part-time professor. Also, the sudden inflation of the US currency is causing his Navy retirement pay to mean less and less. I really feel for anyone who's in financial hard times. But that is simply part of life.

Also, why not give the money that the government would steal from the people BACK to the people for purchase of new cars? Sounds like a better idea to me...

I minored in economics, so I'm not completely daft on the principles (only partially). I said "BS" to your comment "The thing is, markets and businesses need to "implode" to maintain a healthy economy..."

Theory is all well and good, but an imploded auto parts sector means every auto plant experiences parts disruption, shut downs of weeks to months, even those of the financially healthier transplants. Do you understand that? We're not talking only about shaking out the unhealthy companies. We're talking about all auto production going down, and the disruption in the supply chain taking years, not months, to iron out.

That's the industry system we have as the result of the Big Three emulating the Japanese model of outsourcing auto parts instead of making them in house, further risking production by using the "Just In Time" delivery system. 9-11 shut down the borders for a couple of days, remember? Dozens of plants shut down within three shifts - a day and a half - because some parts were coming from Canada and were stuck on the other side of the border. Now multiply that disruption by 1400 companies, and tie ups in bankruptcy court.

The kind of unemployment that would cause, stretching into steel, glass, and tire production, chemical and semiconductor production, plus all the trucking and rail used to ship parts in and finished cars out, we can not afford.

No, it is not fine to allow the free market to function like that. The damage to our heavy manufacturing sector would last beyond a few years. The damage would be almost incalculable. There is simply no other product made in the USA that has this effect on the economy.

And to make it worse, like rubbing salt in an open wound, a major reason for the insolvency is newer competition (the transplants), whose plants were heavily subsidized with our tax money. Each and every one got nine figure tax incentives - you read that correctly - nine figure tax incentives. Hundreds of millions of tax payer dollars. To create North American competition to older domestic manufacturing plants. There-by putting downward pressure on employment in those older plants, cutting jobs that the newer transplants only partially replaced (losing jobs by a factor of 3 lost Big Three jobs to 1 transplant job), there-by causing a decline in tax revenues.

Real smart economic policy. All to placate certain portions of the market who have a bug up their backside against Detroit brand cars. What sense is it to give money away (what the Detroit auto makers are asking for is a loan, not a give away), to create few jobs than you lose, and take in less tax dollars. Some investment. not.

[jdoria]

Ladies please...

There are a lot of people to point fingers at, this is an unprecedented catastrophic event. As a graduate of Cornell with a degree in Labor Relations, I have a text book opinion as well as a GM dealership owner opinion.

Detroit is a dinosaur, period. The Volt is a turd, my 2007 Jeep is a engineering antique.

The bankers beat the 80's junk bond business, 1000 fold, with this sleazy credit business. 99.999% of them will never need to work again. Trust me. Credit default swaps and derivatives??????

Labor Unions are way out of control. By giving Detroit a few million in concession on labor is a total joke. Free or cheap labor inst going to make the product profitable.

The Japanese and Germans are in trouble also. Don't kid yourself.

We have a long road to go before there is light and we can make a decision on what to do to pull the US out of this hole.

[Len_A]

Originally Posted by jsatek

Ladies please...

There are a lot of people to point fingers at, this is an unprecedented catastrophic event. As a graduate of Cornell with a degree in Labor Relations, I have a text book opinion as well as a GM dealership owner opinion.

Detroit is a dinosaur, period. The Volt is a turd, my 2007 Jeep is a engineering antique.

The bankers beat the 80's junk bond business, 1000 fold, with this sleazy credit business. 99.999% of them will never need to work again. Trust me. Credit default swaps and derivatives??????

Labor Unions are way out of control. By giving Detroit a few million in concession on labor is a total joke. Free or cheap labor inst going to make the product profitable.

The Japanese and Germans are in trouble also. Don't kid yourself.

We have a long road to go before there is light and we can make a decision on what to do to pull the US out of this hole.

Well, I don't agree with everything you wrote (Volt a turd? It's not out yet, LOL). I do not blame the labor unions, as I'm up close and personal with them and management, and the situation is not what it reads in a text book.

I do have the same contempt you have for credit default swaps and derivatives, and thank you for pointing out that even the Japanese and the Germans are in trouble. May I point out that Toyota lost a third of a billion dollars in the third quarter, in North America, and my guess is that the fourth quarter is going to suck for everyone, including the transplants. Yesterday, Honda pulled out of Formula One racing to conserve cash, that's how bad it is.

[jdoria]

Originally Posted by Len_A

Well, I don't agree with everything you wrote (Volt a turd? It's not out yet, LOL). I do not blame the labor unions, as I'm up close and personal with them and management, and the situation is not what it reads in a text book.

I do have the same contempt you have for credit default swaps and derivatives, and thank you for pointing out that even the Japanese and the Germans are in trouble. May I point out that Toyota lost a third of a billion dollars in the third quarter, in North America, and my guess is that the fourth quarter is going to suck for everyone, including the transplants. Yesterday, Honda pulled out of Formula One racing to conserve cash, that's how bad it is.

To this day. I question derivatives and default credit swaps to all of my clients. People I once looked up to as "genius millionaires", I now look at like dirt bags... I feel like a total d@ck for listening to these people. Now I ask whats going to happen with all of that real estate you are getting from foreclosures? The answer is, " we don't want it, we are losing money". Total BS. An amortization table is desinged to produce profit for the lender. 99.999% of your monthly payment is written down as interest for the first 8 or so years. My mortgages total 7,770 per month! that's good enough profit to lower the TCO of my 80% financed land!

Don't be married to the unions out of some political or social obligation, make your own internal call on that. I just built yet another trading floor in yet another union building. Work and people were great, but at 3x the cost and 10x the mental effort of any other method of construction i still hate it.

Insurance $18 per hour
B-Fund $12 per hour
Journeyman, Etc pay $29 per hour

I'm still paying $85 per man hour, where is the rest going, legal fees? Bordering on bad, no matter how you look at it.

I owned a GM store before the credit crunch
I contracted Local 3 IBEW labor in NYC on multi-million dollar contracts.
I don't have an opinion or stereotype, I speak from experience.

Unions were initiated to protect employees, not share in profits. Want to make profits, become a CEO. Want simply to stop cruel people from the unlawful use of human resources? Become a union delegate.

To quote Gordon Gekko, "Greed is good" is a total oxy-moron when looking out the window of your home!

[Len_A]

Originally Posted by jsatek

To this day. I question derivatives and default credit swaps to all of my clients. People I once looked up to as "genius millionaires", I now look at like dirt bags... I feel like a total d@ck for listening to these people. Now I ask whats going to happen with all of that real estate you are getting from foreclosures? The answer is, " we don't want it, we are losing money". Total BS. An amortization table is desinged to produce profit for the lender. 99.999% of your monthly payment is written down as interest for the first 8 or so years. My mortgages total 7,770 per month! that's good enough profit to lower the TCO of my 80% financed land!

Don't be married to the unions out of some political or social obligation, make your own internal call on that. I just built yet another trading floor in yet another union building. Work and people were great, but at 3x the cost and 10x the mental effort of any other method of construction i still hate it.

Insurance $18 per hour
B-Fund $12 per hour
Journeyman, Etc pay $29 per hour

I'm still paying $85 per man hour, where is the rest going, legal fees? Bordering on bad, no matter how you look at it.

I owned a GM store before the credit crunch
I contracted Local 3 IBEW labor in NYC on multi-million dollar contracts.
I don't have an opinion or stereotype, I speak from experience.

Unions were initiated to protect employees, not share in profits. Want to make profits, become a CEO. Want simply to stop cruel people from the unlawful use of human resources? Become a union delegate.

To quote Gordon Gekko, "Greed is good" is a total oxy-moron when looking out the window of your home!

Well, manufacturing unions and construction trade unions seem to be two different animals. When you hear that the Detroit Three's labor costs are $70 an hour, about $25 an hour is retiree health care. When that goes out in 2010 to a trust fund, and the rest of the two tiered wage structure kicks in, Detroit and the transplants will all be in the $40 to $42 an hour range, benefits included. To paraphrase what you said, want to stop cruel people from abusive treatment of human resources? Become a union delegate. I've seen more than my share as both a former auto worker from thirty years ago, and more recently as an industrial sales rep calling on these auto plants Unfortunately, d*ckhead supervisors still exist.

The financial rocket scientists that came up with credit swaps and derivatives - guys like you and I should get to have a crack at them. With a traditional Louisville Slugger. Nothing like the sound of hickory coming off some well deserving b*stard's skull. Someone called them financial weapons of mass destruction. Turns out to be very accurate.