Washington's Foot Dragging on Automaker Bailout Disappoints Markets

by: Chris Krasowski November 21, 2008 | about stocks: F / GM    
Chris Krasowski

Chris Krasowski

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For the second time a needed bailout that was, wasn't. Yesterday's market session traded higher by mid-day as Traders were looking for US lawmakers to outline a plan to bail out the American automotive industry. Instead they got grand-standing and lecturing from US senators bent on making automotive executives look foolish in the political spectrum.

A $25Billion package for the big 3 American automakers seems like small peanuts compared to the $700Billion package passed to bail out banks and mortgage lenders, however Ford (F), General Motors (GM) and Chrysler were forced to beg hat-in-hand at the feet of Washington's might.

It doesn't take a rocket scientist to see trends that had been developing in America. Big Trucks and SUVs selling furiously taking up all showroom space, and more importantly development time and dollars within American factories. All the while strong smaller Japanese and European models made their imprint within the buying habits of American consumers.

Then oil spiked higher and credit froze. The big 3 were unable to resell virtually any of their gigantic fleet of leased vehicles, mainly because even Americans were not buying Trucks with gas at $4/gallon. This led to substantial write-downs and quarterly losses, and a situation where the companies were burning through cash so quickly they are unable to sustain themselves any further. To complicate matters more, Union contracts that have been crippling the business slowly for years are now coming to the forefront showcasing just how much money is spent on pensions, insurance and benefits for American Autoworkers. Oh and then of course Americans went into full out Recession mode in October and stopped buying cars at all.

Chevrolet's answer to the problems, the Volt, coming in 2011, could be too little too late. Ford is trying to put "hybrid" on just about every model and seemingly can not find the wisdom to bring some of their more successful small European cars into the American market. All the while Toyota (TM) and Honda (HMC) continue to lead in fuel efficient vehicles while Germany's big 3 dominate mind-share in the luxury segment.

So Detroit went to Washington for help and got smacked around by lawmakers trying to look political as markets around them fell further with every word. The United States Auto Industry is broken, everyone knows it, Senators in a special session will not have uncovered the Lost Ark by saying so. The grand-standing under the guise of "protecting the tax-payer" is all well and good but wouldn't those tax payers be more concerned if their retirement packages, employee stock plans and investment accounts were worth half as much as they were last year?

Did these not people learn anything the first time around when the initial banking bailout failed to pass? Senators and Congress made a lot of speeches about concerned citizens calling worried about their tax dollars going to bailout Wall St. Then the market dropped 700 points in the span of a couple of hours and Joe Q. Public started calling not about his taxes but about his retirement account.

Now Lawmakers have every right to ask Detroit for a turn-around plan before they give them any handouts but this type of thing can not be all or nothing. Authorize an influx of $9Billion to keep the companies and all their workers solvent till the end of the year and then reconvene later to authorize another $16Billion contingent upon seeing evidence of new company direction in the face of a changing industry. And like everything political in America, of course the $25Billion in question had already been set aside for the Auto Industry to use for other means.

But Lawmakers did a lot of shouting and finger pointing but little else thus leading the S&P to an almost 50% decline year-to-date. Amonst the trillions in market losses already sustained by economic and recessionary pressures what's another $25Billion if it will instill some hope to the millions of workers employed by the industry, the markets and the US economy in general.

But then again gas prices fell below $2/gallon so maybe Trucks will sell again. Once this pesky recession subsides that is.

Disclosure: Author holds no position in any aforementioned companies.

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This article has 10 comments:

  •  
    Nov 21 05:29 PM
    And hope it is! what's another $25Billion if it will instill some hope to the millions of workers employed by the industry, the markets and the US economy in general?

    It's money down the drain just like the initial portion of the $700Billion handed out to the major banks. Hope. Where's the beef? Gag, where's the plan? Find me a Venture Capitalist who pitches big bucks to a business without a detailed business plan and he'll/she'll look just like a US Congressman. Where's the plan? Where's the plan? Where's anyone in Washington who knows anything?
    Reply | Link to Comment
  •  
    Nov 21 05:50 PM
    @jarco: Ron Paul... but that is but one man.

    @ the author of the article: "For the second time a needed bailout that was, wasn't." Who says? IF they need that much help they should be forced to declare Chapter 11 first... Then we will be more sympathetic and discuss helping them through this mess with loan guarantees that MUST be repaid - with some interest.
    Reply | Link to Comment
  •  
    Nov 21 07:35 PM
    Is it any wonder that I do not trust the U.S government. Must I list the reasons. (rhetorical questions) A few: I watched as the US government stole the gold of US citizens. I watched as seven US presidents in a row each did something stupid with regard to Indo-China. (starting with Roosevelt) Truman STARTED the Vietnam war. He is given credit for ending the war with Japan. He did not; the Japanese did not want Russians occupying Japan, so they surrendered to the US.
    What next. It looks very much like the US government is hell bent on forcing the auto makers into bankruptcy. If that happens congress will play to the grandstand and refuse to enforce the government's commitment to insure pensions. And will I just watch this time. TRY ME.
    Reply | Link to Comment
  •  
    Nov 22 08:22 AM
    Definite "grandstanding&qu... by Congress ........ BOTH Democrats and Republicans.......... BOTH acting like they are minding the store ......... BOTH asking anal and inane questions ......... BOTH playing violins while Rome is burning ............ Rome IS BURNING!!
    Reply | Link to Comment
  •  
    Nov 22 11:07 AM
    MATH IS AN EXACT SCIENCE. ONE PLUS ONE IS TWO ALL OVER THE WORLD. THE IDIOTS ON CAPITAL HILL THAT WE ELECTED TO OFFICE WILL NOT HAVE THEIR PENSION PLANS OR MORTGAGE PAYMENTS AFFECTED BY THE CURRENT ECONOMIC CRISIS!! HOWEVER, IF AN AUTO MAKER THE SIZE OF GENERAL MOTORS FALLS, THINK ABOUT THESE FACTS.....UNIROYAL, FIRESTONE, PARTS SUPPIERS, TRUCKING COMPANIES, INDEPENDENT PARTS MANUFACTURERS, PAINT SUPPLY HOUSES, ETC, ALL WILL BE IN CRITICAL FINANCIAL CRISES!! LIFE SUPPORT WILL BE OF NO CONSEQUENCE BECAUSE THE TRICKLE DOWN EFFECT WOULD CAUSE THE LOSS OF 1,000,000 JOBS, NOT TO MENTION THE HUGE LOSS OF TAX DOLLARS TO THE FEDERAL GOVERNMENT WHICH BY THE WAY PAYS SOME PORTION OR ALL OF THE SALARIES OF THE ELECTED OFFICIALS THAT WERE SO CONCERNED ABOUT THE THREE INDIVIDUALS THAT FLEW INTO DC VIA LEAR JETS. THE POSTURING BY THESE OFFICIALS TO MAKE GM, FORD AND CHRYSLER LOOK FOOLISH IN FRONT OF THE AMERICAN PUBLIC SERVED NO PURPOSE OTHER THAN AN ATTEMPT TO VALIDATE THAT CONGRESS AND SENATORS WERE DOING THEIR JOBS AND LOOKING OUT FOR THE AMERICAN PEOPLE THAT ELECTED THEM TO OFFICE. WHAT A FARCE!!!!! THOSE SAME ELECTED OFFICIALS AND BILLS THEY ALLOWED TO PASS STARTING IN 1998 IS THE REASON FOR THE CURRENT CRISIS AT HAND. TRUST AND BELIVE THE HOUSING MARKET DID NOT BY ITSELF CAUSE THIS MESS. CHANGING CERTAIN LAWS PERTAINING TO THE PURCHASE OF DEBT BY BANKS AND MORTGAGE COMPANIES BOUGHT THIS ABOUT AND IT BEGAN 10 YEARS AGO. WE AS AMERICANS ARE ALSO GUILTY BECAUSE WE CEASED TO HOLD PEOPLE THAT WE ELECTED INTO OFFICE ACCOUNTABLE. WE HAVE A NEW PRESIDENT AND NOW IT IS TIME TO HOUSE CLEAN IN THE SENATE, CONGRESS AND THE HOUSE OF REPRESENTATIVES!!
    Reply | Link to Comment
  •  
    Nov 22 12:56 PM
    Nice article Chris!!!

    How come I do not see all of this outrage towards AIG?????? I am amazed how much people HATE GM, but they give the store away to AIG???? Someone help me and explain why AIG automaticaly gets $140 BIllion???? Yet GM gets $000.00? I dont get it. How come we did not get all of the Grandstanding when AIG held 3 Big parties and burned through $80 billion in less then a month?? and asked for another $40 billion and got it with no fan fare??? Hmm Barnery Frank is right, we will take care of white collar workers but we want Blue collar workers to go down the drain?? The Democrats and the Republicans are discusting.. And they better watch very carefully what is happening. When people get hungry(all of the laid-off blue collar workers) they do funny things!! Good luck trying to contain them when they really get hungy and angy and the government keeps all the AIG's of the world in wealth.... As a Combat Vietnam Veteran,(and there are a lot of combat vets in this country watching all of this) I feel sorry that the 3 Million Auto industry people are going to ruin. Nice Job US Government. Gm did not cause the $5.00 a gallon gas, nor did Gm cause this so called Banking crisis.

    So lets take out all of our anger on the American Auto companies.. instead of AIG and George Bush.. Makes sense to me- NOT!!!!!

    How much money will AIG keep burning
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  •  
    Nov 22 02:07 PM
    All of the grandstanding in Washington is the result of clueless, hapless, incompetent, brain-dead, stupid, and corrupt Democrats being elected by an equally intelligence-deficient electorate; 64 million to be precise.

    While stumbling in the darkness of moronic decision-making, the Democrat Congress is prone to throw money at all problems and hope they go away. When the more logically thinking Middle Class realizes the direction this bunch of cretins in Congress are taking, they flood them with emails, faxes, phone calls, and screaming to back-off and let things take their normal course. The politicians panic and are frozen with fear that their cushy jobs are in jeopardy and so they react in their normally brainless way – they posture, bloviate, disparage, promise, tap dance, threaten, and do nothing. Meanwhile, the dunces who elected them twist in the wind of uncertainty and probable ruin.

    The dumbing down of America has reached its designed goal of an ignorant and dependent electorate that guarantees life long employment for incompetent politicians. The Founding Fathers are either laughing themselves sick or are in deep mourning.
    Reply | Link to Comment
  •  
    Nov 22 06:40 PM
    I watched the hearings on CSpan and was embarrased at the intelligence and preparedness of the senators. Agree with the author that this inaction has cost billions and trillions in losses in the stock market.
    Reply | Link to Comment
  •  
    Nov 22 07:14 PM
    A private jet is around $20 million dollars and flying per year at $20,000 each way for the daily workday trips probably averages $20 million dollars in air travel per year, per plane. That is $40 million dollars total (for air travel and plane cost) for just one plane. If GM has 7 planes – that is $140 million GM could save in selling the planes. Traveling in coach is probably no more than 5 million so that is a net savings of $135 million dollars. If the average factory worker makes $60,000, that is a yearly equivalent of saving 2,250 jobs.
    Reply | Link to Comment
  •  
    Nov 22 07:17 PM
    How to save GM
    1) GM needs to cut their total car models to 25 (from 60). What they could do is get rid of all Buicks expect Lucerne and Terraza; get rid of all Pontiacs except G6; get rid of all GMCs except Sierra and Yukon; get rid of all Saturns except the Vue; get rid of Saab all together; get rid of at least three Chevy models; get rid of at least two Cadillac models.
    2) Get rid of half the dealerships. Chevy seems to have the best distribution so change the Chevy dealerships to Chevy, BPG, Saturn, and Cadillac
    3) Close at least three of the five regional offices
    4) Close all Zone offices and have employees work out of their homes
    5) Get rid of 50% or more of white collar workers in the field
    6) The factories will close based upon which models will be discontinued
    7) Have upper management take a 35% pay cut
    8) Have middle management take a 20% pay cut
    9) Cut advertising from $2.3 billion per year to $750 million
    10) Get rid of advertising groups and have national advertising only
    11) Get rid of co-op advertising dollars
    12) Get rid of all promotional advertising
    13) Cut all regional and national meetings that cost more than $100,000
    14) No parties for auto shows
    15) Have special cash incentives for cash only purchases
    16) Once the Volt battery is discovered, convert at least half the cars and trucks left after the cut to Hybrid
    17) Move 1/2 the engineers to be used to discover more fuel efficient standards and more alternative fuel / hybrid cars
    Reply | Link to Comment
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