Posted on 12/04/2008 12:46:12 AM PST by Thorin
Most libertarian and conservative leaders are opposing government aid for the auto makers. However, theories of leaving everything to the free market are not valid when the market is crashing or is dysfunctional, as it is now for bonds. Libertarian theories and principles are great for normal times, but they need to be realistic and modified during times of chaos. Consider that they now coincide with the Far Left which also wants to see the car companies in bankruptcy.
Instead of just blindly opposing any government intervention or subsidies, libertarians should be debating how to make government provision of liquidity to markets both minimal yet effective. Otherwise, a collapsed U.S. auto industry will strengthen socialism, nativism, and anti-free trade forces in general. Libertarians won’t be acclaimed for abiding by their principles; rather they will be seen as having contributed to economic disaster and will become marginalized for future battles.
First we must comprehend the risks. Markets are in a free falling downward spiral. The real estate collapse crippled banks, banks then ceased credit for businesses, workers then are laid off as fearful companies husband their cash resources. More workers then can’t afford or fear buying, for example, cars. Then car makers and their suppliers lay off workers who then can’t pay debts and real estate takes another dive. We are in extraordinary and desperate times! Letting auto companies be bankrupted at this time would compound America’s and the world’s disastrous economic situation.
Those who argue that it’s all the companies own fault and they should be left to bankruptcy and “free markets,” whatever the consequences, virtually ignore the credit collapse and two major reasons for crashing bonds and stocks, “mark to market accounting,” explained by Newt Gingrich, combined with the SEC’s elimination of the “uptick rule” governing short selling, put in place after the 1929 crash; it allows speculators to easily drive even viable companies into bankruptcy. These are not the companies’ fault.
Secondly we should know that much of what is written about American auto manufacturers is obsolete or simply false. For example, one often hears that workers earn $70 per hour. Workers don’t make that. That cost includes all the legacy benefits to retirees. Detroit is unwinding from years of union domination, and in 2010 companies will be transferring legacy costs to their unions. Billions are already set aside for this purpose which is already half funded. Another is that American quality is not competitive. Forbes describes the quality of new models and how Ford and GM are major, profitable producers in Asia, Europe and South America. Ford has closed 17 plants and was profitable in the first quarter. GM is the largest auto company in China with 14% of the market. It has many enticing new models coming along.Their skilled workers and engineers are at the heart of American heavy manufacturing.
Yet most critics’ talk of the auto unions is about the way they used to be, not the situation now. In fact the UAW union, in 2007, has already given in with major concessions and will no longer have a stranglehold on the companies. New hires will come in at $14 per hour, with only a 401K pension plan, reduced health care benefits and major work rule revisions. Work rule revisions and the two tier wage structure strike at the heart of union monopoly power. Also it is not necessarily true that companies would be back for more money soon after, as many opponents assume, without evidence.
BANKRUPTCY
Thirdly are the glib proposals for easy bankruptcy, often comparing auto factories to airlines. Some libertarians even blithely argue to let foreign companies take over the whole American market. The industry is immensely complicated and inter-twined with suppliers which provide foreign makers as well. The damaged credit markets have also severely damaged its suppliers. 54 factories, hundreds of suppliers, a million direct and indirect workers are at risk. Auto dealers are the backbone of small communities all over America and employ hundreds of thousands.
A quick bankruptcy is impossible. Chapter 11 would take years to unfold during which time the companies would lose unrecoverable market share. The process tries to be fair by promoting negotiation. It is not a government cram-down. The theory is that this would allow a judge to break union and dealership contracts. It is not comparable to the airlines flying during bankruptcy. Airlines just buy fuel and a few supplies. A passenger buys a ticket for a few weeks out, but an auto buyer depends upon warranties and dealers for years. Airlines don’t compare to auto manufacturers with independent suppliers providing credit and some four thousand parts needed every day; just one missing part can prevent assembly of a whole car. The long bankruptcy process is well explained in the New York Times. Former Senator Spencer Abraham describes the almost sure consequent collapse of many supplier companies also now unable to raise capital or refinance bonds.
A new problem is that there is now little “debtor in possession” financing. This provides for fresh loans to sell or wind down business in an orderly manner. Circuit City’s recent orderly bankruptcy is now in trouble because of this issue. Consequently, Chapter 11 can slip into Chapter 7 liquidation bankruptcy. This would mean selling off assets, voiding repair warranties, and halting production as suppliers stop providing credit. Payments to workers and retirees would stop dead and billions of dollars of bonds would stop paying interest. Billions more of credit default swaps losses (bond insurance) would clobber the credit markets again. This would affect millions of America families.
Another option being bandied about is “pre-packaged” bankruptcy. In practice this would necessitate prior agreement and detailed legal contracts with hundreds of suppliers, dealers, unions, bond holders, and creditors, any one of which could stymie the agreement. It would take months during which time car sales would plummet. The Detroit News explains what would happen. Lost tax receipts, unemployment, medicare and Medicaid costs, and new billions charged to the Pension Benefit Guaranty Corp. would cost Federal and State governments more tens of billions.
Loans to the auto companies will help them survive and cost taxpayers far, far less than letting them go under. I have not addressed all the human misery that bankruptcy would entail, but libertarians should also be cognizant of them, even though they are rarely discussed
Im actually for this bailout (far more than the Wall Street one) so long as the companies have a plan to get out of this mess and its only a loan..
Chapter 11 is, in actuality, the only way they’re going to get out from under all the problems they have. It’s not a great idea, but it’s the best of the bad choices remaining.
For example, the only way GM’s going to be able to trim dealerships is bankruptcy. The legal actions from when they closed Oldsmobile are still ongoing and have already run into the BILLIONS.
I posted this on another thread a while ago; this thread just popped up on FR and I finally found an article where someone thinks just like I do about the Big 3 and their pleas for loans:
Well, contrary to popular opinion on this web site, I do not want the auto companies to go down. That will leave us with only foreign owned auto companies in the U.S. Where do you think the military gets all of its vehicles from? Mostly from GM, according to my nephew who is a veteran. Humvee’s, tanks, etc. Now, in wartime, we switch our auto industry over to a war footing, have them retool to produce our military equipment. Are you going to entrust this to foreign owned auto companies in the U.S.? What if they are amongst the belligerents we are fighting against, or sympathetic to them? China is getting ready to enter our automobile market very shortly. Would you ever want us to be at the mercy of a foreign company for our military vehicles?
Plus, we just can’t let that much of our manufacturing base go overseas or just simply die on the vine in this country. We can’t be dependent on everyone else in the world for our basic necessities and goods. Look what that attitude has gotten us into with regard to oil and our country’s needs. We are at the mercy of hostile nations, Saudi Arabia, Venezuela, Russia, even Mexico doesn’t like us much. You just can’t totally decimate your manufacturing base without jeopardizing your country’s security needs. So, even though it makes one gnash our collective teeth, I want a loan given to the auto companies.
Plus, I must say, Bush via Paulson, has GIVEN away billions to our financial companies, and now is squawking about giving a LOAN to the car companies. Granted there is some risk with these loans, but at least they are loans, not bailouts like the banks and AIG got. The one example of a gov’t loan given to a car company was Chrysler 30 years ago, and they paid it back plus some. It is a calculated risk, but one I believe we must take, primarily because of the security needs of our country via the military vehicles produced by our U.S. car companies. We just must not let our entire manufacturing base dissolve while other countries via unfair trade practices are supporting and subsidizing their companies abroad, including their auto industries, while we aren’t. It is an unfair playing field. I’m surprised our auto companies have survived as well as they have for many years considering what they are up against from foreign competition that hits below the belt whenever possible when it comes to trade practices.
It IS a security issue primarily. For this reason alone I want them to survive. And American pride. I know this is a nebulous concept, but I remember the pride of the American automobile in our country’s history, and I don’t want that pride to disappear. Do you feel pride about Honda, Toyota, Kia? Does that fit into the American history and mystique of the automobile? Is that the Model T Ford, or the big finned cars of the 50’s, or the Corvette? I’m sorry, but that means something to me. I don’t get that same sense of Americana from foreign owned car companies. Do you? Some things are worth saving and our automobile industry is one of them, in spite of the Unions, in spite of the mismanagement by some of their leaders. And because of the unfair playing field they have had to cope with along the way.
P.S., I also believe if the auto industries end up in bankruptcy, they won’t come out of it. No bank will give them loans, even now before being in bankruptcy. What makes anyone think the banks would do so after bankruptcy. So a Chapter 11 (reorganization) would become a Chapter 7 (bankruptcy) in short order. The auto companies would not have the wherewithal to reorganize for lack of any financial backing to get them over the interim hump of a soured economy.
As to quality of the autos, I’m tired of hearing U.S. citizens constantly bad mouth U.S. cars. I’ve had plenty of cars in my lifetime, both American and the occasional foreign car. Most have been pretty good, both foreign and American. The quality of U.S. cars has vastly improved, but because they had a bad image on quality in the further past, that image has stuck and now for many Americans it’s just by rote that they spout how lousy American made cars are, whether it is any longer true or not. My latest car, a Pontiac, I love. I’ve had it five years now, and nothing has gone wrong yet, nothing. That’s a pretty good track record. I’m sick of hearing our American citizens, who should be patriotic on this, raving about foreign cars and preferring them over our own.
I want to support American made products to the extent that I can. I want our country to continue to have a manufacturing base. I don’t want to be dependent on foreign countries for anything and everything. I don’t want to only see “made in China” on the bottom stickers of most of what I buy. Makes me sick. I love my country and want to support its goods and products when possible. I realize it is a global economy and do buy foreign made items also, but given the chance, I look for “made in America”. It’s my country.
Look inside GM’s plan to Congress. Therein, on p. 11, is the following:
“GM’s Plan includes, and is conditioned upon, significant sacrifice and deleveraging of GM’s balance sheet...
GM will immediately engage current lenders, bond holders, and its unions to satisfactorily negotiate the changes necessary to achieve this capital structure.”
OK, so how does one negotiate changes to all those terms, especially the bond holders, without doing a Chap11?
Chap11 is the ONLY way to legally re-open the terms of bonds, labor contracts, revolvers, etc and change where the money flows.
An even better toon specifically on the subject of Big-3 bailout (whose image cannot be posted
on FR due to to copyright restrictions, can be found HERE.
As I see more and more people who don’t know what they’re yammering about keep making excuses for why Chapter 11 isn’t feasible, it becomes impossible.
Pretty soon, any Chap11 filing will be moot and Chapter 7 will be the only avenue open to GM. Ford has a little more time. Chrysler is a dead horse that hasn’t hit the ground yet.
The time for GM to declare Chap11 was in September, or even back in July.
This is another example of how egomaniac CEO’s are taking down the business world of the US in flames around them. Another example of this: If Lehman had management with a lick of common sense and a little less hubris, they would have done a Chap11 and prevented a LOT of the turmoil we now see in the markets. As it was, Fuld had far too much pride and arrogance that prevented saner heads from filing a pre-pack C-11 much earlier one.
And here we are. No more Lehman, huge market distress, etc.
Same deal with GM. Their management keeps yammering this BS that “Chapter 11 is not an option.” Bullcrap. Of course it is an option. It is an option they don’t like because their pay package is going to be one of the things that gets axed, but that’s just tough.
There is no way around the fact that GM is insolvent. Period, end of discussion. There is also no way around the fact that they have to shed huge fixed costs and re-negotiate their existing debt burden to not be just pissing any bailout into thin air.
What has accelerated GM’s (and F/Chrysler’s) demise is that the US consumer is tapped out. Done. Finished. A lot of consumers had been buying cars with HELOC’s - and HELOC’s are now frozen and/or not being written. GMAC has just decided that they want to loan to only people with a FICO of 700 or better. In other words, the easy credit with which people used to buy cars is gone, gone, gone. There is nothing in any of the Big Three’s bailout plans that can or will address this issue.
This is borne out by the fact that November’s auto sales numbers show even the Japanese automakers are seeing big y-o-y sales reductions - Nissan’s sales numbers year-over-year were worse than GM’s! Nothing about baling out the Big Three is going to put more money into the consumer’s pocket and incent them to buy a car - much less a domestic car.
The fastest way to stop the bleeding is to file Chap 11 and start hacking away at the fixed expenses.
For years the money channel talking heads have been advising us to take our money out of American banks and corporations and invest it overseas. Now, that our retirement funds are in the toilet, they’re telling the gov to take more money out of our paychecks to prop up the banks and corporations.
I’m against the bailout in any form. Let them file for bankruptcy - that’s the only way that they’ll get out from under the heavy weight of the UAW. The entire bailout concept in this case is payola for the Unions voting for Obambi.
...so they got rid of the "job bank" system where an employee, if his or her job relocates, they can collect up to 95% of their salary while sitting at home?....which should get real interesting where future cuts will be made as promised as far as select models being eliminated
All of this demand for a bail-out avoids the simple truth. Giving the automakers cash will not solve the problem they can’t sell their products in sufficient quantity and at prices allowing them to show a profit.
And our problem with buying Humvees made by Toyota, here in the USA, under DoD supervision, is what exactly?
I’m just speculating here, but given the vast sums of money our DoD throws at contractors, how long would a brand new start up company take in providing equipment for our troops?
If GM does go down (not likely IMHO), I’ll bet there will be a lot of real,estate, factories, equipment, etc. for sale at a deep discount, minus the UAW. We can probably get our equipment cheaper since the contracts won’t be loaded down with legacy money.
Just thinking here.
Perhaps the UAW members could sell their Class A motorhomes w/SUV on dolly to get then through this crisis. We live in a 35 yr old home which we enjoy that our liberal sister-in-law says is “dated” (while looking down her nose—the only time she was invited here BTW), 10 yr old p/u, a 5 yr. SUV paid for and we don’t go on vacations but we enjoy our state (Texas), lessee, what’s my point...oh yeah, I don’t expect anyone else to support my way of life.
We follow our parent’s advice (long deceased): LIVE WITHIN YOUR MEANS and quit whinin’ !
Save Detroit—Bankruptcy Now Would Do Incredible Damage
Very well stated, and I agree completely. A couple of weeks ago I posted a list of reasons why we should not bailout the automakers. But the contrary view seems to be gaining ground.
“but they need to be realistic and modified during times of chaos. “
This is why the left creates “times of chaos”. And RINIO’s like McCain helped by voting funds for ACORN and other big leftist program.
The reason they are borrowing money is we are broke.
Bad management is bad management and no other excuse can apply. It does not matter whether a small business or a huge one, bad management will always end the life of a business.
In the case of the US auto industry (not the profitable foreign ones) the shareholders simply give the losers they put in as management huge bonuses and outlandish pay to steer the ship further upon the rocks. The effects of reward and punishment do not apply in the auto industry.
The auto industry is now using scare tactics to convince the public that disaster will occur since over 1 out of 10 jobs in this country are directly related to the AMERICAN auto industry. Well, look around......do you see how many in your neighborhood will lose their jobs if the AMERICAN industry fails? The MSM carry’s the water for the auto unions and management by propagating this myth.
It’s time to end this “blameless society” and make everyone totally responsible for their own failures. That also applies to the tics (union members) who have drained the blood of their hosts and now cry that the animal is dead.
It’s people like the first few posters here supporting the bailout/nationalizations of private companies that havw damaged the republican brand.
Here on FR we call them RINO’s.
I just call them socialists.
Go to DU!
” one example of a govÂ’t loan given to a car company was Chrysler 30 years ago, and they paid it back plus some.”
You misrepresent this by not telling readers that for years almost ALL cars the govt purchased were made by the bailout boy.
Let them go under, let AIG go under.
Privatize Fannie and Freddie and repeal the CRA Law, close the 4.5 PERCENT ACORN gets for EVERY mortgage, stop the 100 million dollars to ACORN in the bailout bill.
You leftists posting here should go back to DU. I’ll bet you still support Bush and McCain and hate Palin.
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