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12/14/2008

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Mario Rizzo

I agree entirely with Gary Becker's analysis. I should only like to add that the Bush Administration's probable use of TARP to circumvent the Senate's unwillingness to act is an excellent example of F.A. Hayek's point that economic planning and democracy are in significant tension. Under the dirigiste conception of democracy the task of the legislature is simply to cede authority to the nimble and smart planners: in this case those who know better than the market how to allocate capital. This is not new in American government but it amounts to an acceleration of an unfortunate trend.

Mark

See also:

http://sternfinance.blogspot.com/2008/12/where-should-bailout-stop-and-what-to.html

Thomason

On theory, there are so many voices that are 'right' it is difficult to know which to listen to. It's that's big BUT that follows each voice that drowns out active listening. Some of it sounds a bit like Bogey and Hepburn on "The African Queen" arguing about what could have been done earlier to alleviate the situation they were in.
Sure, if the U.S. automakers had done this or that, earlier, and so on and on. BUT, it's now and we're here, and each "principled view" has some elements of told-you-so, which all together are not much of a basis to act on or even plan upon.
The choices of poison are: to close down the Detroit automakers along with all those who supply and rely on it, or to act on the presumption that legislative staffers and/or bankruptcy judges are more capable stewards than lifelong auto industry executives; or, print more Bush $ bills to prop it up. All of those stink, but wise leaders choose, and are unwilling to sit on principles.

Warren Windham

I can't believe this statement. If you believe bankruptcy is a good solution tell your family about it. Where were you when the big three were negotiating these contracts, maybe you should have been advising the executives on running a business, and maybe you don't believe in the validity of a binding contract. The most profitable way or the easiest way is not always honorable nor right. Its people like you who like to prop up their position ( obiviously anti-union)
and put others down. All American workers need to be able to make a decent wage to raise their families. The calling of the suppression of workers wages from wall street and crowning of management and CEO salaries and then bonuses is appaling. Obviously there is a greed factor and a lack of understanding of how this economy really works. You tell me how much a family of 4 needs to make with a modest lifestyle in order to provide health care, put 2 children through college, save for retirement, and make a budget of utilities, food, housing and other necessities. American professionals and business men think they are much more important than they really are, I'm not a socialist, but a fair days work for fair pay is a must in society. America's problem is on the upper end of throwing money at administrations problems or a CEO with a magic profit pill. Check our your federal benefits for senators, congressman, and state levels. Then when their budgets are facing financial short comings advise them to declare bankruptcy. Honesty and integrety would help instead a loop-hole to break a legal and binding contract.

Dennis

As my father used to say "its always different when its your arm in the sling"---meaning that those that are affected by the auto issues are feeling differently than those that write about it. While bankruptcy may be the outcome--advocating for it is an ignorant position. I will not buy a car from a bankrupt company and history has already shown how the consumer deals with autos from bankrupt companies. THEY DONT BUY THEM. Talk to the outer circle of those affected by an auto bankruptcy. Insurance companies, health providers, etc. They are already asking the question--are you linked to the autos? Who is measuring the ancillary impact of autos dying? If you believe the 3mm numbers for autos--what is the number for all the other services that go out of business? Municipalities that fail, etc.

Tom

The outcome seems inevitable; the "Big 3" will not continue much longer as they are now structured. If they survive, they will be transformed into new entities; globally competitive, with products more reflective of market demands, and financially viable. And they will assuredly be much smaller with a much smaller Michigan-Ohio-Indiana workforce.

The issue is no longer how we got here but how and when the restructuring takes place. The magnitude of change is too great to occur without considerable pain. Hopefully the means of change will minimize the disruption to the economy, the cost to the taxpayer, and with the least amount of damage to people’s lives.

As a taxpayer with no direct ties to the “Big 3” I’m willing to provide relief to workers and families hurt in the transition but I’m not willing to subsidize a continuing state of denial.

gdgeiss

I just don't see how a "bailout" as currently contemplated is going to "save" the US auto industry.

Wage and benefit packages are something north of 10% higher than its competitors and even higher compared to other US industrial workers; the cost of medical and pension benefits for retired UAW members are crippling on a per capita current worker basis; the world auto market has entered a serious and perhaps prolonged recession; the pension funds are losing additional billions of funding coverage in the current world wide financial market crashes; company credit ratings are a disaster; corporate debt may actually exceed the pension/medical retiree costs; the world wide financial system collapse (or near collapse, which, remains to be seen) precludes normal credit operations even if the companies could afford the "vigorish"; its factories need significant infusions of capital to change lines and modernize production processes; there are probably billions in secondary CDS's not addressed at all in the bailout proposal (unless crushing bondholders and triggering default on those swaps is your idea of addressing); and the companies haven't made a vehicle perceived (even if based on unfair perceptions) as high tech and reliable for 20 years.

Toyota sold about 9 million vehicles globally last year (2007) as did GM. The Japanese maker made $17B, while GM lost $38.7B. How is a bailout ever going to change that?

And yet those figures represent not just a death knell for the US auto industry, but a source of hope as well. Without discharging major obligations, at great pain to workers, retirees and bondholders alike, US makers (particularly GM) will never be competitive.

Without a bankruptcy there will never be such a discharge; at minimum there's just not the political will to achieve it, even if there were a concensus on it's necessity.

But clearly, if there was such a discharge, demand exists for GM vehicles that no amount of increased production at current competitors' facilities can possibly meet. So some form of the US auto industry should survive though a bankruptcy, even if only as purchased assets and the readimade skilled workforce needed to get them up and running again within any useful industrial timeframe.

It could be really ugly and bad or merely painful, but one thing seems certain, doing it later rather than sooner will only make it worse in the long run. The first step in extricating oneself from a hole is to stop digging.

Roland Manarin

Let them file for Chapter 11. The demand for cars will still be there and so will the jobs. But the name on their paycheck will now say Honda or Toyota.

neilehat

Roland, Using the old and tired idea that the economically dispossed and dislocated will be picked up by the competition? Think again, Toyota, Honda, Nissan, Hyundai, Chery, BMW, Mercedes, Audi, VW, etc. are now in the process of determining plant closures and bending the ears of their respective National Governments. Who's name is on the paycheck? What paycheck? Oh oH! here comes the Repo man and the bank foreclosure team.

BTW, what's all this going to cost in terms of unemployment comp., workman's comp., health insurance, etc.? Certainly more than the fourteen to fifteen billion the automakers are seeking.

I hope you're one of the ones who loses their livlihood. Then you might see things differently.

As for the Detroit Automakers problem, this is primarily due to pension and benefit packages that have built up over the years. Would they be in this problem now if the Nation had passed a National Health Program ten to twenty years ago like the rest of the Industrialized world? Probably not.

Brian Davis

I'm with Becker at this point. Obama would be smart to let the Detroit 2 or 3 go on into Ch 11 and, if he can sell it to America, interposes the United States as super-priority DIP lender. The banks can't do it or they would have by now. What we've got with the Bush White House playing with this, same as we saw with the dead auto bailout bill, is the creation of reckless confusion about the relative rights of existing secured creditors, bondholders and noteholders, and preferred stockholders. The only thing one may predict with confidence, in or out of bankruptcy, is that common stockholders are already, practically speaking, wiped out. We have an elaborate national and uniform law - an entire Title (11) of the U.S. Code - to bring order to the interests and priorities that seek recognition in bankruptcy. Executive action geared toward skirting the Bankruptcy Code is as dangerous to an orderly reorganization workout (or liquidation) as those silly sliced-and-diced securitized home mortgage notes that have already wrecked the U.S. economy to the tune of $7-$8 Trillion notional exposure. Judge Posner was right about the advantages of the federal govt stepping in as DIP financier. But he's too ready to trust the Executive with more Dollars and more power that will be, if managed like the TARP has been, squandered.

Redmund Sum

Back in the 80's, I was managing a small team of engineers. I preached to my staff tirelessly: "Quality is rooted in professional pride."

At the time, I was much troubled by the constant drumbeat of the UAW threatening to strike the auto companies with their refusal to allow moderization (automation) and their demand of very high wages, benefits, work rules and "jobs bank". I wondered aloud: this work force was being conditioned to be belligerent, greedy, sheltered (from competition) and devoid of professional pride and totally unwilling to pull their weight for the business; how could it be expected to produce a high quality product? If I bought an American car, I would be paying for all these inefficiencies and end up with something that was produced reluctantly by malcontents. Silently, I decided that I would no longer buy American cars. I bought a Japanese car and I never looked back.

Chicago Boy

Warren Windham (see previous comments) is an ass.

neilehat

For an enlightened and factual view of the potential fallout out of the Automakers demise, I suggest a close reading of Roubini's analysis. In a nutshell, it will result in a collapse across the board of all major industrial sectors. Extending the Recession/Depression well into 2010 and perhaps beyond.

Sum, Go ask Toyota or Honda for a job, That's right there is a hiring freeze on and layoff's are beginning to commence across the board. Once again, it's not just a "Union" problem. Being an Engineer, I certainly don't want you working on my staff.

Mike M

I'd just like to note that while Toyota, Honda, and others do manufacture vehicles within the United States, many of their plants are heavily subsidized by state and federal tax incentives. In addition, they send not only their profits, but the vast majority of their R&D money (which is billions of dollars) back overseas. This is stark contrast to the Big 3, who invest heavily in America. It's extremely misleading to characterize foreign owned companies as "American" because they run a few assembly plants here.

Please don't place the blame for overpaid and bloated Union contracts entirely on the Big 3 management. When workers are allowed by the government to strike and shut down production, costing their company billions of dollars per day, it doesn't leave the company in a very favorable negotiating position.

It's also worth noting the strides Ford has made over the past decade, especially in the past five years, to improve the quality of their products and the overall efficiency of their operations. Lumping the "Big 3" together as one giant, bloated entity is also a bit unfair. You are, however, correct in identifying the major challenge they all face- the UAW.

Warren Windham

Chicago Boy, you don't know me, one post and you start name calling without much to say. Can you reasonably tell me how much it costs per year for a family of four living modestly saving for two college educations, retirement, health care, daily, weekly and monthly living expenses and we will call them any rational American no matter what their vocation.

Mr. Redmund Sum you pull the same old lists of generic demands that alegedly crippiled the automakers. You obviously haven't been in an assyembly plant, almost all welding is done with robots, windshields installed and many other applications a robot can do, they are still limited as to what they can do. The jobs bank of which Mr.Gettlefinger president of UAW has said he would give it up was created to save American jobs,(taxpaying into the system, taxes,ssc,hica etc.), while the big three was not only chasing cheap labor, but escaping the EPA, various inventory and warehouse taxes and tax free recruiting incentives across borders and over seas. And if you were really an engineer you know that quality is designed in. Every automaker is looking for the cheapest part built with the cheapest labor to produce a quality product, given this your engineering is your edge. Futher more you haven't price shopped, check out a comparably equipped chevy impala, honda accord, and toyota camry.

To both of you: honest, integrity, and loyality are still commendable.

Tom

Per Mr. Windam:
"I can't believe this statement. If you believe bankruptcy is a good solution tell your family about it. Where were you when the big three were negotiating these contracts, maybe you should have been advising the executives on running a business, and maybe you don't believe in the validity of a binding contract. The most profitable way or the easiest way is not always honorable nor right. Its people like you who like to prop up their position ( obiviously anti-union)
and put others down. All American workers need to be able to make a decent wage to raise their families. The calling of the suppression of workers wages from wall street and crowning of management and CEO salaries and then bonuses is appaling. Obviously there is a greed factor and a lack of understanding of how this economy really works. You tell me how much a family of 4 needs to make with a modest lifestyle in order to provide health care, put 2 children through college, save for retirement, and make a budget of utilities, food, housing and other necessities. American professionals and business men think they are much more important than they really are, I'm not a socialist, but a fair days work for fair pay is a must in society. America's problem is on the upper end of throwing money at administrations problems or a CEO with a magic profit pill. Check our your federal benefits for senators, congressman, and state levels. Then when their budgets are facing financial short comings advise them to declare bankruptcy. Honesty and integrety would help instead a loop-hole to break a legal and binding contract.”

Your heartfelt post shows much concern for those that will be hurt, and I believe it will be many. I’m also pained by the thought of the suffering that appears inevitable whichever direction is now taken.

As a compensation consultant, I don’t know how to calculate a “fair” wage, for either a factory worker or the CEO of an automobile manufacturer. I do know that in a free economy, the parties will sometimes pay too much and sometimes too little; it’s certainly not a perfect system. But, when errors are made a free market will penalize the error until it is corrected. However, when the free market for labor is tampered with, wages can become economically unsustainable and the longer the tampering is allowed to exist, the greater the correction will be (and the pain that goes with it).

Along those lines, I understand your concern about breaking contracts. But, as a last recourse, breaking contracts can sometimes be the only way for both parties to come away with something. An auto industry that closes the door and ceases to exist will leave nothing but widows and orphans with no inheritance. This is exactly the scenario our bankruptcy laws were designed to prevent. Unfortunately, they can’t prevent a business that continues to be economically unviable from eventually ceasing to exist. I pray that will not be the outcome in this case.

Rebecca

There are estimations that UAW wages are ultimately around $10 more (per hour) than foreign competitors, and that total leveling with foreign wages (and benefits/pensions, etc) would only lower the costs of each car by $800 or so dollars.

Where is the proof that the UAW has contributed to their failure? These arguments seem rather like a contrarian reaction to what, I agree, is clear political pressure on liberals to act.

Lee

In response to Brian Davis. I agree. A government-sponsored chapter 11 is the best result for all parties involved. That being said, I can't come up with a working framework that would allow any government agency to come in and provide DIP financing that would prime all of the implicated secured creditors. Is the power to bring an outside financier in to provide DIP funds that would prime everything else in the estate something within a bankruptcy court judge's equitable powers? Thanks.

Tom

Per Rebecca:
"There are estimations that UAW wages are ultimately around $10 more (per hour) than foreign competitors, and that total leveling with foreign wages (and benefits/pensions, etc) would only lower the costs of each car by $800 or so dollars.

Where is the proof that the UAW has contributed to their failure? These arguments seem rather like a contrarian reaction to what, I agree, is clear political pressure on liberals to act."

If I’m reading your post correctly, there seems to be asking who is to blame or rather who is innocent? It’s not a revelent question, at this point, who contributed to the failure. The foundational issue remaining is this; the total of all cost exceeds the total of all revenues. The Big 3 are bleeding cash. In order to stop the bleeding, it will be necessary to drastically reduce all cost. Unfortunately, even to the point of closing.

If you are trying to get a grasp of the magnitude of the reductions that may affect the UAW workers, I believe the total UAW cost, including wages and benefits of active employees, added labor surplus overhead , and pension liabilities, is considerably higher than the amount you quoted, which seems to be the hourly wage + benefit differences for those actually working; only the tip of the iceberg.

neilehat

Tom, You are correct in identifying pension and benefits as the prime cause of the current "cash flow" problems of Ford, Chrysler, and GM. The biggest is benefits, health specfically. Ask any employer what is the largest debit on his books and they will all invariably say Health Insurance for their employees. If we had come to grips with this issue during the Clinton Admin. (instead it was torpedoed by a Republican Congress) and created a vialble National Health Act instead of pushing it off on to Industry, GM, Chrysler and Ford probably wouldn't be in the position they are now in. A "CASH FLOW" crunch.

So where's the problem with a bridge loan. They're done all the time. The problem lies with the Financial Investment Banks controlling the money. Perhaps it's time we circumvented these institutions (due to their lack of ability to properly invest the Nation's wealth in viable investments) and create an "American Industrial Investment Bank". Leastways, the capital would get to those who need it.

Tom

Neilehat,

Taking you post at face value, I don't agree that waiting for national health care is the solution which will return the Big 3 to positive cash flow. Remember, other car manufactures have been profitable with the same health care environment as the Big 3. Asking the taxpayer to continue to provide massive amounts of cash to offset the loses while the Big 3 stands pat waiting for a conceptual national health care plan coming at some unknown point future date isn't a bridge, it’s more denial. Both management and the UAW to must face the known issues causing the huge profit losses and begin making real changes, however painful, necessary to save the Big 3, before its too late.

Brian Davis

To Lee - Super-priming yes, per sec. 364 of the BK Code as long as the BK court finds that the post-petition financing is structured to give "adequate protection" (e.g., market rate interest payments until a Ch 11 plan can be confirmed) to the DIP's secured creditors who held valid liens/security interests on debtor's assets at the commencement of the case. Adequate protection assumes the pre-existing creditor's security (collateral) is worth at least as much as the dollar value of the of the creditor's claim. Another way to do it is to give DIP financing priority as an "administrative" claim, priming all but pre-existing senior liens. I would think that each Detroit auto (as well as the U.S. Treasury Dept) by now is bound to have a spreadsheet for each alternative supported by sec. 364 together with an analysis of its presently-secured debt, what the paper is trading for, and the probable arms'-length value of assets pledged as security.

neilehat

Tom, the point was and is, that that this is a problem that has been in the making for years and the biggest part of that problem has been a Congress and Administation (mostly Republican and addled with the FreeMarket/Free Trade virus)that has been sitting on it's throne and fiddled while America burns, much like Nero.

Not only is there an Economic component to this problem, but a major Political one as well.

As for those making profits, how much? Not much more than those who are operating at a loss. Why do you think all the auto companies sell here? Because if they were dependent on their own home countries they'd be having cash flow problems as well. Maybe not, they have been freed from the onerous issue of providing health care and other benefits in most cases. All they have to do is produce and pay taxes.

As for the UAW and the rest of the "Evil Empire", the easiest method is to cut off and exterminate the pensioners. Sort of a "Final Solution" if you will. Sounds like something out of Berlin in the Thirties and Forties, don't you think?

redmund sum

I know my earlier post will ruffle some feathers. Interestingly, one commenter tells me the jobs bank was created to save American jobs (by forcing the automakers to continue to pay laid-off workers, and hence the laid-off workers continue to pay taxes), while the other commenter reminds me that Toyota and Honda are now in a hiring freeze and laying off workers.

Yes, these evil big companies, especially those foreign-own ones such as Toyota and Honda, have stopped hiring new workers and laying off people, because it is necessary for them to do so for their business to stay viable. For them, and any sensible businessman, it is preferable to have a reduced workforce and stay profitable than to keep hiring and go to Chapter 11, or 7. If GM, Ford and Chrysler could do that, may be their problem not as dire as it is today.

Yes, I used the obscene word: profitable. Honesty is commendable, as I was just reminded. That is right. Companies need to be profitable!!!

I know I am framing the issue in a very simplistic way here. The Big-3's problem is not solely due to the UAW. But I am not about to say they are not the main culprit.

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