Stop Bailout Madness as Congress Targets Ailing Auto Dinosaurs
Companies / US Auto's Nov 17, 2008 - 07:16 PM GMTBy: Mike_Shedlock
Enough is enough. Congress is about to waste more money attempting to prop up ailing dinosaurs GM and Ford. We need to do something about this and we will. Please read this and act. First let's go over the background information.
Time is reporting Pressure for a New Bailout Grows .
Executives of GM, Ford and Chrysler met with House speaker Nancy Pelosi and Senate majority leader Harry Reid on how to increase the size of Washington's aid package to the Big Three. Though details are still being worked out, the push is for an additional $25 billion in federal loan guarantees for Detroit in addition to the $25 billion already promised to assist the industry's shift to green technology.
GM To Big To Fail?
John Mauldin is asking Is GM too Big to Let Fail?
Bloomberg today cites sources that claim a collapse of GM would cost taxpayers $200 billion if the company were forced to liquidate. The projections also called for the loss of "millions" of auto-related jobs. GM, Ford, and Chrysler employ 240,000. They provide healthcare to 2 million, pension benefits to 775,000. Another 5 million jobs are directly related to the three auto companies. GM has 6,000 dealerships which employ 344,000 people. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50 percent, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years.
Wilbur Ross, a well-known multi-billionaire investor, was on CNBC saying that allowing GM to go bankrupt would throw the country into what sounded like a depression. Of course, he does have an auto parts company which supplies GM; so he, as my Dad would say, does have a dog in that hunt.
Unimaginable Consequences
In Three Zeros: Circuit City, GM, Fannie Mae I pointed out the self serving proclamations of Wagoner.
Wagoner states that a GM bankruptcy would have "unimaginable consequences". Here is my translation "Wagoner Admits He Has No Imagination". Of course with GM shares at $3, that should be readily apparent.
Auto Industry Scare Tactics
The auto industry has put together a scare campaign attempting to get people to write Congress to bail them out. The presentation is scary alright, but hopelessly flawed. The Auto industry will no more go away in reorganization than did planes stop flying when airlines went out of business. There will be job losses of course, but those job losses will occur no matter how much money Congress throws at the problem.
New Way Of Doing Business
In keeping with Pelosi's spirit of a "New Way Of Doing Business", GM Opens $300 Million Russian Plant to Boost Sales .
General Motors Corp., the world's biggest carmaker, opened a $300 million factory in Russia as it looks to compensate for slumping sales in western Europe and North America.
The plant in the Shushary district on the outskirts of St. Petersburg will produce 70,000 Chevrolet Captiva sport-utility vehicles and the Opel Astra, with plans to manufacture the Chevrolet Cruze compact car next year.
"Our strategy is to become the leading manufacturer in Russia," Carl-Peter Forster, GM's chief for Europe, told reporters during the plant opening today. "For us Russia is not an emerging market. Russia emerged long ago."
So instead of losing jobs to Mexico, China, and India, GM's "New Way Of Doing Business" will be to lose jobs to Russia.
Top Republican senators oppose automaker bailout
BusinessWeek is reporting Top Republican senators oppose automaker bailout .
Sens. Richard Shelby of Alabama and Jon Kyl of Arizona said it would be a mistake to use any of the Wall Street rescue money to prop up the automakers. They said an auto bailout would only postpone the industry's demise.
"Companies fail every day and others take their place. I think this is a road we should not go down," said Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee.
"They're not building the right products," he said. "They've got good workers but I don't believe they've got good management. They don't innovate. They're a dinosaur in a sense."
Added Kyl, the Senate's second-ranking Republican: "Just giving them $25 billion doesn't change anything. It just puts off for six months or so the day of reckoning."
House Speaker Nancy Pelosi, D-Calif., said over the weekend that the House would provide aid to the ailing industry, though she did not put a price on her plan.
"The House is ready to do it," said Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee. "There's no downside to trying."
Shelby Right Again
Senator Shelby was on the right side of the bailout issue (voting against), and he is on the right side of this. Pelosi and the Democrats want to throw $50 billion at the auto companies as if that would solve anything. It won't.
The combined market cap of GM and Ford is $1.84 Billion + $4.30 Billion or a grand total of $6.14 Billion. Spending $50 billion on companies worth $6.14 billion makes no sense. Furthermore, GM alone has a negative net worth (Stockholder's Deficit) of $60 Billion according to GM's 10Q for the period ended September 30, 2008 .
If Congress gave GM $50 billion, GM would be worth -$10 billion!
Barney Frank says "There is no downside in trying." Of course there is a downside in trying. The downside is however much money Congress is willing to throw at the problem because every bit of it will be wasted.
Stop The Auto Bailout
We need to Call, write, and Fax Congress and tell them we are tired of GM's fear mongering tactics.
Congressional Phone And Fax Numbers
Click Here For Congressional Phone And Fax Numbers
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Message For Congress
Fax Title: Say No To Auto Bailout
Dear senator/congressional rep
The Auto industry is attempting to employ the same scare tactics used by Paulson to get Congress to approve a $700 billion bailout for banks. Please remember that we were told huge measures were needed to prevent a stock market collapse.
Congress passed the $700 billion bailout on Friday October 3.
Since $700 Billion Bailout Passed
- The S&P collapsed from 1114 on October 3rd to 848 on November 17th. This is a drop of 24%.
- Paulson did not use the funds as requested.
- Bernanke promised to disclose how taxpayer money would be used but has refused to do so.
- Bloomberg has filed a lawsuit against the Fed under the Freedom of Information Act to find out just how Paulson has used the money.
- Not a single job was created with the money.
- Fannie Mae has announced it may need another $100 billion.
- Freddie Mac proclaimed it had negative net worth.
- AIG received another $37 billion.
- Cities and Auto companies now want a share of the $700 Billion.
There was not a single positive result out of the money that was spent.
The Paulson plan was poorly thought out and poorly executed which is exactly what one would expect when Congress rushes to pass bills without considering alternatives.
Paulson Humiliated
On November 14 Paulson stated " We have in many ways humiliated ourselves as a nation with some of the problems that have taken place here. "
Humiliated Again
We were humiliated again by wasting half of the appropriated $700 billion and getting virtually nothing out of it. Worse yet, Congress violated free market principles to waste that money.
Now Congress is complaining banks do not want to lend.
Of course banks do not want to lend. Unemployment is rising, credit card defaults are rising, foreclosures are rising, and commercial real estate losses are rising. Banks need reserves to offset increasing loan loss provisions.
Forcing Banks To Lend Is A Huge Mistake
Forcing banks to lend would be a huge mistake. All it will do is increase bank losses. We are in this mess in the first place because banks lent recklessly. Now the ultimate irony is right in the midst of a recession, certain members of Congress are attempting to force banks to lend.
Stop The Madness!
Consumers are tapped out. They are not going to buy autos no matter how much money Congress throws at the sector.
World Will Not End If GM Goes Bankrupt
The very best thing that can happen to GM and Ford is they go bankrupt. The sooner the better. Congress will then see that the world will not end. Both companies will reorganize. Both companies will keep making cars.
The airline industry did not stop flying when it went bankrupt and the auto companies will not stop producing cars if they go bankrupt. In fact, bankruptcies will eliminate the debt on the books decrease interest payments and make the companies more competitive, if and when they ever get around to producing autos that consumers want instead of what the manufactures want to produce.
The combined market cap of GM and Ford is $1.84 Billion + $4.30 Billion or a grand total of $6.14 Billion. Spending $50 billion on companies worth $6.14 billion makes no sense.
Furthermore, GM alone has a negative net worth (Stockholder's Deficit) of $60 Billion according to GM's 10Q for the period ended September 30, 2008 .
If Congress gave GM $50 billion, GM would be worth -$10 billion!
The Downside In Trying
Barney Frank says "There is no downside in trying." Of course there is a downside in trying. The downside is however much money Congress is willing to throw at the problem because every bit of it will be wasted.
Paulson gave Citigroup $25 billion. Today Citigroup announced it will shed 50,000 jobs. Exactly what taxpayer benefit did we get for that $25 billion?
It is high time Congress stop wasting taxpayer money. Let GM and Ford go bankrupt. The world will not end and no jobs will be lost that are not going to be lost anyway. The more money Congress wastes attempting to bail out organizations that deserve to fail, the less money there will be for legitimate uses down the road. It's high time that Congress understand that simple economic fact.
I urge you to vote against any bailout for the Auto companies. To do so would be a further waste of taxpayer money.
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Email your Representative put a link to this video in it and ask them to play it.
Ford's Most Advanced Assembly Line
Ford's most advance assembly line in the world is in Brazil. Check out the video, it will be an eye opening experience in auto manufacturing. Ford cannot build such a plant in the US because the UAW will not allow such supplier integration.
By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.
I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.
When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .
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