The most urgent piece of economic news and policy over the next several weeks will be the fate of the General Motors Corporation. It will take precedence over the general policy response to the worsening recession.
The problems in the auto industry go well beyond the Detroit Big Three. All eleven of the major automakers with operations in North America have come under severe stress, as a result of the sudden reluctance of consumers to buy new vehicles. But the situation at GM is even worse than many people perhaps realize.
As I wrote here, GM’s immediate financial situation is why they’re in dire straits now. As of the end of September, they reported about $16 billion in balance sheet cash. At a burn rate of roughly $1 billion a month, they (and we) figured they had enough cash to get through a good part of next year. The plan was to hope that economic conditions recovered enough by then to improve their cash-flow position, and get some new capital into the company.
What happened to change all that, is that US consumers suddenly went on strike in October. GM reported October sales that were 45 percent below the levels of October 2007.
I’ll give you a minute to pick your jaw up off the floor. You’re ready to go on now? Ok.
With that big a hit on their top-line revenue, GM’s cash position has deteriorated far faster than they had planned. If the consumer stays on strike through the end of the year, GM probably doesn’t have enough cash to keep operating.
What does filing for Chapter 11 bankruptcy do for GM under such circumstances? Not a whole lot. Leave aside that a great many of GM’s customers might suddenly become reluctant to buy a new vehicle from a bankrupt company (because of fears that the warranty would not be honored, or that parts and service might be harder to get).
The real problem is that bankruptcy doesn’t solve GM’s cash squeeze. There’s not a banker in the world right now that would lend them a penny. Companies go into Chapter 11 when there’s a reasonable expectation and a credible plan to emerge from bankruptcy and continue operating.
But in GM’s case, there are very serious questions about their markets and about their whole business model. They rely on cash flows from high sales volume to keep afloat a cost structure that should have been rationalized long ago. I believe that GM, as currently constituted, is insolvent.
But the immediate problem facing GM now is a cash shortage that could leave them literally unable to operate before too much longer. Possibly before the end of the year.
And that’s why GM’s management is pulling out all the stops to lobby for an immediate infusion of cash from you, dear taxpayer. In this effort, they’re joined by their close allies in the leadership of the United Auto Workers, as well as Michigan governor Jennifer Granholm, and Michigan’s Congressional and Senate delegation.
The Bush Administration and congressional Republicans have supported a plan to redirect $25 billion appropriated last September for use by the Detroit automakers. This money had been the quid pro quo to induce the Big Three to accept higher gas-mileage standards, and was to be used for factory retooling, alternative-fuels R&D, and the like.
Instead, the Republicans would disburse this $25 billion immediately and permit it to be used as operating capital. At GM’s current run rate, this presumably would allow them to stay alive for another two to four months.
Congressional Democrats, who started debating the issue yesterday, aren’t in favor of that idea, or at least they say they aren’t in favor. They want to allocate at least $50 billion to the Detroit Big Three during the current lame-duck session. I don’t know if they intend to take it all from the Treasury’s TARP plan (which was supposed to be for stabilizing the financial industry), or if they’re thinking $25 billion from TARP and $25 billion from the fuel-economy grant I just mentioned.
The issue comes down fundamentally to this: should the taxpayers throw an enormous of money that is unlikely ever to be repaid into General Motors, to keep them operating in their current bloated state? They have far too much production capacity, their labor costs are far too high, and they have far too many dealers.
GM needs to shut down some capacity, renegotiate with the UAW, and change their production mix to more fuel-efficient vehicles. And in all candor, they’ve known this for decades. Rather than complete these reforms over time (which would have exposed them to market risk), they instead very effectively negotiated with Congress for an endless parade of market-distorting regulations that shielded them from competition.
Now that the string has run out, they’re looking for a direct input of taxpayer cash to keep operating more or less as they always have.
The case to provide an emergency bridge loan for GM is basically this: they expect that sales will recover quickly from October’s extremely depressed levels. And they also expect that the North American market will rebound to at least 16 million vehicles sold per year by 2010. (This year’s rate will barely break 11 million.)
Neither of these assumptions is very good. If we put 25 or 50 billion dollars into GM now, it will just be the first of a long series of emergency cash infusions. And the temptation to keep throwing good money after bad will be impossible to resist.
What’s the downside if we don’t bridge GM now, during the lame-duck Congressional session? Well, if they’re forced into Chapter 7 bankruptcy and are forced to stop operating, it’s going to throw a lot of people out of work and also wreck a lot of smaller companies (GM’s suppliers and dealers).
To press this point, GM announced today that they’re postponing by a month the incentive payments that they owe their dealers for sales made in October. Outside estimates are that about half a billion dollars are being withheld from dealers.
This of course is being presented as a cash-preserving move. It also has the surely-unintended side-effect of causing GM’s dealers some very direct pain. Those dealers are all burning up the phone lines to their Congressmen right now, threatening to dump lots of employees on the street right before the holidays unless GM gets their bailout.
It’s going to be politically impossible not to bridge GM at this point in time. The Republicans know this. The Democrats know it too, which is why late yesterday they started posturing that there would be no lifeline, and that the Republicans are to blame. This way, the bailout will happen with Republican votes. And the Republicans will still be portrayed in the media as having tried to throw three million people out of work.
For their part, GM and the UAW would just as soon wait until the next Congress and the incoming Democratic administration. Since the new Senate will be all but filibuster-proof, the Big Three and the UAW can expect to get a much better deal from Congress than they would now.
By “better deal,” I mean a much more open-ended commitment from the Federal government, which would allow the Big Three to avoid meaningful and painful reforms. That also goes for the state of Michigan, which delivered critical electoral votes for Obama, and for the UAW.
It’s ultimately going to be a far worse deal for the taxpayers and for the people who buy automobiles. General Motors will still be as uncompetitive as ever, but now its losses will be socialized. Welcome to industrial policy, American-style.
-Francis Cianfrocca
The part
roxer Tuesday, November 18th at 9:03AM EST (link)folks are missing is this:
What happened to change all that, is that US consumers suddenly went on strike in October. GM reported October sales that were 45 percent below the levels of October 2007.
Congress can bail out GM all they want. GM can build new quality fuel efficient cars all they want (that will take some time though). But until consumers actually buy the product, it’s all in vain. Maybe a tax credit would be a better idea? Give the consumer a tax credit for buying a new car from one of the big three.
The other car makers would scream bloody murder. I would not blame them since they have done everything right - especially build them in the US. I do not see a win-win in this for anybody. I would also not tell the American tax payer to suck it up as Congress seems to be pushing towards. As a matter of fact, why does this seem to be a bailout of the unions and not necessarily of the car companies?
“Where I stand does not depend on where I’m standing.”
–Fred D. Thompson, 2008
Like you said, it seems this will be neverending
bk Tuesday, November 18th at 9:14AM EST (link)Ford and Chrysler will demand (and obtain) a piece of the pie if GM is getting anything. More will pour in after the inauguration.
Japanese automakers will look for help for their US plants in some form or fashion. Will it take aid to the Japanese plants in southern states to get some blue dog votes for the Detroit/UAW bailout?
Then we get another round by the summertime as gas prices start rising again on top of whatever the bad state of the economy is, not to even mention that people will have learned their promised tax cut is gone at best or has become a tax increase at worse. Who’ll be buying cars come next June/July?
Whatever happened to the business of “we need this $700B NOW for X purpose or the world will end” and then they spend almost none of it on what they said it was needed for? Is there any sort of actual PLAN in anyone’s head any more?
In the mean time I suspect we’ve had borderline folks quit making mortgage payments because they believed Obama and the Dems promises to cut down on foreclosures, so the stuff that used to be bad surely must be getting worse, even while we’ve ignored that to focus 24/7 on Detroit.
When will someone in Washington other than a small fraction of the GOP realize we need to stop the madness?
Where in the constitution does Congress have the power to do this?
Next93 Tuesday, November 18th at 9:28AM EST (link)I’m still trying to figure out where in the consitution Congress gets the power to buy equity in private companies, or to hand out money to private companies to keep them afloat. Because according to the 10th ammendment, if that power isn’t specifically granted to them, they don’t have the power to do so.
The closest thing I’ve found is the interstate commerce clause, and that doesn’t even come close to the idea of nationalizing industries.
Bottom line is that this whole bailout concept is unconstitutional. Or has the concept of “a living, breathing document” now come to mean “we make things up as we go along”?
Constitutional limits on the powers of the federal government:
It’s not just the law, it’s a good idea!
ugh
Tim Tuesday, November 18th at 9:31AM EST (link)GM is a complete mess of a company. Made completely ridiculous business decisions and dug their own hole.
Bailing them out is a waste of time in their current state. All it means is that the goverment is going to have to make the tough decisions (like cutting costs and that) which private enterprise should have already done.
Let GM Reorganize in Bankruptcy Court
kingfish Tuesday, November 18th at 9:41AM EST (link)American Spectator has a good column today on how GM can fix itself. Could someone tell me why it produces an Envoy AND a Trail Blazer? Or why Ford produces a Mountaineer AND an Expedition? Let them go into a reorganization in bankruptcy court. Too many dealers, too many brands and lines, too much of everything. A bailout fixes nothing and ensures we will be back here discussing another bailout sooner rather than later.
I worked at GMAC for five years and you wouldn’t believe how screwed up GM is. Their culture is pretty similar to that of the government. Above a certain management level, anyone who showed common sense, initiative, leadership, etc was hammered down or run out. I had a VP of sales for the whole division who had never been in sales before or in a customer’s office. Too often at GMAC I saw too many things that reminded me of Charles Dickens description of the French Aristocracy in A Tale of Two Cities: Too many people who are grossly not qualified for the jobs they held but were put in those jobs because they had been at GM for so long and they didn’t want to let them go.
Hell, our health care plan was just as good or better than the union’s, so much for union healthcare costs driving them in the ground when they gave better health care plans to the white collar guys at GMAC.
And Toyota & Nissan are offering 0% interest...
izoneguy Tuesday, November 18th at 9:41AM EST (link)…they are taking advantage of the situation which any good business would do. Toyota says they “have plenty of money to lend”. Then you see a GM spot for Buick - that is the big “ugh”.
Does GM realize how ugly some of their cars are?
That is the biggest problem they have. If you cannot sell something perhaps you need to take a deep hard look at why.
And having bloated management, out of control advertising costs and the most uncompetitive labor contracts does not help.
And the REAL irony is that most Obama supporters probably don’t even own American cars!!!
So Obama will have to bail out a company that probably sells most of it’s products to Republicans.
Just say NO to anymore Bail-Outs
“When the government fears the people, there is liberty. When the people fear the government, there is tyranny.”
Thomas Jefferson
Screw GM, its Unions, Dealers and employees.
Tbone Tuesday, November 18th at 9:44AM EST (link)If I go broke, I go broke. They can too. It is called capitalism.
Envisioning when all that is Left is the Right.
Lotsa luck
Next93 Tuesday, November 18th at 9:53AM EST (link)And, of course, we all know how GOOD the government is at doing that sort of thing…
Constitutional limits on the powers of the federal government:
It’s not just the law, it’s a good idea!
5...n/t
Attack Mode Tuesday, November 18th at 10:05AM EST (link)n/t
“Land of the Free and Home of da Whopper” Peter Griffin…Family Guy
conform and celebrate diversity….or else!!!
Steel-Belted Radial Right Winger
“I’ll create 5 million jobs from out of unicorn farts and pixie dust” Justatron paraphrasing Obamessiah…yes I love it that much.
Not One Thin Dime
Finrod Tuesday, November 18th at 10:18AM EST (link)I don’t want any of my money going to GM or any of the other auto makers until they get rid of the 12,000 workers they have sitting around doing crossword puzzles and watching World War II documentaries. (Hat tip: Neal Boortz)
—
Finrod’s First Law of Bandwidth:
A picture may be worth a thousand words, but it takes the bandwidth of ten thousand.
Senate Republicans Better Not Betray Conservative Principles
Augustus Tuesday, November 18th at 10:19AM EST (link)If the Senate Republicans bail out GM and the UAW, I am quitting the GOP. A bailout will be the final straw for me. I have had it with Congressional Republicans bragging to their constituents about how conservative they are and then acting like a bunch of spend happy liberal Democrats once they return to Capitol Hill.
I am not the cause
ed_ga Tuesday, November 18th at 10:24AM EST (link)I have bought approx 20 new cars in my adult life and all but 2 have been from the big 3. If thet get bail out money, my big 3 car buying is over. Why should i have to pay for something that i have already paid for with my tax money? It is time for my truck and my wife’s suv to be replaced. If they are responsible and use chpt 11 to get their cost in order the 2 new vehicles will be from the big 3, if not another company will get the sales.
$25 or $50 billion
JakePrime Tuesday, November 18th at 10:51AM EST (link)It doesn’t matter. If GM gets enough to last until 2009, they’ll be knocking on the White House door soon enough. Then they’ll get as much as they want. All they’ll have to do is limit executive, they only thing Democrats care about.
Does anyone seriously believe that GM will use the bailout money to fix the company?
Why not Chapter 11?
woodsman Tuesday, November 18th at 11:06AM EST (link)Let GM reorganize and eliminate the obvious costs, and develop a game plan to keep some of the skilled workers (at greatly reduced wages and benefits comparable to the Japanese auto workers). Some will take some painful hits on this, but it should NOT be the general tax paying citizen.
The Federal government could provide some tax incentives to get the public to purchase good mileage vehicles for a short period of time (1-2 years?).
Reduce the corporate tax rates and depreciation schedules to something that will provide quicker investment.
Then where plants that are closed due to consolidation of models use those facilities as business incubators with some state tax credits. GM could still own the the land and buildings for assets, and the facilities are put to work for local employment.
If the UAW is serious about helping its members then they can pay for retraining people to work at the incubators instead of watching movies. I’m sure the people would rather be working and productive anyway, from a pride point of view…
I think there is a way out of this, but it won’t be easy, and it will not be fast, but in the long run it could be profitable.
That’s what the game is about anyway.
And STOP giving away money….
there is no evidence
Streiff Tuesday, November 18th at 11:24AM EST (link)that GM is a good candidate for Chapter 11.
“A man does what he can and endures what he must.”
? for Blackhedd
posterposter Tuesday, November 18th at 11:32AM EST (link)I have resigned myself to near complete socialization of practically everything for the next four years.
My question for you is this: will we be able to erase the damage the Dems are about to do? How will we un-nationalize everything, from auto to healthcare?
Bailout Cannot Save GM...They Already Drank The Pelosi Hemlock
rcov092 Tuesday, November 18th at 12:01PM EST (link)GM cast off on a quest to “save” the company by diverting all their design resources into making the “Volt” The volt is an electric 9plug-in) car with a small engine to prower it along for trips over 75 miles (their stated limit under battery)
They did under the pressure of $5.00 gas and pressure from Congress. The problem is this. The Democrat Administration and probably Democrat Controlled House & Senate (They will appoint Olympia Snow to a Cabinet post to move her seat over to Democrat control) hates all forms of energy other than wind, solar and pedal power.
They will make electric power to power the volt (the big problem in their risky scheme to convert the powering of America) so expensive that consumers will view the volt as the “Electric Hummer” so expensive to buy and drive no one….no one will buy it.
Couple this wik all the other “marketing” decisions they have made have doomed them. Dumping in another 25-50 billion of our money will only change the size of the bankruptcy. I for one even believe that in the end GM probably cannot be saved.
I also suspect that Democrats believe this too but owe the unions so heavily they will take our money to do so. This weeks exercise is only so that they can blame the eventual outcome on the “evil” Republicans. It is the same strategy they employ on every Socialist scheme they promote.
“Not One Red Dime for the NRSC or NRCC till they stop trying to elect liberals”
Join the RedState Strike Force
Get Margaret Thatcher to reincarnate as the President of the US
Francis Cianfrocca Tuesday, November 18th at 12:02PM EST (link)n/t
I like how Black doesnt even address the possibility of 'no bailout'
Alberta Tuesday, November 18th at 12:13PM EST (link)and by like, I mean im quietly terrified.
America, come on now, this is no good. Stop playing Soviet. I want to be able to get a mortgage one day, and a car, and not have to pay 20 (or more) points on them either. Oh well, you older folks had to do it under Carter.
A real question. The dollar, its going to get killed by this, or no? Im thinking if they bail out the car cos, it will have a negative effect on the dollar (be worth less compared to other currencies) as they will depreciate it as a tool to sell cars internationally.
Plus who is going to want USDs when America is going the way of Zimbabwe?
Sir, my concern is not whether God is on our side; my greatest concern is to be on God’s side, for God is always right.
Abraham Lincoln
Failing that,
posterposter Tuesday, November 18th at 12:43PM EST (link)where do we go from here?
Union Fault???
RightWingIt Wednesday, November 19th at 1:17AM EST (link)What do you think guys? I’m blaming the union for this…maybe not 100% - but still, they’ve been in there causing problems for years. They are part of the problem!
RightWingIt.com