Nikkei Sinks 5.6 Percent as U.S. Auto Bailout Fails

damm iff GM is going bankrupt than toyota will have trouble to.

 

This is going to be the Smoot-Hawley tariff of our era.

If Reid is so worried, then he needs to force Senate Republicans to put their money, or more properly their butts, where their mouth is. It takes 60 votes to close off debate. Fine. Force the Senate to stay in session, take a vote every hour from now until somebody says they've had enough. If the Republicans want to filibuster, then ... make them do that. Don't just put one long evening into it then say, oh, boo hoo, we can't get an agreement.

I'm just amazed at the stupidity of this entire process.

Nobody seems to have mentioned to JQ Public that these are loans, not gifts. All the popular coverage implies that we'd be giving GM $15 instead of lending it. The government is at risk for loan default, that's the extent of liability.

Nobody brings up the magnitudes -- revenues of US car producers are something like $350B, which is all at risk, right now, absent $15B in loans. That's pretty leveraged. I've seen estimates (of unknown quality) that the one-year loss of Federal tax revenues, should all of the Big 3 shut down, would exceed $100B. So there's a very real possibility that failure to make the loans will actually increase the deficit. Let alone the pension liabilities that the taxpayers are already on the hook for through the Pension Benefit Guaranty Corporation. People seem so blinded by ideology and hatred that they can't even make a few rough dollars-and-cents calculations.

The car manufacturers say -- and it appears plausible to me -- that the parts suppliers will fail if GM fails. So, in effect, Ford US shuts down as well. (I wonder if that's part of the effect on Toyota. Absent that, you'd think that loss of GM would have boosted Toyota's stock.)

Finally, it's not clear that GM has enough cash and credit lines even to be able to engage in an orderly reorganization. To do Chapter 11, you have to have enough cash in the till, or enough banks willing to lend, to fund ongoing operations as the reorganization is worked out. But GM apparently doesn't have that. If what I've read about that is true, then if GM can't get financing, it will have literally to be shut down and liquidated, which would be incredibly destructive and wasteful in the best of times, and will be an exercise in stupidity in the current climate.

GM's problem is that they're going bankrupt too early in the depression. Come this time next year, with 10+% unemployment or so, I think JQ Public may have figured out that this is a serious situation. But things haven't deteriorated enough ... yet.

OK, so I'm an economist and the predictions of economists aren't worth much. But if you looked at the Fed's data release yesterday, you'd see that total US household net worth started to decline in Q3 2007, and now in Q3 2008 total US household debt went down. That's the first time total credit extended to households has fallen since they've been keeping statistics (past half-century). This recession is only starting to get revved up. And here we are, flirting with the disorderly shutdown our largest manufacturing enterprises -- at the start of the recession.

To a large degree, I believe in the "creative destruction" and "cleansing depression" concepts of the Austrian school of economics. And I'm no fan of GM. But I'm even less of a fan of shooting ourselves in the foot. It is way worth gambling $15B of the taxpayers' money on this, if only to allow for orderly reorganization. If we're too dumb to do that, we deserve the consequences.

Maybe the President will reverse himself and do this as an act of the executive branch. Given the economic track record so far, that seems unlikely. So as of today, my investment planning is predicated on the likelihood of a disorderly liquidation of GM. As the phrase goes, the world can stay irrational longer than I can stay solvent.

 

Deleted due to double posting.

 

All of the Japanese automaker's stock fell because the market knows what the public has been blind to. The failure of just one of the Detroit 3 will cost the rest of the industry BILLIONS in lost productivity.

The Plastech Bankruptcy was a precursor to what will happen of GM fails. The CEO of Johnson Controls was very frank when he testified before congress. When Plastech failed in threatened to shut down operations at more than two dozen assembly plants in North America and touch every automaker that builds here. Johnson Controls stopped the domino's by buying Plastech's assets and cranking the production lines back up. It all had a happy ending but Johnson Controls warned congress the failure of GM won't have a happy ending.

GM alone owes suppliers more than $60 billion in account receivables. If they go bankrupt dozens if not hundreds of their suppliers with follow. All the assembly plants in the US and many abroad will grind to a halt as the supplier parts run out. Remember that we live in the time of JIT and JIS supply chains. The tier one supplier I worked for only kept 3 days of inventory on hand.

No one will be able to put together a rescue package for dozens of suppliers in time to keep auto production going. We can't even agree on how to allocate $15 billion for GM and Chrysler let alone a $100 billion or more needed to rescue suppliers.

We are about to see how important the auto sector is, buckle your seat belts. Personally, if the automakers fail, I'll have to plan on at least a year if not more of unemployment. It is the auto business and their suppliers that supply engineering jobs in Birmingham, AL. That is something our wonderful Senator Shelby seems to be completely ignoring.

 

Jhinton, excellent points all. I feel the need to rant some more.

This system is easy to break and damned hard to repair. I think engineers get that more than economists. Not just here, but true of all big businesses. That's why many are worth more as a going concern (Chapter 11) than they are in liquidation value (Chapter 7). It makes the gain/loss on this $15B bet hugely asymmetric. If we do it and it doesn't help, well, we're out $15B. That's $50 per US citizen. If we don't do it and it crashes the entire US auto manufacturing sector, that would be on the order of $1300 per US citizen per year in value of lost production, until such time as domestic production recovered. Two weeks of lost production would exceed the value of the loans. But instead of looking at this rationally, we're playing Russian roulette.

If GM is doomed to die, so be it. I think that would be a huge mistake, from the standpoint of US national interests, but Mr. Market is saying otherwise. But there's a difference between letting GM get its affairs in order versus letting the corpse hit the floor at whatever random point this weeks' cash flow is inadequate to pay this week's bills. Which is where this is heading.

Not that GM isn't 99% responsible for its own misery -- Mulalley begin hording cash at Ford two years ago. But an uncontrolled shutdown of US auto manufacturing is the last thing we need right now. If that means helping GM get over their mistakes, so be it.

 

Detroit going down will cause a world-wide depression and massive deflation. Toyota makes more than 50% of their profits in the US. They build twice as many vehicles in Japan as they sell there so what happens when they have to have massive layoffs in Japan. does anyone think that after Toyota loses months of Production in the US because of disruption in the supply chain that they won;t transfer chunks of that production back to the motherland?

 

I'm glad the bailout has failed so far. No that's not being anti-American from across the pond, I want your country to recover just as much as my own. But from so many threads here, feeding a dinosaur isn't going to cure it, it will only help it live a little longer.

Maybe some of the failure points are geared around good ole economics too. Would you put your own money in a business that makes products that no-one wants any more ? Where's the future in that ? Supply and Demand economics. Forget SUV's, they've had their day, "Caesar is dead, long live Caesar !"

On the plus side, Ford are making efforts to hybridise their vehicles and are making them smaller. They should get a helping hand, although "strangely" they reckon they don't need the funds today so see off the wolf, just maybe tomorrow.

GM should also be helped - but only along their Volt schedule. If this vehicle works, it is their life saver and future and the US should invest in it, and heavily, to the point it technically surpasses the Prius Gen 3.

As for Chrysler, I don't know. They seem to be piggy in the middle. Perhaps they should be engulfed in one of the other two ?

Just my 2c, but however you try to reason helping them out, if money loaned or pledged only shores up current cash flow problems, then you might as well just flush it down the drain because all that has been bought with the money is a bit of time.

 

The house is starting to catch fire. Now is not the time to argue over who caused it. Put the fire out first before it consumes the whole house. There'll be time enough for arguments later.

 

Why is it that when the iceberg has broken the ship in two, that we (collectively, not any individual) start pointing out the need for the ship to be able to float? The break occured many years ago and the only repair presented in the last month is to overpower the inferior management with money to cover this shortcoming.

I've just got finished watching a big chunk of $700 billion get spent in an orgy of shoveling cash to financial institutions. This was concocted by two Wall Street trained finance guys and accepted way too sheepishly by Congress. No clue as to whether it saved the day or was a total waste. As far as I can tell, the only financial firms/CEOs/Board of Directors that learned the right lesson are the ones not bailed out. All the others continue business as before, but now with bailout money to make up for their bad decisions.

There is no question that America is better served by taking active measures to save the US auto industry, but damn, it's got to be PRECEEDED with a plan that solves the root problems.

Sure, a lot of Americans do not know economics inside and out, but many recognize that what is happening is not solving the problem. Where is the plan to make better cars, or lacking that, where is the plan to restrict the US auto market to US firms?

(PS. Not a rant against anyone in particular, just a frustration in general)

 

I think your post has a lot of compelling points.

IMO, many people (myself included) are leary of bailouts to GM and Chrysler while suspecting that the consequences of not bailing them out could be severe.

When there doesn't appear to be a plan on how these companies are really going to survive without additional massive financial bail-outs in the future, people just don't want to jump on the idea of bailing out a company for their bad mistakes.

A Catch-22 if you will. The best thing IMO would be for GM and Chrysler to go to the public with a clear, cohesive plan on how they are going to make it. This would significantly increase the public support for their bailout (and perhaps even their cars).

 

I think the economist Paul Krugman captured the essence of this. He was asked what the Bush administration ought to do about the car industry, and he said something to the effect of, lend them enough money to survive until January 20, then get out of the way.

My point is that you shouldn't expect anything useful from the Bush administration, given their track record. They had and have no coherent plan for the financial system bailout. (Which, it should be said, was not a gift of $700B. It has been the creation and purchase of something less than $350B in preferred stock of banks. On net, absent a reduction in the value of the US banking system, the actual cost of that part of the bailout is zero, so far.) If we require a rational, workable plan from the Bush administration before lending money to the US car industry, GM should just go ahead and declare bankruptcy now (instead of January, when it looks like they are going to run out of money).

The point of this $15B in loans is to keep GM and Chrysler alive until somebody else takes over the government. At that point, imho, they'll have to do something that looks exactly like Chapter 11 bankruptcy for GM and Chrysler, and will probably require yet more funding, but cannot be literally called bankruptcy. Only at that point, with the gun to their head, can they determine whose ox will be gored in the bankruptcy workout.

My only point is, it would be foolish to let GM fail in an uncontrolled fashion right now (ie, December or January). In all likelihood, the US budget deficit would be higher under that scenario than if we lost the $15B in loans. We'd both shut down the US car industry and increase the taxpayers' liabilities. Everybody loses. Better to gamble $15B in loans now than to guarantee that outcome by inaction.

Do I have great faith that the Obama administration will develop a plan to save the industry? No. I haven't seen anybody discuss what I see as the realities of the situation. For example, what if US auto demand stays at 10M vehicles per year or less for the next five years or so (the level required to bring US vehicles/driver back down to its historical level.) Anybody left standing at that rate? If not, one or two of the big 3 have got to go, so that the last one can survive. That's what depressions are supposed to do. Bankruptcy or merger, take your pick. But letting it crash and burn willy-nilly because this is the month GM runs out of cash -- that's not sensible.

 

The Detroit 3 have gone to the public with clear plans. The problem is that those plans didn't get any media exposure. Instead we learned that the CEO's went to Washington in corporate jets the first time and hybrid cars the second. As normal there is little substance in the information shown in the media but lots of talking head yelling at each other.

Here is Fords Plan:
http://media.ford.com/article_display.cfm?article_id=29533

Ford has launched a new website:
The Ford Story: A different route - Ford on the credit crunch, recession and more fuel efficient vehicles | Ford Vehicles

Here is GM's Plan:
http://gmfactsandfiction.com/wp-con...estructuring-plan-for-long-term-viability.pdf
GM even has a video of their CFO reading and explaining the plan on their website

GM has launched a new website:
Facts About the Auto Crisis - GM Facts and Fiction

 

Jhinton, your point is well taken. I get where Ford is coming from. They were prepared for this.

I just want to say that GM's plan is a bankruptcy reorganization. They're just not calling it that. And that they need the short-term loans to be able to carry that out.

Take a look at Table 4. As of 12/31/08, $32B in debt evaporates off their balance sheet and the equity of the company increases by that amount. Basically, somebody gives GM $32B. That's part of the plan. Half their debts other than accounts payable are forgiven by the lenders.

As far as I can tell, the sum total of their explanation is this:

"GM will immediately engage current lenders, bond holders, and its unions to satisfactorily negotiate the changes necessary to achieve this capital structure; Oversight Board involvement may be necessary to be successful."

So the plan is basically a government-run Chapter 11 bankruptcy. For which, they need the federal loans in the short term. That all makes sense to me, as long as you believe their demand forecast (12M+ vehicles per year). GM's long-term bonds are selling right now for about a dime on the dollar. It's possible that bondholders would not be all that put out with a 50% haircut on face value coupled with a higher probability of eventual repayment.

 

Even with public exposure, very few are equipped to understand the real meaning of the various finance plans. Yet everyone has direct experience with car quality issues.....and it is the buying public that will determine the fate of GM, not the finance plan.

As long as the GM plans keeps addressing cash flow issues only, instead of how GM is going to prevent losing market share, then it is not a plan that addresses the most important point.

When I go through the plans, here is what I extract:

FORD - We were smart enough to start getting our house in order so we will be OK. If the economy gets much worst faster than we are executing, we will need a loan.

GM - We need cash NOW, or bad things will happen. Our plan is to basically continue what we planned to do all along, but now accounting for the big market changes that have occurred.

I find it maddening that this GM plan continually mentions how many awards and other irrelevant self congratulations brought up. Leading the industry in reducing lost work hours is of little relevance to the many people about to be hammered by GM's leading the industry in lost jobs.

 

As always, your responses are first rate.

The mind bending thing about these bailout affairs (all of them) is the larger the sum, the less thinking expended of how to make good use of it. The question that always should be asked on both sides of a bailout is:

"What is the best possible way to spend this money?"

Unfortunately, the situation gets manipulated into a situation where the only course of action is to spend it on the most worrysome debt needing payment. I can dream up options, but Congress would be well served to direct the CBO, GAO and request some of the more reasonable Washington Independent Organizations make recommendations or evaluations. For example, having an independent audit of GM's finances should be required for government loans...and then the sensibility of the plans presented could be much better evaluated.

 

FL_prius_driver, I'll ditto all that.

I'm going to write out my plan.

The first thing to do is define the national interest here.

One aspect of that is purely economic: we need the industry to stay in business right now due to the downturn, and we'd like to have the industry thrive over the longer haul as part of a viable US economy. The first part is fairly uncontroversial, I think. Or it will be soon, as the economic situation deteriorates. The second part, you'll hear people say "let Toyota do it", but I'm of the opinion that you need a US-run segment of the industry if for no other reason than to be able to produce trucks and tanks for the next war.

So I'd work from the standpoint that we actively want a US-run segment of the auto industry now and in the future.

The second aspect of national interest is more arguable: Do we have a national interest in requiring the industry to do things that are not dictated by "the market" (by the interaction of consumers' preferences as shaped by advertising and industry's goals?). The obvious candidate there is the entire energy independence/national security/environmental area. There's a lot of precedent there. But it's tough to figure how hard you can push that in a (temporary?) era of $1.50 a gallon gasoline.

If it were up to me, I'd put a tax on gas to put a modest floor on the price (I think Ford already suggested that). Then work from there. We burn about 150 billion gallons of gas/diesel per year. A dime a gallon would fund the first $15B in loans.

But if you really wanted to change things, I'd say that by far the most effective thing you could do would be to ban SUV ads on TV, the same way they banned cigarette ads and (voluntarily) banned liquor ads for some time. Vehicles averaging less than umpty miles-per-gallon, or vehicles getting below the 25th percentile of mileage within class (so you could still advertise pickups) could no longer be advertised on TV as of such-and-such date. On paper, it wouldn't cost consumers a thing, wouldn't cost car producers a thing, and (if ad revenue was unchanged) wouldn't cost the networks a thing. Same rules for all, so not disadvantaging anybody. But I bet the car executives would know it would be the kiss of death, so they'd have no choice but to hit the MPG targets. Any strong hybrid or PHEV or EV would be excepted from the ban. No exception for the phony-baloney flex-fuel cars that'll never run on ethanol anyway. Use the power of TV for good for a change.

But if you were of a mind to impose the targets the old-fashioned way, then that gets hashed out here. I'm not sure you'd make a lot of headway with the price of gas where it is now, and given that the Congress already upped the CAFE standards. But given my preferences, I'd be OK with MPG targets and with incentives to get more miles powered by electricity. That'll be reached via political rather than technical consensus anyway.

Then the next step is obvious. At some level, the financial side of this is like any other bankruptcy. GM needs to show what it's going to do to become a viable competitor. Looks like they're moving down that path with their published plan, though its short on details. There's nothing particularly controversial there, just a lot of people are going to lose a lot of money, so there'll be a lot of squabbling. And because the government is the guarantor, then there's going to be some politics over who loses what in the workout.

So that's where your third party comes in. They'd set up the rules -- here are three scenarios for auto demand over the next 10 years, and three scenarios for the price of oil. Here's Toyota's cost for making a car. Take your accounts and show us how you reach average profitability over that period under the low-medium-high scenarios. Show who has to give up what. The third party then certifies that yes, the numbers add up, or the plan goes back to be reworked. Third party also critiques each plan to show what combinations of concessions would reach the same level of profitability.

Next step is the bargaining with mandatory arbitration. Because this is where it gets ugly. A plan that can't be implemented is less than worthless. All the interested parties sit at the table to agree to the concessions. No idea how that would work. In theory, it's no different from any other bankruptcy, but in practice, it's tough to believe that the Congress would keeps its hands off the process. Mandatory arbitration is required because this is where (e.g.) the pensioners lose some benefits, or the creditors take a loss. Any time you're in the business of breaking existing contracts, you're going to need some legal backstop to keep the lawsuits to a minimum.

Then you reshuffle the money and the contracts and see if the industry can make it. If not, the final component of the plan is for the orderly liquidation of one or more of the Big 3, at some future data, based on criteria for success or failure. In other words, you limit the Federal liability and oversight to a defined amount of money and time -- you sunset the aid, to the extent that you can. (Congress can always override the sunset provisions at a later date, so nothing's ever set in stone, but its' still worthwhile to force a re-vote if they want to continue aid down the road.)

So, bare bones, I don't think it's hard to figure this out. It's just going to take longer to get that process started than GM has right now.

But if it were up to me:
0) Congress authorizes $15B in loans right now. As part of that bill,
1) Congress defines the national interests here as having a profitable US-owned segment of the auto industry now and in the future, and having that segment lead the way in reducing the use of oil for transport. To the extent possible, the Congress would signal what technical goals it would require for the energy use portion of the national interest.
2) The DOE/DOT or the GAO would be tasked with specifying three standard scenarios for auto demand/oil price, the auto makers would they submit accounting and other documents showing who would have to give up what to reach profitability under those scenarios, and would reach whatever explicit technical targets were established in Step 1 (e.g., higher CAFE standards). Standardizing the formats as much as possible. Third party experts would certify that the numbers add up, and if not, they go back to the industry to be reworked.
3) Proceed to bargaining with mandatory arbitration as backup, ensuring that some bargain would be reached within a fixed time period.
4) The Congress then passes a second bill, the legislation authorizing the loans required to make this work. I'd fund this with a gas tax too.
5) A ban on TV ads for the lowest-mileage vehicles goes into effect (along with whatever other technical hurdles are imposed).
6) Federal oversight board reports annually to the Congress on progress.
7) Loans are repaid or companies liquidated within a decade.

Requires two acts of Congress and a bankruptcy workout.

 

To me another aspect is just as important. If the car industry is really well run, then the US would be a leader in improved, sustainable transportation. This will be needed badly in the future. Depending on overseas industries is just so unnecessary. As an example, Space-X has jump started the technology of 30 year old rocket designs, and is profitable!!! The conventional space vehicle manufacturers and US government were so innovation dead, that the US started depending on the Russians for space transportation. The parallels with the auto industry are amazingly similar.

Almost every industry has to be forced to keep standards and comply with (good) regulations. Safety is almost always seen as something that can be shortchanged for short term profits. The California approach to these issues has been astoundingly good compared to national approaches. Rather than complicated CAFE standards, or technology dictates. they require a percentage of non-polluting cars and power plants. History has shown how well this works. It resulted in the EV1 and the world's first effective solar plants. Even better, it has put more choices out to the citizen, with a very easily enforced set of legislation.

The tax as a funding mechanism I would agree with as a bailout funding mechanism while the time is right.

I'll take a pass on that. I always ask the question, can something be achieved by providing more choice than by adding regulation. If I were to force something, it would be that a production EV and a production PHEV must be available. It's not that there are too many SUV choices, it's the dearth of non-SUV choices that bothers me. Let them advertise SUVs that weigh more than Sherman Tanks, just ensure that a viable non-polluting options is really supported. If nothing else it gives the government the option of tax incentives to EV buyers to shape the market. (Would GM's position be better off if the EV mandates we never removed?)

As long as everything is public and transparent, I can agree. I cannot say if this would operate as planned.

I can see where you have focused on this real important part, keeping the company alive while there are many vested interests that get hammered. Wow.

I will try and remember this and compare to what eventually emerges. This has helped me significantly by pointing out that keeping the auto maker(s) alive is going to be an exercise in picking out who gets their contracts broken.

 

The only way that GM is going to be saved is if EVERYONE gives a little.

• The management will take pay cuts and give up some control of the company to an arbiter.
• The union will allow plants to close, speed up pay cuts, start paying for more of their healthcare, and kill the jobs banks.
• The bondholders will take pennies on the dollar for their bonds. (GM debt is currently selling for about $0.10 on the dollar.)
• Dealers will loose their dealerships and won't get bought out. (GM needs to eliminate brands but won't because they can't afford to buy out the franchise owners.)
• The public will give GM bridge loans to finance the reorganization.

This can be done. It was done successfully with Chrysler more than 25 years ago. The problem is that it took 3 months to get everything organized and right now GM doesn't have 3 months.


BTW, I don't see a future for Chrysler that doesn't involve them being absorbed by another manufacturer or being broken up and sold.

 

Actually, what became clear was the the need for everyone to give up a LOT.