Another "Bailout" GM Ford Chrysler
11-18-2008, 02:39 PM
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Another "Bailout" GM Ford Chrysler
Vitaliy N. Katsenelson, 11.17.08, 01:45 PM EST
Allowing automakers to declare bankruptcy would be a victory for taxpayers, consumers and free markets.
Government intervention in the financial system via the Troubled Asset Relief Program made me sick to my stomach, but without it, there is a real possibility that our economy would have come to a screeching halt as trust in the financial system was strained to the point of breaking. Confidence among depositors and banks alike needed to be restored.
The putative bailout of Detroit's "Big Three" automakers is quite different from TARP, as it will only postpone the inevitable. No matter how much money you throw at them, the Big Three, or at least General Motors (nyse: GM - news - people ), will most likely still go bankrupt. They have managed to lose billions in good times and bad times.
Their business models were broken before the financial crisis hit; the crisis just accelerated the inevitable. The only questions are how soon and how much of the taxpayer's money they'll consume before they face their fate, since they have structural problems that will not be resolved until they go bankrupt.
In the 1980s, when the Big Three had virtually no competition, they sold their souls to the devil unions, signing contracts that put them at an incredible competitive disadvantage in today's environment where consumers don't have to buy American and have plenty of choices.
Unfortunately, these companies are run for and by the unions that have very different objectives than for-profit enterprises. These contracts, for instance, forced GM to run factories at 80% utilization, whether there was adequate demand or not. This, in turn, forced GM to sell cars to car rental companies at cost, killing future demand for its cars as it was only a matter of months before these cars made their way into the used car market.
It is hard to judge the true quality of their management as their unions made management's job impossible. But management is at fault of being stuck in the past and producing gas guzzlers (SUVs and trucks) when consumers clearly demanded fuel efficient vehicles. To its discredit, GM spends half as much on research and development as does Toyota (nyse: TM - news - people ) and for three times as many nameplates. This is not a sustainable business model.
Bankruptcy is a blessing, not a curse. Contrary to common perception, bankruptcy doesn't mean that the Big Three will disappear. Not at all, and quite the opposite. It will insure that they'll be around 50 years from now. While in bankruptcy, they will be able to break contracts with unions that are choking them, lower their debt burdens by turning debt holders into equity holders (and regrettably wiping out existing shareholders). Their hands will be untied to right-size by shrinking their operations, cutting costs and becoming competitive again.
Jobs will be lost, factories will be closed, benefits cut. Yes, all these things will take place, but the layers of fat that these companies accumulated over the decades need to be shed to confront the marketplace that is only getting more competitive. Today, the Big Three compete mostly with Japanese and European automakers. But competition will only intensify as the world flattens, the quality of Korean cars improves (in many cases, it already has), and Chinese and Indian cars come to the U.S. and the rest of the developed world.
An automaker bailout is simply bad for capitalism. It will put competitors at an unfair disadvantage. It will cost taxpayers money, which at some point will lead to higher interest rates and higher taxes. It will lower economic growth, and it will send an army of other failing companies lobbying to Washington asking the taxpayers to bail them out (though this will likely happen anyway). Finally, and most importantly, it will raise the likelihood of a Japanese-like 15-year recession. We'll be repeating their mistakes by not letting failed companies go bankrupt and thereby creating an economy full of zombie-like, semi-dead companies.
Capitalism is what needs a bailout. Though we often don't appreciate it, capitalism is what made this country great. It allows for the fit to succeed by allowing the unfit to fail. Let's bail capitalism out by letting the Big Three face their fates and not allowing them to become leeches on the backs of the U.S. taxpayer and our economy.
Vitaliy N. Katsenelson, CFA, is director of research at Investment Management Associatesin Denver, Colo., and he teaches a graduate investment class at the University of Colorado at Denver. He is the author of Active Value Investing: Making Money in Range-Bound Markets(Wiley 2007).
Allowing automakers to declare bankruptcy would be a victory for taxpayers, consumers and free markets.
Government intervention in the financial system via the Troubled Asset Relief Program made me sick to my stomach, but without it, there is a real possibility that our economy would have come to a screeching halt as trust in the financial system was strained to the point of breaking. Confidence among depositors and banks alike needed to be restored.
The putative bailout of Detroit's "Big Three" automakers is quite different from TARP, as it will only postpone the inevitable. No matter how much money you throw at them, the Big Three, or at least General Motors (nyse: GM - news - people ), will most likely still go bankrupt. They have managed to lose billions in good times and bad times.
Their business models were broken before the financial crisis hit; the crisis just accelerated the inevitable. The only questions are how soon and how much of the taxpayer's money they'll consume before they face their fate, since they have structural problems that will not be resolved until they go bankrupt.
In the 1980s, when the Big Three had virtually no competition, they sold their souls to the devil unions, signing contracts that put them at an incredible competitive disadvantage in today's environment where consumers don't have to buy American and have plenty of choices.
Unfortunately, these companies are run for and by the unions that have very different objectives than for-profit enterprises. These contracts, for instance, forced GM to run factories at 80% utilization, whether there was adequate demand or not. This, in turn, forced GM to sell cars to car rental companies at cost, killing future demand for its cars as it was only a matter of months before these cars made their way into the used car market.
It is hard to judge the true quality of their management as their unions made management's job impossible. But management is at fault of being stuck in the past and producing gas guzzlers (SUVs and trucks) when consumers clearly demanded fuel efficient vehicles. To its discredit, GM spends half as much on research and development as does Toyota (nyse: TM - news - people ) and for three times as many nameplates. This is not a sustainable business model.
Bankruptcy is a blessing, not a curse. Contrary to common perception, bankruptcy doesn't mean that the Big Three will disappear. Not at all, and quite the opposite. It will insure that they'll be around 50 years from now. While in bankruptcy, they will be able to break contracts with unions that are choking them, lower their debt burdens by turning debt holders into equity holders (and regrettably wiping out existing shareholders). Their hands will be untied to right-size by shrinking their operations, cutting costs and becoming competitive again.
Jobs will be lost, factories will be closed, benefits cut. Yes, all these things will take place, but the layers of fat that these companies accumulated over the decades need to be shed to confront the marketplace that is only getting more competitive. Today, the Big Three compete mostly with Japanese and European automakers. But competition will only intensify as the world flattens, the quality of Korean cars improves (in many cases, it already has), and Chinese and Indian cars come to the U.S. and the rest of the developed world.
An automaker bailout is simply bad for capitalism. It will put competitors at an unfair disadvantage. It will cost taxpayers money, which at some point will lead to higher interest rates and higher taxes. It will lower economic growth, and it will send an army of other failing companies lobbying to Washington asking the taxpayers to bail them out (though this will likely happen anyway). Finally, and most importantly, it will raise the likelihood of a Japanese-like 15-year recession. We'll be repeating their mistakes by not letting failed companies go bankrupt and thereby creating an economy full of zombie-like, semi-dead companies.
Capitalism is what needs a bailout. Though we often don't appreciate it, capitalism is what made this country great. It allows for the fit to succeed by allowing the unfit to fail. Let's bail capitalism out by letting the Big Three face their fates and not allowing them to become leeches on the backs of the U.S. taxpayer and our economy.
Vitaliy N. Katsenelson, CFA, is director of research at Investment Management Associatesin Denver, Colo., and he teaches a graduate investment class at the University of Colorado at Denver. He is the author of Active Value Investing: Making Money in Range-Bound Markets(Wiley 2007).
11-18-2008, 05:23 PM
#3
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The big three need a shakedown, not a bailout. The average labor union employee makes $70/hr...and will pay workers 90% when laid off, and the UAW higher-ups make just as much as some CEOs.... of course they are failing! Shouldn't producers try to make things that people want to consume before scapegoating their failures and seeking bailouts?
What about the other part of the US auto-industry... Honda, Toyota, Nissan, etc.. they pay US taxes and employ US workers.. and those are plenty profitable businesses.. so the US auto industry won't "fail".....
Perhaps the big three will follow in the path of the US steel industry... by shutting down all those inefficient mills and stuff.
We'll see what the UAW lobby will try to pull off.
What about the other part of the US auto-industry... Honda, Toyota, Nissan, etc.. they pay US taxes and employ US workers.. and those are plenty profitable businesses.. so the US auto industry won't "fail".....
Perhaps the big three will follow in the path of the US steel industry... by shutting down all those inefficient mills and stuff.
We'll see what the UAW lobby will try to pull off.
11-18-2008, 05:37 PM
#4
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Posts: 2,934
I find it funny that pilots that make $80/hr plus are saying this. Most auto workers don't make anywhere near that pay level. A vast majority of them that I know don't make anywhere near that. A vast majority of them are also out on the street and not getting anywhere near 90% while laid off. I'd love to know where they got their statistics. Sounds like the same place that says we as pilots have such a great life and make so much money because they compare our pay rates to those working a traditional 40 hour workweek.
Remember, CBAs are two way streets. Both sides agreed to this. US automakers have continued to lag behind in reliability and economy compared to the Japaneese. Much of the US production has already been moved out of the US yet they still continue to scream about the costs. GM has moved much of theirs to Canada where the government is taking care of healthcare for the people. If not there, Mexico. Apparently it's so great there that their citizens are moving here to find better pay.
This seems to sound just like the legacy carriers about 6 years ago. If you fail to evolve we the taxpayer shouldn't be responsible for bailing you out.
Remember, CBAs are two way streets. Both sides agreed to this. US automakers have continued to lag behind in reliability and economy compared to the Japaneese. Much of the US production has already been moved out of the US yet they still continue to scream about the costs. GM has moved much of theirs to Canada where the government is taking care of healthcare for the people. If not there, Mexico. Apparently it's so great there that their citizens are moving here to find better pay.
This seems to sound just like the legacy carriers about 6 years ago. If you fail to evolve we the taxpayer shouldn't be responsible for bailing you out.
11-18-2008, 05:44 PM
#5
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Posts: 999
yeah, but when you start at $30 an hour for a 40 hr work week, plus overtime, plus ridiculous benefits, I stop feeling bad that you do that well for putting a bolt in a hole.
Don't get me wrong, these people deserve to make a good living like everyone else does, but I wanna throw up when they are on TV complaining about taking concessions to help our their company.
Maybe we'd make what we're worth if we could go on strike the day after our contracts expire.
OB's tomorrow pip?
Don't get me wrong, these people deserve to make a good living like everyone else does, but I wanna throw up when they are on TV complaining about taking concessions to help our their company.
Maybe we'd make what we're worth if we could go on strike the day after our contracts expire.
OB's tomorrow pip?
11-18-2008, 06:08 PM
#6
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Posts: 440
I have always said and I still believe that you are worth what you negotiate. The UAW was able to negotiate a deal in which its members are still paid a good wage for not working over a period of time. That is what they wanted and that is what both sides agreed to.
However, with that being said there are certainly consequences for what is negotiated. This is where both parties are at fault, and the solution should NOT be government intervention.
If a company is going to lay people off due to declining revenues and demand for product, there is a serious cash flow problem. Management should have realized that this clause would only make a bad situation worse. The UAW should have realized that this would weaken the employer (i.e., the guy who signs the paycheck) and thus increase the level of insecurity of the labor force.
The consequences of that action is like making the hole in the bottom of a ship much bigger by hitting it with an axe. Personally, I think the government (and more importantly the taxpayer) should avoid bailing them out and let the free market forces of capitalism work its course. Could it possibly result in the failure of one or more of the big 3 auto makers? Yes, but then again the taxpayer wasn't asked to sign off on these labor agreements either.
However, with that being said there are certainly consequences for what is negotiated. This is where both parties are at fault, and the solution should NOT be government intervention.
If a company is going to lay people off due to declining revenues and demand for product, there is a serious cash flow problem. Management should have realized that this clause would only make a bad situation worse. The UAW should have realized that this would weaken the employer (i.e., the guy who signs the paycheck) and thus increase the level of insecurity of the labor force.
The consequences of that action is like making the hole in the bottom of a ship much bigger by hitting it with an axe. Personally, I think the government (and more importantly the taxpayer) should avoid bailing them out and let the free market forces of capitalism work its course. Could it possibly result in the failure of one or more of the big 3 auto makers? Yes, but then again the taxpayer wasn't asked to sign off on these labor agreements either.
11-18-2008, 06:20 PM
#7
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Originally Posted by 250 or point 65
OB's tomorrow pip?
To keep this on topic, I have a feeling that bouncing on the pension responsiblities and letting the PBGC take care of it just like the airlines did would keep the executive packages quite strong.
11-18-2008, 06:45 PM
#8
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Position: USAF
Posts: 1,398
Originally Posted by Pilotpip
I find it funny that pilots that make $80/hr plus are saying this. Most auto workers don't make anywhere near that pay level. A vast majority of them that I know don't make anywhere near that. A vast majority of them are also out on the street and not getting anywhere near 90% while laid off. I'd love to know where they got their statistics. Sounds like the same place that says we as pilots have such a great life and make so much money because they compare our pay rates to those working a traditional 40 hour workweek.
USATODAY.com - Carmakers craft big, creative buyout offers to shed workers
IBDeditorials.com: Editorials, Political Cartoons, and Polls from Investor's Business Daily -- If No Givebacks, Then No Bailout
from the Investor's Business Daily: When you fold in health care, pensions, hourly pay, vacations and the rest, average total compensation for a Big Three autoworker is $73.21 an hour, according to data cited by University of Michigan economist Mark Perry. Toyota, Honda and Nissan pay a still-generous $44.20 an hour in total compensation — a cost edge of nearly 40%.
-Please keep in mind that when factoring this cost... it would include what would be paid into the healthcare plan by the employer, etc
Several of these UAW things were started when the US had little competition in the auto-industry.
-disclaimer-
this post is not intended to be political
11-18-2008, 07:17 PM
#9
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People fail to mention other decisions that get them into this mess. How often do these three change body styles along with other aspects of a vehicle? Very frequently. Most times there are unnoticed changes at midyear. Do you know what the start up costs are every time you do that? I was talking to the manager of a dealership about this and he said "ya know, you're right". He was talking to someone involved with engineering that told him the figures. Each prototype is a half to one mil for that one vehicle alone.
Do you also know how that came about? It was in the early 30's by none other than GM. The idea was to get you to buy new all the time, getting you to want the latest and greatest.
They don't have to go as far as Henry Ford by saying "you can have any color you want as long as it's black" but the engineering costs of constant changes are mind boggling I'm sure.
Do you also know how that came about? It was in the early 30's by none other than GM. The idea was to get you to buy new all the time, getting you to want the latest and greatest.
They don't have to go as far as Henry Ford by saying "you can have any color you want as long as it's black" but the engineering costs of constant changes are mind boggling I'm sure.
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