An Auto Bailout Too!

Washington is in a bailout mode following the Fed's bailout of Bear Stearns on March 14 and the Treasury's standby authority to bailout Fannie Mae and Freddie Mac, codified in H.R.3221 enacted on July 30.  Is the auto industry next?

On July 30, Senate Democrats agreed to take up a $6 b. loan guarantee for the auto industry when they return in September.  There are several problems with such an action:  1) It won't work; 2) It would be costly to taxpayers; 3) It would bailout one foreign owner and disadvantage others; 4) It would impede the restructuring of the auto industry; and 5) It would only the delay the firing of Big Three auto workers for a short time.

We went through this before with the Chrysler bailout in early 1980.  On January 7, 1980, President Jimmy Carter signed H.R.5860 into law.  It provided Chrysler with a $1.5 b. loan guarantee ($1.2 b. was used.), but only at the price of laying off nearly half its workforce, 20,000 white collar and 42,600 blue collar workers.  Chrysler's creditors took payment of 30 cents on the dollar on $600 m. of debts, and another $700 m. of debts were forcibly converted into preferred stock which was worth much less.  Meanwhile, much less deserving equity holders were made better off.  The warrants that Treasury got for the loan guarantee and the guarantee fees more than paid off the roughly $300 m. cost to taxpayers, but I doubt the taxpayers will be so well protected this time. 

Senator Debbie Stabenow (D-MI) has made it very clear that she see's the $6 b. loan guarantee as the first tranche of $25 b. of loan guarantees sought by Detroit's Big Three auto makers.  The $6 b. will be scored by the Congressional Budget Office as costing taxpayers $900 m.

Chrysler recovered for a time with the K car and by inventing minivans, but in 1999, it sold out to Germany's Daimler-Benz AG, and they sold 80% of it to the Cerberus Capital Management L.P. in 2007 for $7.4 b.

Step back for a moment and look at what has happened to the U.S. auto industry.  It changed hands to foreign firms and moved South as explained in this International Herald Tribune article.  This happened because Detroit sought quick profits in gas guzzling SUV's and trucks, produced less reliable and desirable cars than its foreign competitors, and agreed to union contracts it couldn't live up to.  Now Detroit wants to be bailed out of the consequences of a long history of poor management decisions.  If the Big Three are bailed out, what about the U.S. auto workers making better cars for foreign firms in the South? 

The marketplace can impose harsh consequences on workers in failing firms, but if we relax those standards, everyone will be a little worse off, and those workers would only <!--[if gte mso 9]> Normal 0 false false false MicrosoftInternetExplorer4 <![endif]--><!--[if gte mso 9]> <![endif]--><!--[if !mso]>

President Bush and Senator McCain have had to courage to say no bailout, and I doubt Congress can overcome their opposition this year.  However, next year, if Senator Obama wins the White House, more taxpayer money may head towards Detroit.