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I think people are a little too eager to believe the hype that the massive loans and bankruptcy process (which trampled creditors and favored the unions) "worked." As with most political claims, they are over-simplifying things. Are we really just going to take these guys at their word and believe the campaign slogan?
As is usually the case with government spending, it's easy to see the benefits of the spending, but it's much more difficult to see the hidden costs of the spending. We see the jobs that are "created or saved," but it's hard to quantify what would have happened if that money would have been spent elsewhere in a more efficient way.
It was a loan not a bailout. A bailout would be like the subsidies which the government has been giving to numerous companies all along, but which receive far less criticism.
And companies frequently take out loans, but due to the size of the automakers and due to the unwillingness of the banks to loan money, the only one they could borrow from was the government.
So, or course the loans helped the automakers. Any time you can get money when you are low will help.
The criticism I have is that:
1. The automakers shouldn't have put themselves into a position where they got so low on cash. They should save more and be more aggressive in downsizing.
2. Manufacturing companies and banks should be able to partnership like they do in Japan (kieretsu), so that lines of funding are more accessible.
3. We in the US need to realize that in order for our businesses to compete with foreign companies, we need to compensate for the advantages that foreign companies have over US companies. Either by adopting foreign practices, requiring foreign companies to abide by our laws, and/or by imposing an import tariff.
Last edited by michigan83; 06-10-2011 at 09:18 AM..
It was a loan not a bailout. A bailout would be like the subsidies which the government has been giving to numerous companies all along, but which receive far less criticism.
And companies frequently take out loans, but due to the size of the automakers and due to the unwillingness of the banks to loan money, the only one they could borrow from was the government.
So, or course the loans helped the automakers. Any time you can get money when you are low will help.
The criticism I have is that:
1. The automakers shouldn't have put themselves into a position where they got so low on cash. They should save more and be more aggressive in downsizing.
2. Manufacturing companies and banks should be able to partnership like they do in Japan (kieretsu), so that lines of funding are more accessible.
3. We in the US need to realize that in order for our businesses to compete with foreign companies, we need to compensate for the advantages that foreign companies have over US companies. Either by adopting foreign practices, requiring foreign companies to abide by our laws, and/or by imposing an import tariff.
It was import tariffs that drove foreign car companies to build plants in the US.
President Obama's visit to a Chrysler plant in Toledo, Ohio, on Friday was the culmination of a campaign to portray the auto bailouts as a brilliant success with no unpleasant side effects. "The industry is back on its feet," the president said, "repaying its debt, gaining ground."
If the government hadn't stepped in and dictated the terms of the restructuring, the story goes, General Motors and Chrysler would have collapsed, and at least a million jobs would have been lost. The bailouts averted disaster, and they did so at remarkably little cost.
The problem with this happy story is that neither of its parts is accurate. Commandeering the bankruptcy process was not, as apologists for the bailouts claim, the only hope for GM and Chrysler. And the long-term costs of the bailouts will be enormous.
In late 2008, then-Treasury Secretary Henry Paulson tapped the $700 billion Troubled Asset Relief Fund to lend more than $17 billion to General Motors and Chrysler. With the fate of the car companies still uncertain at the outset of the Obama administration in 2009, Mr. Obama set up an auto task force headed by "car czar" Steve Rattner.
Under the strategy that was chosen, each of the companies was required to file for bankruptcy as a condition of receiving additional funding. Rather than undergo a restructuring under ordinary bankruptcy rules, however, each corporation pretended to "sell" its assets to a new entity that was set up for the purposes of the sale. This is what is done with "ordinary bankruptcy rules" also.
With Chrysler, the new entity paid $2 billion, which went to Chrysler's senior lenders, giving them a small portion of the $6.9 billion they were owed. (Fiat was given a large stake in the new entity, although it did not contribute any money). But the "sale" also ensured that Chrysler's unionized retirees would receive a big recovery on their $10 billion claim—a $4.6 billion promissory note a 54% loss and 55% of...dubious... Chrysler's stock—even though they were lower priority creditors....again a dubious exchange.
If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren't.There were no other bidders. A bid wouldn't count as "qualified" unless it had the same strings as the government bid—a sizeable payment to union retirees more like many concessions and full payment of trade debt. If a bidder wanted to offer $2.5 billion for Chrysler's Jeep division, he was out of luck. With General Motors, senior creditors didn't get trampled in the same way. But the "sale," which left the government with 61% of GM's stock, was even more of a sham.
If the government wanted to "sell" the companies in bankruptcy,they didn't it should have held real auctions and invited anyone to bid.no one wanted to But the government decided that there was no need to let pesky rule-of-law considerations there was nothing illegal done interfere with its plan to help out the unions and other favored creditors. the unions also made concessions that were long overdue and would not have been given up if not for the government forcing them to Victims of defective GM and Chrysler cars waiting to be paid damages weren't so fortunate—they'll end up getting nothing or next to nothing. They will still honor all recalls and are still liable for defective products.
Nor would both companies simply have collapsed if the government hadn't orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process.Then why did they go to the government for help? The only "only"?...as if this is insignificant serious question was GM's ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there's a very good chance it would have been from who?—the government could have provided funds without also usurping the bankruptcy process. I'd say the government took full advantage of the bankruptcy process. Bankruptcy actually was beneficial to the companies because it allowed them to dump shareholders, bondholders, and creditors and to get union concessions.
Although Chrysler wasn't nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring (true, but this would have solved the entire problem if the companies were more proactive early on) or through a sale to a more viable company.But it would have hurt Chrysler to break it apart from the company. And who was wiling to buy it? This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.and would Fiat want Chrysler without jeep?
The claim that the bailouts were done at little cost is even more dubious. This side of the story rests on the observation that GM's success in selling a significant amount of stock, reducing the government's stake, and Chrysler's repayment of its loans, show that the direct costs to taxpayers may be lower than many originally feared. But this doesn't mean that taxpayers are off the hook. They are still likely to end up with a multibillion dollar bill—nearly $14 billion, according to current White House estimates.
But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it's sold. By waiving this rule, the government saved GM at least $12 billion to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers' pockets.Government tax laws benefit corporations in more ways than this.
The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in,the government didn't "step in". The automakers went to the government... rearrange the existing creditors' normal priorities, and dictate the result it wants...as any takeover company would... Lenders will be very hesitant to extend credit under these conditions. They already were.
This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble.That will depend on if they have money they have to lend, not on fear of government takeover. If a bank is willing to loan or continue to loan money to a corporation, the corporation won't need to go to the government. As a result, the government will face even more pressure to step in with a bailout in the future.not if they aren't asked to. In effect, the government is crowding out the ordinary credit markets.The ordinary credit market was reeling from the sub-prime mortgage crisis.
None of this suggests that we should be unhappy with the recent success of General Motors and Chrysler. Their revival is a very encouraging development. But to claim that the car companies would have collapsed if the government hadn't intervened in the way it did, and to suggest that the intervention came at very little cost, is a dangerous misreading of our recent history.
The automakers may not have gone out of business, but they would have been much more devastated. Their big problem was that they did not have management and union that was competent or willing to take the drastic actions necessary to save the companies, which they should have done long before they went to the government for help.
No one was willing to help them (except Fiat). The banks were not willing to loan because they were facing huge losses from the subprime crisis. The government was the lender of last resort.
It should be emphasized that foreign governments frequently help their companies out financially, so American companies have to compete with that disadvantage. Also, the US government has greatly aided American companies in the past. Look at all the plants the gov helped build during WWII. The government still subsidizes many industries.
I was only in favor of the loan "bailout" because I felt that since the gov was giving loans to the banks, the automakers should not be discriminated against. But I would much rather the automakers not put themselves in a position where they need a "bailout". And part of that prevention is an ongoing effort by the gov to help ensure US companies can compete against foreign companies.
It was import tariffs that drove foreign car companies to build plants in the US.
Not really. It was the threat of import restrictions (not necessarily tariff, but restrictions on quantity) and other political concessions that forced them to build plants here.
But an import tariff would force them to build more plants here and that would be good for American workers.
How did the union (retirees) of Chrysler get paid off completely (even if Chrysler stock was of dubious value) when the creditors only got $2B (< 30% of what they were owed)? I thought the creditors always got paid off first. Didn't the government play favorites here?
The government shouldn't have interfered. Let the companies go bankrupt and see what springs up from the ashes. The tax payers will never get their money back from these "loans" and it appears we won't be getting much tax revenue from the for a while either.
The banks shouldn't have been helped either. There's just no penalty for failing now. Collect all of the profits when a gamble goes well but never take a loss when things go bad since the government will bail them out. Anything too big to fail should have been broken up into smaller pieces.
The automakers may not have gone out of business, but they would have been much more devastated. Their big problem was that they did not have management and union that was competent or willing to take the drastic actions necessary to save the companies, which they should have done long before they went to the government for help.
No one was willing to help them (except Fiat). The banks were not willing to loan because they were facing huge losses from the subprime crisis. The government was the lender of last resort.
It should be emphasized that foreign governments frequently help their companies out financially, so American companies have to compete with that disadvantage. Also, the US government has greatly aided American companies in the past. Look at all the plants the gov helped build during WWII. The government still subsidizes many industries.
I was only in favor of the loan "bailout" because I felt that since the gov was giving loans to the banks, the automakers should not be discriminated against. But I would much rather the automakers not put themselves in a position where they need a "bailout". And part of that prevention is an ongoing effort by the gov to help ensure US companies can compete against foreign companies.
How did the union (retirees) of Chrysler get paid off completely (even if Chrysler stock was of dubious value) when the creditors only got $2B (< 30% of what they were owed)? I thought the creditors always got paid off first. Didn't the government play favorites here? The unions gave up a lot as well. The stock they got went to fund their pensions and health care (VEBA) so that the company wouldn't be responsible for funding them in the future. It's a big risk on the part of the union because the company can declare bankruptcy again and the union will lose everything. I think the lesson for everyone is that automotive stock will from now on be a very risky investment because automakers, like the airlines, will learn to use it every time they run low on cash in order to dump shareholders. The union would have been safer not accepting the stock.
The government shouldn't have interfered.That's a very "Pure Capitalistic" mentality, and one that I once held. The problem is that we are not operating in a pure capitalist world. If the United States were the only country on the planet, I would agree. But most countries do not hold that belief. If the governments of other counties "bail out" their companies (who compete with ours), then our companies are at a disadvantage. What we really need to do in this country is develop a means whereby companies, banks and the government all work together on a continual basis to ensure that our companies are competitive internationally. That will mean relaxing anti-trust laws while still providing government oversight. Let the companies go bankrupt and see what springs up from the ashes. Again, if it were just the USA, or if we had closed borders, I would agree. If there is a demand for cars, new companies will spring up to make those cars. The only problem is: nowadays, that company would spring up overseas. How many auto companies have been started in this country in the past 80 years? (That have grown to considerable size.) The tax payers will never get their money back from these "loans" and it appears we won't be getting much tax revenue from the for a while either. The taxpayers are getting money back. The automakers are raising money elsewhere (stocks and bonds) to pay back the government. Let's not forget that 1.) the US government has given money to automakers in the past (WWII and even more recently to fund new technology), 2.) the US government has continuously given money to many companies in many industries (agriculture included) in the form of non-repayable subsidies, 3) foreign countries give money to their companies to compete against ours, and most disturbingly 4.) states in the US have given money to foreign automakers to locate plants in their states. So, yes, if we lived in an ideal world that practiced free market capitalism worldwide, I would say absolutely no government involvement. But since we don't, we must do whatever it takes to keep American businesses and American jobs.
The banks shouldn't have been helped either. There's just no penalty for failing now. Collect all of the profits when a gamble goes well but never take a loss when things go bad since the government will bail them out. You're missing one key factor: the government created the sub prime mortgage mess when they decided to federally insure mortgages (Fannie Ma & Freddie Mac). That encouraged, and in fact necessitated, the banks to gamble in them. So if the government creates the disaster, the government should clean up the mess. Anything too big to fail should have been broken up into smaller pieces. That I completely agree with.
On that last point, I think it would have been interesting idea for the gov to have broken GM into smaller pieces. I know Penske was interested in Saturn and I think Pontiac could have also stood on its own. Hummer was sold to China; it could/should have been kept here. There are a surplus of factories and talent, so I don't think it would have been as hard as starting from scratch. The automakers have contracted out so much of their components and very little is built "in house" anyway. So building a car is a matter of building the shell (frame of the car), and buying all the components from suppliers who already exist, and putting it all together in a factory that has already been built.
Banks also should be prevented from growing to big "to fail". This can be done by raising the reserve requirement based on the size of the bank. The bigger the bank, the more they have to set aside in reserves. We also need to get rid of FDIC. I was pissed when they raised the insurance from $100,000 to $250,000. It's like they had no clue that government insurance is exactly what allows and encourages banks to lend (or invest) recklessly.
Perhaps Michigan's economy will improve to where it's average for the U.S., but that wouldn't take the state out of recession because the entire country is in a recession (with the exception, perhaps, of a small handful of low population states that are experiencing an oil and natural gas boom).
And don't count on the auto industry to bring the state back to prosperity. Perhaps sales will increase a little bit, but they probably won't ever return to anything close to previous highs. When you have a nation of student-loan-indebted indentured-educated-servants who work low-wage jobs, people won't be able to purchase high-profit margin vehicles, especially when their pocketbooks are under attack by high gasoline and high food prices. Coincidentally, the nation's housing market isn't doing very well either in spite of low interest rates and low prices in many parts of the country. (It's difficult for the working poor to purchase homes, and indentured-educated-servants are liable to suffer pipe-dreams about relocating to find work in their fields.)
But with these gas prices hanging around $4 a gallon how long before it starts to hurt us again? The trucks are going to sit at the dealers, people will start staying home and then the same crap could just start all over. I know we have had to cut back to make up for paying so much at the pump. I drive 28 miles each way and my wife is burning through $75 a week between school and work. This crap needs to stop. Don't like to sound negative in a positive thread but I think this is going to start hurting us.
The high gas prices might actually encourage some people to get rid of their gas guzzlers and purchase higher mileage economy vehicles. The problem is that they are liable to purchase low-profit-margin compacts and the Japanese and Koreans lead in that sector. (The earthquake-tsunami might help a little bit.) At $30,000+ the Volt is a luxury vehicle for most. People might like hybrids, but they'll want low-profit-margin hybrids that sell for under $16,000 (they don't exist yet).
Location: Ocqueoc, MI - Extreme N.E. Lower Peninsula
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Chevy has a good alternative in the Cruze. It's a non-hybrid getting between 36-42 mpg, depending on the model. Base price is right around 16,800. It's getting good reviews in Consumers Reports and other industry publications.
Chevy is really banking on this car, and other models coming based on the Cruze platform.
The high gas prices might actually encourage some people to get rid of their gas guzzlers and purchase higher mileage economy vehicles. The problem is that they are liable to purchase low-profit-margin compacts and the Japanese and Koreans lead in that sector. (The earthquake-tsunami might help a little bit.) At $30,000+ the Volt is a luxury vehicle for most. People might like hybrids, but they'll want low-profit-margin hybrids that sell for under $16,000 (they don't exist yet).
When electric cars are the norm and everyone is plugging in for 10hrs+ a day the already high price of electricity will skyrocket. Just like the push for E85 made the price of corn and a lot of agriculture prices start to climb. It's simple, when something everyone must have is owned by any company the wealthy owners and stock holders will have their grip on the throats of American people and still sleep peacefully at night while they rake in billions and the average man suffers. Kind of sick if you ask me.
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