Monday, November 17, 2008

Upon further review (more bailout discussion)

As more information becomes available, it becomes clearer that the bailout, even if it took place as I cautiously offered here, would be bad news.

In doing the math, the feds would be throwing $25 billion at an industry that the market currently values at only $7 billion - and that has a net worth in excess of $200 billion in the red.

Without bankruptcy, the manufacturers have no chance to obtain debt relief, escape their UAW contract and set on a proper course. As of right now, the group most in favor of the Detroit bailout is understandably the UAW.

3 comments:

  1. I find myself torn on this issue. It goes against some of my principles to throw good money after bad, but bankruptcy seems to be a worse option in this case.

    The automakers have made a decent case in my opinion that this would be a bridge until the perfect storm that got them into this dire condition has passed. 2010 seems to be a date at which they will have gotten the full benefits from a renegotiated contract with the UAW, a chance to alter their product line to be more in step with what consumers are asking for, and a chance for the economy to recover to a point where people can get a car loan and are actually buying cars.

    I think we the people have to cringe and loan them the money in light of what a collapse would bring. I don't believe the rosy picture of bankruptcy that we are being fed. I see Detroit, plus millions in the surrounding suburbs, along with hundreds of thousands of families and jobs, collapsing in on itself. And that is not good for anyone, no matter where you live.

    ReplyDelete
  2. Bankruptcy is by no means a rosy picture. Many many folks would lose their jobs - nobody is disputing that fact.

    Unfortunately, the idea that they are about to turn around doesn't fit with the fact that Chrysler is losing $500 per vehicle they sell - and they doing the BEST out of the three.

    If Ford were to sell off all of their assets, the would still owe $160 billion. GM would still owe roughly $60 billion.

    If the Feds loan Detroit $50 billion, this does not change anything. Even if the feds outright GAVE them the money, the amount of debt is still at staggering levels.

    Without relief from their debts and other constraints that would allow them to be profitable, the loan being requested simply postpones Chapter 11. In other words, tons of folks are still going to lose their jobs.

    Paying out also permits the UAW to continue to operate under the assumption that they can force higher wages without repercussions.

    I love Michigan and the people there, however, it doesn't look good regardless of what money is sent their way.

    ReplyDelete
  3. A little more on this: If it were apparent that they were on the cusp of a turnaround, private lenders would be willing to step in.

    The fact that nobody is stepping up to the plate in that regard indicates that no lending institutions have any faith at all that they will be paid back.

    ReplyDelete