Detroit's bailout: A taxpayer's nightmare
Posted
Dec 19 2008, 12:02 PM
by
Anthony Mirhaydari
Rating:
The decision to use $13.4 billion of the financial rescue package to bailout America's auto industry is an imperfect solution that will prevent a true recovery for GM, Ford and Chrysler.
A pre-packaged bankruptcy would've wiped out investors but allowed the tough decisions on layoffs, brand eliminations, wage concessions, and dealer closings to be made free of political pressure. Instead, we get muddled government involvement that will only delay the inevitable at the expense of the public.
Moreover, by angering global trading partners, we've threatened Detroit's long-term survival by reducing access to both emerging market economies and acquisition targets in the industry. This situation richly hypocritical: Just last year, the U.S. Commerce Department proposed tightening World Trade Organization rules against government lending to "uncreditworthy" companies -- companies like GM and Chrysler that can't raise cash anywhere else.
As Felix Salmon notes, there is also the question of enforcement. Bondholders are expected to convert 67% of their holdings in a debt-to-equity swap. Without the iron gavel of a bankruptcy judge, creditors could balk as they are under GMAC's restructuring efforts.
Getting the UAW to agree to deep cuts outlined in the Bush proposal will be difficult. Not only are their cushy unemployment perks being eliminated, but wages will be cut to parity with foreign-owned U.S. factories by the end of 2009. Once the more sympathetic Obama administration is in place, I wouldn't be surprised if the UAW threatens to strike against the terms of the bailout. The union is already saying the deal added "unfair conditions singling out workers."
While there are many reasons why Detroit is in this mess, this bailout isn't the way to solve them. Cold hard business realities would win the day in bankruptcy court and could quickly get the automakers back on track. Now, not only do we allow issues of "social fairness" and political retribution to impede the process, but invite a rise in trade protectionism as well -- all of which will increase the cost of the rescue.
With so much riding on it, this bailout won't be allowed to fail. The government can ill afford another crisis of confidence or a questioning of its ability to steer the economy out of this mess, especially with a massive fiscal stimulus package on the way. Since Chrysler owners Cerberus Capital announced an additional $2 billion investment in light of the government's support, consider picking up a few shares of Ford or GM to offset your looming tax bill.
Disclosure: The author does not own or control shares in any of the companies mentioned.
Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
Related reading:
Bush bails out Detroit
What if GM goes bankrupt?
Why bailout won't save Detroit
Union-busting for the big three
