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Detroit's bailout: A taxpayer's nightmare

Posted Dec 19 2008, 12:02 PM by Anthony Mirhaydari
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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 GMFord and Chrysler.

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

Comments

 

I love this government driven bailout stock market rally. Paulson came out today and said the other $350B needs to be given out. That should give the market more bailout rallies. Obama hits the street in January with his trillion dollar bailout. Hey thank goodness for the bailouts. I was starting to think the stock market should be going down with all of the bad news out there. And only $17.4B for the car companies and the government will be watchng them like a hawk. And in the mean time the fnancial institutions will get another $350B with no traceability. I'm sure billions are being funneled to the execs and into their offshore accounts.

Does anyone here realize that GM did not start this financial meltdown??? The greedy banks did. Ang GM makes excellent cars these days and some surpass the imports. Get your facts straight!!!!

Does anyone have any empathy for their fellow man anymore? All I hear on TV and read on the blogs are people wishing 3 million people to be unemployed and soon to be homeless. I would never wish that on anyone. I have empathy and compassion for my fellow man. If you have lost your job I truly feel for you. If I could have helped you or chipped in a few bucks to help you I would have. I just can’t believe that people wish heartache, pain and homelessness on others. That’s what it all boils down to. It’s not the companies, it’s the people. The real people. We are not just numbers, statistics and taking points; we are living, breathing human beings just like you are. If you believe in Christmas you must have at least some Christian views. Doesn’t the Christian faith tell you to love your fellow man? I have given thousands to charities to help others. I have donated my time to help others. I even went to Louisiana to help the victims of hurricane Katrina. Did you? How much do you give to charity? How much of your time do you spend helping others?

When will people see it’s not the US Auto Industries fault that the economy is collapsing. Yes, the industry has had some problems, but that is not the problem now or the cause of this. It was Wall Street and the Bankers that caused all of this not the Auto Industry. The foreign auto makers are hurting too. They have had just as much loss in sales as we have. They are going to their governments for help also. You can look it up on the web and you will see it’s true. Toyota just announced today that they are shutting down plants in the US too. They are begging the government to help us also. They share 65% of our parts suppliers and they know if we go down the parts suppliers go which in turn will force them to go. I don’t wish those people, my fellow Americans to lose their jobs either. Do you people see the domino effect????

Their are at least 3 million peoples jobs that will be gone. The average family is 4.5 people; therefore, that is 13,500,000 people with no income. That is 7,500,000 children that won’t have a home or income. How could anyone wish that on those children or anyone??? It just blows my mind. I can’t even wrap my brain around people that could be that cold and heartless.

Toyota , Honda, BMW, and other foreign car companies make no bones which company the profits go back to which country. Their names are in your face on the back of the vehicles. When you buy a Toyota the mother country is Japan. When you buy a Honda the mother country is Japan. When you buy a Nissan the mother country is Japan. You know it’s a FOREIGN car. Doesn’t matter if it was built here by some good ol’ boys.

Where do the foreign transplants ever state on their cars for all to see this vehicle was built by hard working Americans? They promote their products in the US from Japan.

You know all those bumper stickers on the back of cars (American and Foreign) that say “We support our American troops”. How many cars in Japan do you think have bumper stickers on the back of their Toyota’s , Honda’s and Nissan’s that say ” We support American troops”?

I know many folks from the Big 3 headed down to states like New Orleans, Alabama and other southern states to volunteer their time after the disaster of Katrina. Same with the NYC Twin Towers. Americans help support Americans rather it be physically or monetarily. And I promise you , the next disaster rather it be caused by man or by nature it will be Americans helping Americans once again. It won’t matter who you are or were you live. It won’t matter if you drive an American car or a forign car. It won’t matter what religion you are or the color of your skin. It won’t matter if you belong to a union or not. Because when it comes down to helping our neighbors we are all Americans.

Can you pull the stats for me how many Japanese from their Big 3 came to the United States to help out with our crisis. How many helped the folks that build their cars. Or how many have morned and cried over the deaths of Americans from the south who lost their lives at war where the Japanese have a very small presense.

While our government spends BILLIONS and BILLIONS of tax payer dollars for a war that has been questioned by many countries, Japan sits there silently spending dollars on their auto industry. It is American blood that has been spilled to keep our freedoms so we can be one nation.

Tell me which part of this you don’t understand . And think about this, no one can predict tomorrow what awaits us, but if something should happen to you or your community rest assure it will be an American that will help stand beside you .

Yes I am a GM engineer, and I don’t know what my job status is for 2009 or beyond. But if I was to loose my job, I would never turn my back on GM because I know were GM stands today is not the cause of our leadership or our products. My family and myself (before my life with GM ) has always purchased GM products. Both cars and trucks. Trucks that were used hard on the family farm. I can honestly tell you they have been great dependable, reliable vehicles for many many years.

Yes I will always support American products because I was born in the heart of America. Where the very soil of this country is in my blood. But if I can ever reach out with my hands and help some assembly line worker down south that helps build foreign cars I would most certainly do that for he or she is a fellow American.  that’s what Americans do. We support one another because no one else will.

Let it rest already people.......I am a GM employee, and I am proud of our cars.

Avon Barksdale, You said it well and I couldn't say it any better.A retired Chrysler

employee.  Only thing I could add, is WAKE UP AMERICA AND START BUYING

AMERICAN PRODUCTS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Domestic cars are the worst!  These problems didn't just appear with the bad economy, it took years of disapointing the consumer with shoddy products.  I too work in the auto industry and I'll take Toyota or Honda any day!  GM needs to take responsibility for their culture and failures.

Enough of this venting, nothing is going to happen until we change our form of government.  I suggest we do as most European nations have done and move to a parliamentary form of government.  Then if we don't like our representatives we can vote the bums out immediately. We should also insist on a National referendum for all issues such as this...we can't leave these monetary decisions to politicians and the "so called experts"; they are the ones that have gotten us into this and other messes.  Ask yourself this, when was the last time any local, state or federal government balanced a budget?

GM = JUNK!  If you spend any money on one, you'll regret it every time you make a payment.

Y. Taxpayer what are you smoking over there, a nice big hunk of 3 inch hemp rope or something.   Hey please cut me off a hunk of that rope and toss it over here, so I can smoke the same thing to get on the same wave lenght as you are on.

If you want to buy and drive that Toyota Tudra truck, then go for it, however the quality, durability and reliability does not even come close the Ford F-150 period.   Do your home work before you make a fool of your self on a public forum.

And please do not even attempt to compare the F-Series Super Duty, because there is no comparison period!!!   My F-350 Super Duty is flawless and unstoppable!!!   I tow heavy and often, the Toyota could not even deal with the dead weight over the axles, let alone even attempt to tow the loads that I pull.

I had a beauty of a Cadillac (2002), all the bells and whistles, a sweetie of a gas guzzler but what a great looking car. Then it started to nickle and dime me, then dollar me, and finally after 8 hours at the service department, nearly a grand spent and a worried service manager hoping that this time they HOPE they got if fixed, I traded the thing off for a Honda. Love it... solid, dependable, easy to drive and when gas went sky high, I was smiling with my savings. I've had the same bad luck with Fords too.

As a salesman for a now defunct Union Printer, Believe what you know in your HEAD.   it's sad for the workers, but the reality is that,  industry leading pay and benefits are an oxmoron to job security (IN ANY JOB).  The Golden Goose is dead.  It hurts these working class families, but the costs are so uncompetitive.  Ultimately, Unions kill the incentive to invest and compete, which is is a tough working class pill, but we've seen it in printing, airlines, automotive, etc.   We have to be realistic on what jobs are worth.  In my limited knowledge, non-Union employees are fairly compensated.  Granted Unions paved the way for this, but their inflexiblity and thinking, has created a void of realistic wage and service.  

if how much a rig can tow is your selling point, peterbilt, kenworth and internation do that job better than any ford.

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