After the first oil shock of 1973-74 Congress mandated that the auto makers build small cars to meet CAFE requirements. Congress therefore, mandated the supply side of auto production, but ignore the demand side. For the last 35 years, auto makers have been selling every small car at a loss to meet CAFE standards while the American public has demanded large cars, SUVs, minivans and trucks.

If Conngess had the spine to slowly increase the price of a gallon of gas with federal taxes and driven the price of gas to European levels (or Japan), the American public would have made the transition to small cars, voluntarily, and the the Big 3 would be healthy today.

Add to the above, the cost of Federal bumper standards (front and rear), emission standards, seat belt standards, air bag standards, fuel tank standards, crash standards, headlight intensity standards, (whew, get the point??), and you appreciate fact that the Feds have been in the business for 35 years and OWES the Big 3 assistance during a crisis that was initiated by Wall Street, not the auto makers.

Gerry B., Naples, FL.

You have a good point. There are two points that make Cerberus different. Acccounting transparency is the biggie. I would suspect that they would have to open up the books to the government before getting any funds. If not, heads will roll.

The second part is one that I think is what may keep them from getting our money without making serious changes. Hedge funds and private equity companies hide not only behind a veil of secrecy, but also exclusivity. By requiring net worth tests to their investors, they supposedly keep people from taking risks they should not take. However, the real thing they do is keep the opportunities and information about them within a certain class of people. Most of us like to think that this sort of thing is unamerican. It stinks of classism and cronyism, and would likely bring these guys down if it persisted. I don’t think it will. I think you are going to see a democratization of the hedge fund business and I also think it will lead to a lot of people paying high fees for low or even negative returns. In the meantime, the game will simply move to a new location and start up again because our legislators and bureaucrats are too busy playing games to get the rules right.

Not a flame. This is a good question. Actually I was very specific to include both politicians and bureaucrats. In my original post I clearly explained why I think this about politicians, but throwing bureaucrats into the mix was no blithe slip.

As incompetently as I believe many of Big 3 executives have acted in recent decades, I think it is folly to believe that the winner of a fancy beauty pageant (i.e. a politician) or an unaccountable career governmental bureaucrat, untempered by the desperate realities of working ones way through the ruthless private business world, could do better.

I stopped reading the piece by the time I got to #5 on the list. Why, because it reads like some ultra-lefty undergrad’s screed – complaining about secrecy and vulture capitalism over and over.

Cereberus is a hedge fund – why the heck does it owe anyone a duty to disclose anything? Sure, if it is looking for a Fed handout, perhaps more disclosure is needed, but that’s the job of the government – if we don’t like the job they are doing, then throw the bums out. It’s business should not be required to be an open book – if you think so, then do you want open documents for the financial bail outs? How about SBA loan holders? How about student loan holders? How about all the other taxpayer backed obligations?

This disclosure screaming is unrealistic from a business standpoint and therefore when you harp on it your thesis gets undercut.

And calling these guys vultures and stuff.. Warren Buffett, one of the few well liked billionaires (him and Oprah, that’s the list), is a vulture capitalists too, but no one cares. He makes money by sitting on cash and buying things when folks are bleeding. See his recent investment in GE. Cereberus and their hedge fund ilk does the same – there is no moral difference.

But it is easy to complain about these evil hedge funds. Whatever that means.

I stopped reading at #5 because you’re going on and on about GM’s insolvency. Yes, this may true and all fine and good if you view it in the narrow definition of bankruptcy. But you’re missing the other half of the equation.

As you should know, bankruptcy filings don’t happen because people (or companies) are insolvent, they happen because folks have no cash flow, or a mis-match of cash flows.

Just like a home owner (or a car owner) who is upside down on their loan, the car isn’t repo’ed and the house isn’t foreclosed because of the technical insolvency, that happens when you are cash flow short and miss payments.

It matters, but not as much as you make it out, that GM is insolvent. The big news today in their 3Q filing is the cash burn rate – they are running out of cash and therefore are on the precipice.

A loan to GM may make sense on a pure economic perspective – perhaps they just need to ride out the current cash flow bumpiness and will have better prospects in the future. Certainly their product mix is getting better.

Add to this the public policy angle – i.e. the total number of ppl that would instantly hit the unemployment rolls if GM sinks.

Lastly, to those who commented that GM does not pay tax because it does not make money. Apparently, these commentators never heard of, or had to pay, payroll taxes, sales taxes, property taxes, gasoline taxes, etc. etc.

Corporate income tax is but one component of taxes that a company contributes to the tax base.

Edited to say: Public D, nice thoughts.

Why is a CH11 unlikely?

1) GM has substantial operating cash needs ($11-14 billion according to the company). While filing would partially mitigate the cash burn (as they would no longer have to pay interest or principal on maturing debt) it would also create substantial additional cash costs (expensive lawyers and advisors such as the individual who posted this editorial) and very large one time costs (GM would likely have to pay a number of its suppliers cash on delivery, with $27B of accounts payable at 9/30 this would be a $10-20B cash outflow). This excludes any business impact of a bankruptcy (CNW has reported that >80% of customers would not buy a vehicle from a bankrupt manufacturer).

2) In a normal credit environment this cash outflow would be met with a DIP (Debtor in Possession) loan. However, as any bankruptcy lawyer knows availability of a DIP loan of that size is next to impossible in any case, and would be especially difficult at GM as GM has already encumbered most of its valuable assets (besides equity in foreign subs and GMAC). If GM is unable to raise $3B of secured debt against that collateral what chance is there that they could raise $10-20B

The current credit environmeny has made a CH11 reorganization of GM operationally infeasable, so the real question is whether the US Economy is better off providing liquidity or encouraging a liquidation.

We need green cars. We need green buses, railroads, dams, planes, factories, wind turbines, buildings, etc. We also need jobs that pay a living wage. Health care. The ability to send our kids to college, and the ability to retire. It seems almost completely forgotten, or for many young people never learned, that the automotive industry rivals, or even surpasses, the tech industry in how it fundamentally changed this country, how we live, how we see ourselves, and how we interact with each other. It also spawned countless new industries. Ever hear of fast food? What made that possible? What do you suppose refined crude oil is used for?

How many Americans over the last 100 years have earned a living doing road construction and vehicle maintenance? Ever tried taking a covered wagon from LA to Vegas? Could there even be a Vegas without a Detroit? Half of the Fortune 500’s Top Ten Revenue Earners for 2007 were either Oil or Automotive companies (Two to Tango) – with GM at #3, Ford #7. We can make criticisms of their management decisions until the Dow comes home, but to suggest that GM as a company, or Auto as an industry, is not been good for America reeks of a kind arrogance that seems to come with all the expectations the digital and information revolution rightly foreshadows.

But that doesn’t obliterate the fundamental value of manufacturing and transportation. Ask anyone who’s ever needed a taxi, ambulance, squad car, or hearse. We should stop fantasizing about the magical Knowledge Economy that craps droplets of gold and wisdom from the ether, and start making the actual, reality-based, actual value-creating economy work for people and the planet.

Casting entire industries to the scrap heap of history, when their clear necessity in the world of tomorrow would be a serious mistake.

It’s because of the state and federal tax breaks that any of these companies have had money to invest in anything and keep going. Thing is, that can only continue if there is hope of things improving. That is now gone.

So regardless of how much money is dumped into GM, there will be thousands of lay-offs and closures because the reasons to close up shop have become insurmountable. And mom&pop places closed up long ago. They couldn’t afford stuff like ISO 9000 along with yearly price cuts demanded by the Detroit 3.

Yeah, really, it’s that bad. And when you can’t sell your house and there aren’t any other jobs available good luck getting out of the quicksand onto firmer ground.

The only people left paying any decent amount of income tax are on the GM BOD and the GM mgmt. So I guess in a way you are right – without this gov’t money coming in the Feds would lose out on some taxes.

Are you referring to the same suppliers who continually take it in the shorts from Detroit’s penny pinching bullying tactics?

Suppliers have much better, more profitable relationships with their transplant clients than with the Big 2.8 companies. As the transplants pick up the slack, the suppliers who serve them will be better off, thanks to the increase in sales to their better customers.

True…the Big 3 may not pay a lot of taxes overall due to recent losses but perhaps you’re forgetting about the thousands of up-to-now profitable Tier 1,2,3 Suppliers, Mom and Pop Shops, raw materials suppliers and all the associated businesses who do pay taxes and would be flat-out of business if the Big 3 went under.

@Stu Sidoti: Firms that lose money don’t pay income tax. In fact, they can use losses to reduce income tax owed in past or future years they make a profit. So the Domestic 3 haven’t been paying taxes for a while now and won’t for a long while yet. And with 5000+ dealers going broke this year, there are a lot fewer companies paying into the system. So no, there is no payback for the taxpayer.

No one. Not the union, not management, not the government. We are all on our own. If you trust someone, and you get burned, blame ONLY yourself. Take them to court if you want, but don’t blame society, or Washington, or “rich” people, or CEO’s or any other group.

There are no guarantees, we are all taking risks everyday, and there IS NO SAFE CHOICE.

Personally, that means that I value stock options, government entitlements, and pensions at almost nothing. I used to think my 401k was mine, but then I read about Argentina. I guess the 401k is at risk too.

Yes. Despite the shrinkage in market share and customer respect, GM, Ford and to a lesser extent Chrysler are still psychologically huge. That is, they occupy major mind-space as symbols of the economy and the nation’s industrial prowess. There’s some truth in the idea that what’s good for GM is good for America (and vice-versa, which was the main point Engine Charlie was trying to make). A shutdown of a major American automaker will be a big, big story. And a shock to many, because the media has neglected the story of Detroit’s fall. The situation just ahead will be somewhat similar to that FDR saw as he waited the months between election and inauguration. (BTW, Roosevelt campaigned as a balanced-budget fiscal conservative. So much for political promises.) It will take all of President-elect Obama’s rhetorical skills to soothe America’s economic nerves. So I take no glee in watching the D3 circling the drain; it’s a sad (though also enfuriating) affair.

Could use it after all the market losses!

If the minimum wage was lowered to, …say $1.10 per hour, we have a chance to be somewhat competitive with the Chinese economy and win some of the jobs back from China. Oh,yeah…this includes no bennifts….it hurts the corporate prifit margine.

To answer the question…”Can the US economy thrive with out the Big 3 ?”…the answer is yes…in the long term. Companies come and go and jobs come and go and other industries crop up….so as long as the American worker is willing to work for $1.10 per hour, there will be jobs a-plenty, perhaps the Chinese will set up many of their company shops here…..Now that sounds like positive news in a Doom & Gloom time in our country’s history.

See Delphi:

http://www.makingsteel.com/delphicase.html

See Dana:

http://open.salon.com/content.php?cid=38619

I don’t know who the average worker or taxpayer is supposed to trust.

You slip quite blithely between ‘politcians’ and ‘bureacrats’. These are beasts of very different natures. Are you even sure exactly who your ire is directed toward? Or is it just “those people in Washington”? When you paint with such broad strokes your arguments take on a somewhat hysterical feel.

(RF: if you consider this a flame of one of your writers you may remove it.)

I have seen lots of this attitude. Your buy out on your GMAC loan may be lower than you think. It can be a very good time or a very bad time to owe auto lenders.

My take on this whole mess is that the most important thing now is the overall impact of whatever is done on the economy. As I said in another thread. This is an unprecedented situation that a whole (domestic) industry, one of the biggest, is facing an imminent collapse in a large industrial economy. This would be bad enough on its own but in this economic climate the effects though unpredictable shouldn’t be underestimated. I think the only reasonably clear thing at the moment is that the industry cannot be allowed to collapse, at least not immediately and all at once. The overall objective should be to try and make the industry survive but in a viable form for the long term even if at a significant cost to the taxpayer. Beyond this I have no specific cure for Detroit. There is a new administration waiting to take over and many new members of congress. Hopefully they can manage the process to some kind of resolution for the good of the America which might not necessarily be the same as that which is good for Detroit and is almost certainly not the same as that which is good for Cerberus.

One question however. Over here in Germany, a company’s CEO or MD makes himself personally liable if he does not declare bankruptcy as soon as his company is insolvent. The term for this is bankruptcy fraud. No such thing on the books in the U.S.?

Yeah, but Rick Wagoner is no James T. Kirk!

You know, like some of us have been saying for a long time on TTAC, an insolvent company that isn’t making a profit and has no realistic plan for doing so, is bound to collapse eventually. GM has been wearing invisible clothes for quite a while; you’d think more people would have noticed.

5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its liabilities were $70b, dwarfing its current assets of $55b.

I think the author meant total liabilities versus current liabilities. Current liabilities are, roughly speaking, things due n the next year. Long term liabilities are things due after a year. There are a few other elements, too.

Total liabilities = current liabilities + long term liabilities (plus a few other things).

If your current assets are less than your current liabilities, you have negative working capital. Not unusual in business. But if your total assets are less than your total liabilities, you are insolvent under one of the familiar tests of insolvency.

Here’s a thought experiment: why can’t the next Alfred P. Sloan or, hell, Walter P. Chrysler-styled entrepreneur buy the pieces of Chrysler they think they can remake into a successful concern? Dissolve the thing and let the market decide which bits should go on. Race nuts bought Aston Martin so why can’t the same thing happen here?

Signed,
Pollyanna