In George Orwell's Animal Farm, the farmyard creatures create seven commandments to ensure harmony and protect against human cruelty. The seventh commandment, "all animals are equal," eventually gets a rider: "but some animals are more equal than others." For most, it's satire. For others, it's a way of life. To wit: federal politicians, whose interest in special interests far outweighs their concern for the "average" voter– if only because taxpayers are too busy earning money to pay their taxes to notice how the cash is being wasted. Except when they're not. The plan to bailout Detroit's automakers looks set to be one of those times.
Today's Wall Street Journal gives the public its first glimpse of Detroit's planned assault on federal funds. Surprisingly, ALL THREE domestic automakers are banding together to hit-up Uncle Sam for a $25b loan. What's more, the automakers want the money at a 4.5 percent interest rate. AND they're seeking a proviso that the feds can defer ANY interest payments for five years. You know; if the automakers can lobby elected representatives hard enough.
This is not what most analysts expected– even the ones who didn't expect it (if you know what I mean).
Surprisingly, The Big 2.8 are asking for cash money. A loan is a far less politically palatable "request" than federal loan guarantees. There can only be one reason why Detroit went for the more dangerous, direct approach: the banks won't touch them even WITH federal backing. It's a sure indication that the money men have finally (and correctly) reached the conclusion that Detroit's current business model is well and truly dysfunctional. Dead, even. They are not going to throw good money after bad.
Which is, to Motown's way of thinking, beside the point. After all, the $25b loan will be spun as an investment in new technology, not a bailout per se. It's simply a way to help us "modernize" our old factories to build THE CAR OF THE FUTURE. In other words, if you really want those EVs, you gotta pay. Us.
But why so little money?
Seriously; $25b is not enough cash to sustain GM for a couple of years– never mind GM, Ford AND Chrysler. To put that number in perspective, when Ford doubled-down and mortgaged the farm (including their logo) in 2006, they raised $23b. GM's contribution to the United Auto Workers health care VEBA fund is (i.e. was) $29.9b. A $25b federal loan may be The Mother of All Band-Aids, but it's nowhere near enough cash for The Big 2.8 to reinvent themselves.
It is, however, a "doable" sum if you're dressing-up a bailout as an "investment." No doubt supporters of the domestically-owned automobile industry are already comparing the $25b figure to the cost of the war in Iraq, or the space shuttle, or tax breaks given to oil companies, or some such thing.
And anyway, it's a prelude to a kiss: the REAL bailout (in for $25b, in for another $25b). Truth is, it would extremely difficult for The Big 2.8 to ask for a "realistic" loan– or loan guarantee– to turn all their asses around. That number would be near-as-dammit a trillion dollars.
Of course, like all trillion dollar– or, I should say $25b federal expenditures, the vast majority of the money would disappear down a rathole, never to be seen again. American-owned automakers are not a cash-starved start-up looking for enough money to bring PC products to market. They're a motley crew of failed businessmen and women who've demonstrated an abject and ongoing inability to develop competitive products. Giving them more money to piss away would not solve anything.
The operative word here is "would." This is not a done deal. For one thing, as the failing financial industry hoovers-up federal funds, there is the very real prospect of "bailout (yes bailout) fatigue." For another, painting Motown as a "good investment" will be an extremely tough sell. The public currently sees The D2.8 as EV-killing gluttons who feasted on SUV profits when they should have been building small, fuel-efficient cars. The hundreds of millions of dollars pocketed by D2.8 executives will do them no favors in this regard.
The real deal killer: Detroit's irrelevance. The gas – electric hybrid Prius already exists. Fuel efficient small cars already exist (some of them sold by Detroit). As far as the general public is concerned, even the plug-in Volt is coming along nicely– without federal funds. The public can easily see this $25b "green loan" for what it is: an attempt to help Detroit do what should have been doing all along. A reward for incompetence.
Giving The Big 2.8 federal tax money to play with is also a bad idea for Detroit. Even if the operation is a success, without Chapter 11 reorganization, the patient will die.
Morea on Aug 26, 2008Phil Ressler: The Feds have to recruit and appoint new boards... Aye, there's the rub. Who says they can do a credible job of this? Does anyone believe the process won't be filled with cronyism and political favoritism? Why not just go whole hog and have the Federal government buy and run GM, afterall $6 billion will take the whole thing. It could be part of the Department of Transportation.
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