Bailout Watch 518: How Much is This Boondoggle Going to Cost Me?

by Robert Farago

Published: May 2nd, 2009

bailout watch 518 how much is this boondoggle going to cost me

Some Detroiters honest-to-God believe that Chrysler and GM will repay the money “loaned” to them by the federal government. That’s a leap of faith that would have taken Evil Knievel across the Grand Canyon (proper) and on to Maui. But you know what? In all this excitement, I’ve lost track of how many billions we’re actually talking about. I reckon the government’s to-date contribution towards keeping the zombies alive lies just north of $37 billion. That doesn’t include the duo’s share of the $25 billion Department of Energy retooling loans (should they live that long). Or the $5 billion blessed upon GMAC. And the $1.5 billion loaned to the now-defunct Chrysler Financial. Or Canada’s contribution to the kerfuffle. Or the cost of running a 25-member Presidential Task Force on Automobiles. And the phalanx of lawyers employed by same. And the community organizer assigned to help out affected communities with, wait for it, federal funds. And now . . . the rest.

No less a personage than the President has promised to provide “fresh” funding for GMAC to absorb Chrysler Financial. I’m thinking that’ll be $5 to $10 billion, for a start. And we’ve heard nothing of the cost (or logistics) of the federal warranty program backing Chrysler buyers. And here’s something interesting I found on CNNMoney:

The U.S. government’s $700 billion bailout fund can be used to purchase debt and equity from domestic auto makers, U.S. Treasury Secretary Timothy Geithner told congressional leaders this week.

In letters dated Wednesday to the chairmen of several key committees, Geithner said he and U.S. Federal Reserve Chairman Ben Bernanke have determined that the purchase of auto makers’ debt is “necessary to promote financial market stability.”

Moreover, Geithner said he and Bernanke have concluded the debt qualifies as a “troubled asset,” making it eligible for purchase through the bailout fund. The fund was originally created as a way to cleanse bank balance sheets of risky mortgage-related assets that have constrained their lending ability.

Geithner said certain companies involved in the auto manufacturing sector already have asked the Treasury Dept. purchase debt obligations or equity. However, he declined to provide names or further details.

Question: at what point do even Detroit’s myopic cheerleaders say “basta”? I have a feeling we’re going to find out. Later.

Robert Farago

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2 of 28 comments

Happy_Endings on May 03, 2009
I can understand why you might think sales and incentives might work, but GM/Chrysler would be much better off to be honest about their product and price it appropriately. I didn't mean to say it was the best way, but rather their best way. They couldn't afford the lost sales and money at the time and they still can't. So the best way to move metal, really their only option, was to offer huge incentives. I remember 2-3 years ago GM swore off incentives and tried to price their cars at a price that was realistic. It didn't last long because they lost sales. They would need a strong leader, like Mulally, to incorporate a long term strategy based on product. But GM can't even think about that strategy now. They'll soon be a bankrupt car company. People are going to be concerned about buying from a bankrupt car company. This is on top of the fact that Americans are conditioned to wait for GM to offer a sale at some point, which GM is only too happy to oblige.

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Pch101 on May 03, 2009
I didn’t mean to say it was the best way, but rather their best way. They couldn’t afford the lost sales and money at the time and they still can’t. So the best way to move metal, really their only option, was to offer huge incentives. This gets to the heart of the problem. These price discounts have become the norm; they're now expected. It will take many years of superior products, improved brand equity and better inventory management before the domestics can hope to maintain the current sales volume with higher prices. It can't happen overnight. They have two basic options: Radically cut production and end the discounting, with the understanding that higher prices will lose a lot of sales, or; keep building a lot of stuff, discount the hell out of a lot of it, and hope that they can build their reputations enough in the meantime that they can slowly increase their prices and close the gap. Hyundai is basically taking the latter approach, as is Ford. With the task force slashing and burning brands, GM and especially Chrysler may fall in between these two approaches.

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