The Auto Bailout Explained

by Edward Niedermeyer

Published: October 5th, 2010

While some have questioned why TARP was used to support the automotive industry, both the Bush and Obama Administrations determined that Treasury’s investments in the auto companies were

consistent with the purpose and specific requirements of EESA. Among other things, Treasury

determined that the auto companies were and are interrelated with entities extending credit to

consumers and dealers because of their financing subsidiaries and other operations, and that a

disruption in the industry or an uncontrolled liquidation would have had serious effects on financial

market stability, employment and the economy as a whole.

Translation: credit dependence killed the car companies. And from the 0% Red Toe Tag Sales to GM Daewoo’s $2b currency gambling loss, the glove fits. It’s a lesson that isn’t brought up often enough, and it’s one of the only passages of note in the Auto Industry Financing Program section of Treasury’s two-year TARP retrospective [ PDF here]. Otherwise, the document is swallowed up in accounting for the billions spent on banks, despite the fact that

We now have recovered most of the investments we made in the banks. Taxpayers will likely earn a profit on the investments the government made in banks and AIG, with TARP losses limited to

investments in the automobile industry and housing programs.

So, why not explain why projected auto rescue losses were reduced to $17b with more than just a footnote? [#2 on Figure 2-B shown above]

#Bailout #BailoutWatch #Government #TARP #Treasury

Edward Niedermeyer

More by Edward Niedermeyer

Comments

Join the conversation

9 of 35 comments

Jeff Waingrow on Oct 06, 2010

picard234: When self-interest comes up against ideology, do you really need to be reminded of the usual winner?

Like Reply
- PrincipalDan on Oct 06, 2010
  
  "A man's principles mean nothing unless he has a full belly." - Mark Twain
  
  Like
Jaje on Oct 06, 2010

I'm still on the fence about the Fed bailout of any industry. I believe in the free market to right the wrongs - punish those who lied, cheated and stole (and most importantly those who knew it and looked the other way) in the system. Unfortunately we threw money at them in droves to save them. Consumers irresponsibly in the chase "material possessions" spent way more money than they made and borrowed against their homes and other property. We built up this system and we bailed it out meaning it will then gain steam again and go this route. However, if we did not bail them out - our recession likely would have be so much worse it would have become a true depression. No other Presidents (Bush and Obama) have had to deal with a market like this since the late 20's. I'm still on the fence about whether we should have gone this route. It seems that we are slightly better off in the short run with the bailouts to help stable the system - but we need to weed out the corruption in the financial system (let alone our Congress).

Like Reply
- See 2 previous
- PrincipalDan on Oct 06, 2010
  
  I'm with you on the conflict. I'm a classical liberal when it comes to economics (government should stay the hell out) but also know that the collapse of those companies could have thrown the economy into chaos. I still personally believe that long-term (30 to 50 years down the road) the American economy would have been better served by a either Chapter 11 or Chapter 7 bankrupcies for GM and Chrysler. GM at least is still an "engine of wealth destruction" - money is being poured into it and pissed away. I hate that! I hate mortgaging even more of our future to prop up a company that still hasn't learned a damn thing from its near death experience.
  
  Like
- Edgett on Oct 06, 2010
  
  I'm not a fan of government intervention in business. Having said that, to pretend that the government hasn't been intermixed in virtually every business for the last sixty years is ridiculous. Almost the entire tax code is set up to incentivize one business or another. Reagan's ACRS was a government subsidy of the auto business, allowing individuals to write off auto purchases in just three years. The long exemptions of trucks and SUV's, along with one-year expensing of GVW>6000 lb vehicles as surely put the auto business into jeopardy as the lethal combination of (mis)management and mismanaged unions. The redolence of this subject arises when suddenly someone "decides" it is philosophically bad for the government to be involved. The change is what creates problems, no matter which direction the change moves; and the more radical the change, the less predictable the outcome. In the case of the auto-industry bail out, I suspect that both Bush and Obama feared that Chinese manufacturers, flush with cash, would buy GM and Chrysler at pennies on the dollar. For this reason alone, I supported this bailout. I wouldn't mind seeing good dialogue on getting the government out of every business, but it cannot be done overnight. The airline business is a perfect case in point; never a great business to start with, airline "service" has gotten worse in each succeeding year since it was deregulated by Carter. The "benefit" to we citizens is that we are now herded like cattle to sit in chairs that would shame Greyhound for the privilege of "cheap" travel. Regulated airline travel was far superior.
  
  Like
- Geeber on Oct 06, 2010
  
  Regulated air travel was also far more expensive, relative to the average person's income, than it is today. Of course it was nicer - fewer people flew, and those that did tended to be in the higher income brackets. They demanded better services and more amenities. (It was also more dangerous - we've set safety records for air service in this country over the last few years.) The flight was as much part of the vacation as the destination itself. Now people just want to get where they are going. It isn't just in the U.S. While in Europe in 2006, I took two flights on Ryanair. We were packed like cattle into the planes, and the attendants sold lottery tickets halfway through the flight! But we got where we were going for not much money and not too much time, which is what really matters.
  
  Like
86er on Oct 06, 2010
The only people opposed were actual socialists (who hate the idea of wealth redistribution in the “wrong” way) and actual libertarians (who don’t like government doing anything). Psar, I would've expected the "libertarian-as-pseudo-anarchist" meme from anybody but you.

Like Reply
Geozinger on Oct 06, 2010
"We now have recovered most of the investments we made in the banks. Taxpayers will likely earn a profit on the investments the government made in banks and AIG, with TARP losses limited to investments in the automobile industry and housing programs." How did the banks pay it back? They have your money. On the consumer level: You overdraw your checking account? Ding! Increased fees, sometimes as much as 200% of what they were previously. Look at your bank fees on your personal accounts. They have all gone up, sometimes dramatically. How's your savings account doing? Wow 1% interest? Fantastic! I'll be able to retire in 384 years with that! On the business level: The company my wife was employed by was forced into bankruptcy by one of the banks it had borrowed money from. They wanted payment immediately and the arrangements and negotiations prior to the deadline were declared null and void. The bank used the courts to force them into bankruptcy, but fortunately, the BK judge did not allow a liquidation of the company (it was fairly well run and making money). They were sold at auction to a venture capital company, who is now in the process of 'right-sizing' the company, we'll see how much longer my wife will be employed. A similar thing happened to a large, well established furniture retailer in our area, but in this case, the bank prevailed and the company is now forced into Chapter 7 liquidation. Over 100 years of business flushed down the toilet, with a liquidation company treating the family name like toilet paper. So, how can the car companies get in on this action?

Like Reply
- Geozinger on Oct 06, 2010
  
  More thoughts... Whatever happened to all of the money these banks were supposed to lend to boost the economy? How can I get in on this gravy train, with my business? I really need my own legislator. And BK judge. It seems to me these financial institutions are getting the money to pay off the TARP loans by sucking it out of our wallets. How else are they able to come up with all of this money so rapidly?
  
  Like