Final Inspection

Auto Bailout Critics Get Desperate

RSS

Equating the U.S. auto industry with the city of Detroit is nonsense.

As the North American International Auto Show opens in Detroit, there is optimism in the air that has not been felt for years.

U.S. light-vehicle sales are soaring to pre-recession levels, profits are strong and factories are humming on overtime. Automakers and suppliers are expanding capacity and hiring thousands of new workers throughout the U.S. to keep up with demand.

Nowhere is the enthusiasm greater than at General Motors and Chrysler. Faced with extinction in 2009, they now are rolling out a record number of award-winning vehicles such as the Chevy Corvette and Silverado, Ram 1500 pickup and new Jeep Cherokee CUV.

General Motors just announced it will spend $1.3 billion at five U.S. manufacturing facilities to build new engines and transmissions, as well as upgrade an existing assembly plant in Flint, MI, a rust-belt city very much in need of new investment.

In key auto-producing states such as Michigan, Ohio, Indiana and Tennessee, the benefits of the government rescue of GM and Chrysler can be seen everywhere.

Property values are rising and there are fewer home foreclosures. More people have good jobs and are earning salaries and paying income and Social Security taxes instead of collecting unemployment, food stamps or welfare.

Americans should be celebrating bipartisan support of the U.S. auto bailout by two U.S. presidents, a departing Republican and an incoming Democrat, that averted an economic apocalypse. The U.S. economy now is well on the road to recovery thanks in large part to a robust North American auto industry.

Sadly, some critics are so invested in political dogma they can’t bear the idea the federal government succeeded in helping two crucial U.S. companies survive the worst economic crisis since the Great Depression. This has driven bailout opponents to create desperate and downright silly explanations for why they believe the auto bailouts were not successful.

Desperate talking point No.1: The auto bailouts were supposed to prevent Detroit from going bankrupt. The city of Detroit has declared bankruptcy so the bailouts failed.

Equating the U.S. auto industry with the city of Detroit is utter nonsense. The government rescue was designed to prevent GM and Chrysler from closing their doors and causing the loss of 1.2 million jobs and a 1930s-style depression in the industrial Midwest.

In late 2008, advisers to President Bush told him there was no way to save GM and Chrysler other than a government-funded managed bankruptcy. Despite his personal aversion to bailouts, Bush knew failing to step in would cause an economic catastrophe. “I didn’t want there to be 21% unemployment,” he has said publicly. 

In order to prevent GM and Chrysler from ceasing operations, Bush signed off on $17.4 billion in bridge loans, requiring the two automakers to develop restructuring plans under President Obama's watch in 2009.

The Obama Admin. then provided tens of billions of debtor-in-possession financing to allow the automakers to pay suppliers and keep the lights on while they went through a managed bankruptcy in an incredibly short 40 days.

The goal was to save more than a million jobs and the national economy. It did that. The states of Michigan and Ohio have benefitted especially, but the proceedings did not target specific cities to be saved.

Desperate talking point No.2: Allowing the government to save struggling companies is socialism and kills competition.

Ford, Toyota, Renault-Nissan and Honda all publicly backed government assistance for GM and Chrysler. If the two automakers failed, it was widely believed there would not be enough volume to sustain the huge but fragile automotive supply chain.

“If GM and Chrysler would’ve gone into a free-fall, that could’ve taken the entire supply base into free-fall also, and taken the U.S. from a recession into a depression,” Ford CEO Alan Mulally said last June.

GM should have gone through a conventional bankruptcy.

This is pure fantasy. The Bush and Obama administrations determined a conventional bankruptcy proceeding was not feasible. In 2009, light-vehicle sales were down 50%. The global auto industry was drowning in excess capacity, machinery and employees. Even though GM and Chrysler assets such as the Chevy and Jeep brands had great worth in better times, they had zero appeal to investors at the height of the global financial meltdown.

It only made sense for the U.S. to bail them both out because the government otherwise would be forced to deal with the social consequences of the ensuing massive unemployment.

The Center for Automotive Research, a Michigan-based think tank, calculated the cost to the government and taxpayers of doing nothing for GM would have been almost $40 billion, including lost revenue from income and Social Security taxes and higher costs related to increasing use of food stamps, welfare and other social services.

That’s why the taxpayers’ loss of about $10 billion when the government divested all its shares in GM ultimately is a bargain.

Japan, Germany, Brazil, China, Russia and other auto-producing countries all offered money, incentives, tax breaks or “cash for clunkers” programs to prop up their auto industries in 2009 for the same reason: It was less expensive than dealing with the social costs of massive unemployment.

They also were keenly aware that a successful domestic auto industry is a key element of every major economy, as well as a source of national pride.

dwinter@wardsauto.com

 

Discuss this Blog Entry 6

on Jan 21, 2014

For some reason you think the bailout was the end all to the Auto industry and the big comeback is here? People held out as long as they could and bought new vehicles with a 30 year mortgage but guess what; the price of the Automobile's is getting out of reach for the common worker.

Fact Seeker pointed out the obvious to you in your early on comments…
* $49.5B bailout of GM.
* To date, only $32.4B recovered.
* Leaves $17.1B owed to U.S. Gov’t.
* Gov’t still owns 189.2m of GM shares.
To break-even each remaining share would need to be sold at $90.38 (current stock valued at $34.74). So taxpayers – hate to break it to you – but from an accounting perspective your taxpaying dollars come up with a sizeable loss.

Now we are in the next step; guarantee a minimum wage so they can afford to purchase a vehicle; after all the life of a vehicle is 84 months. Nothing new here back in 1973-74 the same thing took place; again and again it continues. By the way how much more is a person paying to buy a GM car to pay that 49.5 billion dollar loan; after all they should just be giving us our tax dollars back. I know I am sour grapes but please; how come some of those employees are not asked to sacrifice.

I understand your economic stimulus comments and concept but when I read that GM is going to build a new plant or facility and put in another billion or so; they would probably do that anyway if they want to succeed. Then again there is free tax money to build new in a different city instead of rebuild existing operations

on Jan 21, 2014

The information you cite is is out of date. Loans have been repaid and U.S. government has sold all its shares in GM.

on Jan 21, 2014

Perhaps the figures are a little outdated but there are plenty of other articles that support at least billions still owed and as we all know number lie and liars use numbers. So while in essence that may have paid back the original 49 billion there still remains how it was paid and I am sure the treasury will find they are short in the end. There are others with a different point a view and here is a good article to look up: Why "Government Motors" Still Owes You by John Rosevear, The Motley FooL

I am not saying some help was not needed, but I am saying we are far from out of the woods and that all we have is still the same old organization. Call me again in another ten years; let's see how they are doing then; it is just too early to put the feather in the cap. It was nice to see them earn the car of the year award, not hard when a car sell for 50 grand; you can put a lot into a vehicle at that sum. But are they putting that engineering into the everyday vehicle the little guy drives because they con only sell so many Caddies. Keep in mind GM still receives some of the largest tax benefits of all companies in America. I think I just read where they received a 28 million tax credit in the previous year.

on Jan 22, 2014

The "Motley Fool" article you cite, like so many others, pretends the cost of doing nothing would be zero.

As I state in the commentary: "The Center for Automotive Research, a Michigan-based think tank, calculated the cost to the government and taxpayers of doing nothing for GM would have been almost $40 billion, including lost revenue from income and Social Security taxes and higher costs related to increasing use of food stamps, welfare and other social services."

When the U.S. Treasury sold off all its shares in GM last year, it realized a loss of $10 billion. However, the bailout enabled the U.S. Treasury to avoid the much greater loss of $40 billion in social costs, so ultimately it -- and taxpayers -- came out ahead.

To your other question. GM now makes numerous high-quality affordable cars. UAW concessions enable GM to build the excellent Chevy Sonic in Michigan, the only subcompact built in the U.S. The Chevy Cruze is another fine compact car, built in Ohio. The Sonic starts at a little over $14,000, and the Cruze starts at about $17,000.

on Feb 3, 2014

@ answergrape : "For some reason you think the bailout was the end all to the Auto industry and the big comeback is here?"

Now this is a hard comment to fathom. The auto bailout wasn't done perfectly, and things aren't completely rosy. They never are. But by most objective measures, the U.S. auto industry is certainly in comeback mode and is leading economic recovery.

RE: "People held out as long as they could and bought new vehicles with a 30 year mortgage but guess what; the price of the Automobile's is getting out of reach for the common worker."

The facts say you're wrong. There are MANY affordable vehicles available and many more pre-owned that are affordable by most. Leasing (short term) is flourishing and many new car "buyers" are on these shorter term deals.

RE: "Fact Seeker pointed out the obvious to you in your early on comments…
* $49.5B bailout of GM.
* To date, only $32.4B recovered.
* Leaves $17.1B owed to U.S. Gov’t.
* Gov’t still owns 189.2m of GM shares.
To break-even each remaining share would need to be sold at $90.38 (current stock valued at $34.74). So taxpayers – hate to break it to you – but from an accounting perspective your taxpaying dollars come up with a sizeable loss."

If your "facts" are this out of date, its no wonder you come if with erroneous conclusions.

RE: "Now we are in the next step; guarantee a minimum wage so they can afford to purchase a vehicle; after all the life of a vehicle is 84 months."

The average age of a vehicle on the road is 11.4 years, but your statement is a complete non sequitur

RE: "Nothing new here back in 1973-74 the same thing took place; again and again it continues."

What took place in 1973 - 1974. Back then we had an oil crisis? Currently, we don't. What's your point?

RE: "By the way how much more is a person paying to buy a GM car to pay that 49.5 billion dollar loan;"

What $49.5 billion dollar loan? The price of vehicles is set in a competitive market. Your phantom and non existent loan, notwithstanding.

RE: "after all they should just be giving us our tax dollars back."

All tax dollars have been returned less about $10 billion, and that has more to do with the fact that the Feds sold their stock too soon.

RE: "I know I am sour grapes but please; how come some of those employees are not asked to sacrifice."

Everyone sacrificed. Everyone did not sacrifice equally.

RE: "I understand your economic stimulus comments and concept but when I read that GM is going to build a new plant or facility and put in another billion or so; they would probably do that anyway if they want to succeed."

No shit! That's the point. They are able to make those investments in the U.S. because they still exist as opposed to having to go through the disruption and chaos of liquidation and economic depression.

RE: "Then again there is free tax money to build new in a different city instead of rebuild existing operations."

The investment has been in both existing facilities and in new locations, depending on what makes the most sense.

on Feb 3, 2014

RE: "Perhaps the figures are a little outdated but there are plenty of other articles that support at least billions still owed and as we all know number lie and liars use numbers."

A little outdated? Yes, there are still a few diehard RWers who want to make inflammatory statements that appeal to laissez faire types who are ideological, not pragmatic. In your case, "outdated" means "wrong."

RE: "So while in essence that may have paid back the original 49 billion there still remains how it was paid and I am sure the treasury will find they are short in the end."

Drew Winter's piece pays the numbers out clearly. They are what they are.

RE: "There are others with a different point a view and here is a good article to look up: Why "Government Motors" Still Owes You by John Rosevear, The Motley FooL"

One is certainly entitled to one's own opinions, but not one's own facts. The Motley Fool piece IS right on one issue, the loss carry forward. This was done to protect the tax payer's interest in the company. There are so many other opinions based on made up facts on that page there isn't room to start. You might as well be wasting your time on Porter Stansberry, who predicted GM would go BK again in 18 months. He predicted this almost 18 months ago. You can make blind sycophants believe anything.

A couple of points:

First: The auto supplier base also supplies military procurement. Many of the larger suppliers were already in C11 court, a missed check away from liquidation. The rest has one foot in the grave and the other on a banana peel. Imagine our soldiers stuck in the desert with broken equipment and no parts. Not a lot has been made of this, but it is known the Pentagon made a trip to the WH during the Bush 43 admin. to explain what was at stake. Imagine a liquidation at a time when the banking system was frozen, and those with cash come in to by up the pieces for bargain prices. Who had cash (dollars) and didn't need financing? Now imagine Chinese interests owning American brands and suppliers of the military.

Second: The CAR report was hopelessly conservative in its estimation of what was saved. The cost of pensions dropped on the Federal Pension Guaranty Corp would have been staggering, easily over $30 billion on its own. I don't believe the CAR report even considered that.

RE: "I am not saying some help was not needed, but I am saying we are far from out of the woods and that all we have is still the same old organization."

Out of the woods? Well, GM has a fortress balance sheet and isn't on the brink or even close. That's a fact.
RE: "Call me again in another ten years; let's see how they are doing then; it is just too early to put the feather in the cap. It was nice to see them earn the car of the year award, not hard when a car sell for 50 grand; you can put a lot into a vehicle at that sum. But are they putting that engineering into the everyday vehicle the little guy drives because they con only sell so many Caddies. Keep in mind GM still receives some of the largest tax benefits of all companies in America. I think I just read where they received a 28 million tax credit in the previous year."

In your case I don't think we should equate reading and comprehension. There are plenty of cars available for well under $20K. If that doesn't suit you, buy a pre-owned vehicle. After all, everyone drives a used car.

Please or Register to post comments.

What's Final Inspection?

WardsAuto editors share insights and observations on the global auto industry.

Contributors

David E. Zoia

As Editorial Director, I oversee much of what goes into WardsAuto.com, enjoying a ringside seat that lets me observe up close just about every facet of the industry worldwide. I have covered the...

James M. Amend

James Amend is an associate editor at WardsAuto.com, covering day-to-day business and product news at General Motors. He also leads coverage of regulatory and environmental issues, as well as the...
Blog Archive

Sponsored Introduction Continue on to (or wait seconds) ×