GM fiasco

[DTS]

This post is not meant to open up a nasty political potpourri, just trying to understand this mess, if possible.

With all the talk of a humongous bailout of GM, Congress keeps trying to sell this to us by saying if they approve it, we'll all have an "equity stake" in this beast.

What equity do they expect to have now or ever?

[Black Bart]

I think they're saying

This post is not meant to open up a nasty political potpourri, just trying to understand this mess, if possible.

With all the talk of a humongous bailout of GM, Congress keeps trying to sell this to us by saying if they approve it, we'll all have an "equity stake" in this beast.

What equity do they expect to have now or ever?

the government will "nationalize" the company until the loan is repaid (I don't know how that works -- if the government's actually a legal owner or just a lienholder). Here's a conservative political columnist's view (he's against a bailout).

https://www.jewishworldreview.com/cols/krauthammer111408.php3?

On the economic fallout, here's another link from market analyst Jim Cramer of thestreet.com

https://www.thestreet.com/print/story/10448166.html

I think the sticking point on passing the bailout is whether or not the United Auto Workers will agree to wage/retirement cuts -- the union president has said "No." The UAW is a large supporter of the Democratic party and Pelosi has carefully avoided talk about wage reductions; focusing instead on company "retooling and restructuring" (Dems want GM to make small, environmentally-friendly cars). Republicans think propping up the union house of cards with several more billion is throwing good money after bad.

I believe the congressional fight starts tomorrow. It should be interesting.

P.S. On a personal note, I've got some "equity" in GM. I bought 170 shares at $8 per share (it's now $3) a while back on the theory that the bailout would go through and that the stock had gone down (as I was kidding John H a while ago) "about as fur as it kin go."

[BOB W]

Sorry> let them file for Chapter 11............Then give them monatary support. AND renegotiate wages & pensions down to real life issues just like other car makers down south. Our auto prices have been financing $75 an hour for far too long.

[Snaggletooth]

Different World

The bastion of vibrant economy that once was personified in GM is a world that no longer exists.

I remember the days where the bull companies on Wall Street were companies who built plants, hired people, provided benefits, and looked forward to a growth plan. Medical care for retirees was only a minor issue, unions negotiated raises at every contract, and companies paid these wages and benefits, expanded sales, and grew their profits. Companies like GM were the status quo, not the exception.

Now the stock market endears itself to companies who shut down plants, lay off people, shut down benefits and thus try to salvage a bottom line. Hundreds of millions of dollars are paid to corporate CEOs who can bring these things about.

Is it any wonder this has happened? Millions of people working at $25/hr have their jobs gone to Mexico or China now work at WalMart or HomeDepot for $7. Their work week is limited to 25 hrs/wk so only top management can have affordable health insurance. Nominal wages (not just real wages) have declined over the last few years and illegals are brought in to take work away from those who formerly worked at livable wages.

Better count on the big shots to fix this one. If they are looking toward the consumer to spend the economy back into solvency, it's too late. The consumer has already been sucked dry.

[DonPriebe]

You can buy the whole thing!

On a personal note, I've got some "equity" in GM. I bought 170 shares at $8 per share (it's now $3) a while back on the theory that the bailout would go through and that the stock had gone down (as I was kidding John H a while ago) "about as fur as it kin go."

According to Yahoo Finance today, the total market capitalization of GM is only $1.84 billion. So they want a bailout from the Feds far, far in excess of what the whole company is worth.

On the other hand, the stock currently pays a $0.25 dividend each quarter. That's a dollar a year on a stock that sells for $3.00. Where else can you get a 33% return on your investment. Course, it might not last. Their current earnings per share is -$38.74. (yes, that's a LOSS of $38.74 per share.) Does it sound like throwing more money at this company will fix the basic problem?

[JohnH]

This post is not meant to open up a nasty political potpourri, just trying to understand this mess, if possible.

With all the talk of a humongous bailout of GM, Congress keeps trying to sell this to us by saying if they approve it, we'll all have an "equity stake" in this beast.

What equity do they expect to have now or ever?

What I find comical about the blather from Washington is this latest nonsense that the taxpayers will have an "equity stake" in the companies we bail out. Does anyone really believe that even if any of this "equity stake" ever actually produced a return, Washington would somehow handle it in any responsible manner? They would just find more places to blow it on more projects to buy votes, all the while figuring out how to collect still more taxes from those who actually produce.

[Oxtrainer]

GM Bailout

It seems to me that a Company paying 25 to 30 dollars an hour or more will end up
having a problem selling to a public making 7 to 15 dollars an hour. When any company insists on making a product that will not sell then perhaps they should go out of business.
That is harsh I know but can we have the whole country making unsalable products and
keep in business using taxpayers money?

[Black Bart]

Probably not, but

...Does anyone really believe that even if any of this "equity stake" ever actually produced a return, Washington would somehow handle it in any responsible manner?...

I was just wondering -- do you remember the Chrysler bailout 20 or 30 years ago (don't remember who was prez at the time)? Does anybody know if Chrysler ever paid that back or not?

I believe the bailout will go through because almost none of the politicians today can stand the kind of heat that would be generated from the thousands of unemployed and auto-related business shutdowns. But the question is -- at what cost? That columnist said the GM hourly rate is $73 while Toyota's is just $48 (which also sounds pricey to me). If the union won't take less to save their own sinking ship, then the bailout would be a futile gesture to delay the inevitable bankruptcy.

Sure will hate to give up my Tahoe and switch to a dinky little puddle-jumper (meantime, I've read that big Buicks are all the rage in China).

[Black Bart]

Thanks Don,

...the stock currently pays a $0.25 dividend each quarter. That's a dollar a year on a stock that sells for $3.00. Where else can you get a 33% return on your investment?...

That's mighty comforting; lemme see now, 25 cents times 170, that's uh....$42.50 and my loss (so far) is $850.00 and so that makes it only...umm...$807.50 now.

New of note: Arkansas passed a lottery bill Nov. 4th -- here's my chance to quit playin' the market and hit the big time.

[Snaggletooth]

Chrysler

Bart, I think the Chrysler bailout started in 1978-9 under Mr. Carter, with some $50 million. Similar reasons - gas crisis, "caught" with bad inventory making gas guzzling dinosaurs when the public was buying bug-sized cars with parakeet appetites. Disastrous product line with serious mechanical and quality problems in the 1976-78 Volare and Aspen.

Wasn't enough. Received another $200million or so under Reagan administration. Reportedly staked their whole future on the K-chassis Reliant and Aries. Borrowed the money on a 20-year loan. Public was horrified.

Entire loan was paid back in 18 months, leading many experts to conclude that only a fraction of the money was ever needed. Chrysler claimed the economic turnaround was due to incredibly successful product line, led by above-mentioned K-car.

Not positive about all numbers and dates above.

[AuditorTurnedGood]

I wish the governement

would use the proper definition of "equity" and "loan" one of these days. When the AIG thing first came out we were "loaning" them the money, but were going to end up with a 79% ownership of the company. Last time I looked through my old accounting text books, those two things don't mean the same thing.

As for the car debaucle, if congress is going to bail out the "big 3", it should start by not giving a dime to Chrysler. It's privately owned by Cerberus(sp?) Capital Management, AKA a private equity fund. Diamler Benz essentially PAID them around 7 billion when the accounting was all done to take Chrysler off its hands, if I remember correctly. Let them figure it out. As for Ford and GM, all I can hope for is that if we do give them a pile of cash, we actually attach some strings to it, unlike the empty threats we attached to the bank money: "Well, yous guys better loan out this 250 billion or we'll get really angry.", which has not worked so well. This is a major opportunity for the government to effect not only how the car companies operate, but also what they build, how they build it, and how much it costs. I don't like nationalization of assets more then the next guy, but if we're going to have this much leverage, for crying out loud, let's use it to the advantage of the public and the enviroment.

[DaveO]

Without UAW concessions on work rules, job banks, wages and benefits a bailout is just good money after bad. Pelosi is determined to pass card check which will push even more manufacturing jobs out of the country and will almost guarantee no new plants will be built.

Let the big three file for BK protection. They will emerge smaller and stronger.

[JohnH]

Bart: Yes, I'm old enough to remember the Chrysler bailout - thanks for reminding me. I recall that an underlying reason for the Chrysler bailout was that they were also involved in manufacturing tanks, so there was a bit of a national defense issue at the time. Does anyone recall that?

Anyhow, it seems to me that if the govt wants to help the auto industry & stimulate demand, why not hold a national lottery and give $30K to 800,000 people who must use it to buy a car from one of the domestic auto makers? At least that way the money would find its way through the normal market channels and a large number of taxpayers would benefit directly. I say this in jest, because it's a variant of the "broken window" theory that pseudo-economists trot out every time there's a hurricane or other natural disaster. But it makes about as much sense as the bailout.

I also heard on NPR this morning that one financially-challenged lawmaker wants to make auto loan interest tax deductible as a way of helping the auto industry. Amazing what simpletons some of these politicians are, and they aren't ashamed to publicly display their ignorance.

As I see it, bankruptcy reorganization offers the only way for the auto makers to efficiently do what needs to be done, but it won't be allowed to happen because of all the union members who would desert the Democratic party if their companies were forced/allowed to make the hard choices.

[Nashville]

No One Would Buy

As I see it, bankruptcy reorganization offers the only way for the auto makers to efficiently do what needs to be done, but it won't be allowed to happen because of all the union members who would desert the Democratic party if their companies were forced/allowed to make the hard choices.

John, it also won't happen because if they went into bankruptcy, no one would buy their cars.

Like 'em or not, I think we're selling the labor unions short, and depicting them as greedy Tweed bosses who would cost their members jobs. They do NOT want to kill the goose that lays the golden egg, and they know that. Could they be running away from stark economic reality? Without a doubt. Have they endured years and years of company whining about wages and benefits when these same companies would not clean up their own act? Without a doubt.

There would be no middle-class without them, and in spite of all the corrupt practices they have been involved in, the middle-class is what made this country great. This could be like Mexico, where only 34 families control 52% of the land. Complain about tax concepts with "redistribution of wealth?" Guys, we've already got it, as wealth is finding new ways to be sucked to the top of the economic scale every day. I just wish if some of this "redistribution" flows down, it would flow down to those people trying to work instead to people for just existing.

[JohnH]

Yes, you make a good point about buying cars from bankrupt companies. But then I've bought tickets and flown on airlines while they were in bankruptcy. Every product has a price point, even when a company is reorganizing under the bankruptcy laws.