Friday, November 07, 2008

Bailout Nation

Looks like General Motors won't survive the next three months without a major government bailout. At the current burn rate of $2.3 billion per month, GM will be out of money in 90 days.

Politically, it is impossible to let GM fail right now. Some estimates put job losses from a GM bankruptcy at 2.5 million in 2009. The problem is, the company is completely inept, and a simple cash bailout won't change a broken corporate culture. This scene from the PBS Frontline show "Heat" is quite poetic:


A picture is worth a thousand earnings statements. An inconvenient truth indeed.

22 comments :

patient renter said...

Of course nobody should forget that they just recently received a bailout which was slipped through Congress while the big financial bailout was in the works.

Clearly even more bailouts are not sustainable.

Max said...

Clearly even more bailouts are not sustainable.

I think the tangible nature of a GM bailout will be illustrative. Here's a company that's been mismanaged for years, overrun by pension and medical costs, unable to innovate, and when things turn down, they run to Uncle Sam for more cash. The numbers I've seen are F and GM will need $50 billion to survive the next 18 months, yet the combined market cap for both is around $7 billion!

Will they simply beg for cash, or will they offer a plan that makes their businesses successful in the future? The answer will mean the difference between 2 million jobs kept or lost in the next year.

Anonymous said...

What do you suppose they do about GM and Ford and their immense legacy costs? Let them go out of business and send unemployment to 20%? Do you realize the repercussions of letting them fail? So many business and industries are reliant or connected to their survival. They are making cost cuts as quickly as possible, but can only do so much. The unions have destroyed them, it is much like the state of Ca and its budget problems. A bailout was done for the steel companies a while back and it did wonders for that industry. I would not really call this a bailout either, it is a loan that must be repaid. When your business goes to a bank and asks for a line of credit to support cash flow while going through a transition, do you call that a bailout too?

Max said...

I would not really call this a bailout either, it is a loan that must be repaid. When your business goes to a bank and asks for a line of credit to support cash flow while going through a transition, do you call that a bailout too?

Yes, if the government is making "loans" to companies that no bank on earth would make, that's a bailout.

I don't know how to fix GM without pain. Nobody else does either. But I prefer to call it like it is. Self delusion is one reason we got into this mess.

In some ways, GM is a microcosm for the entire country.

Anonymous said...

When you buy a GM, Ford or Chrysler product, the last $5k or so pays for the "legacy" some guy who retired 15 years ago. When you buy Toyota, etc, thats $5k of product you get instead.

We'll all pay that $5K whether they succeed or fail. I'd prefer to separate the legacy from the US industry, so they can invest whats left into the product and current employment.


Its not like Toyota isn't damaged by the current economy, their low profit announcement just swamped their stock market, but they have no debt and little "legacy" costs - they have no pension costs and 10% of GMs health costs - so who really pays for Toyota's pension and health costs...taxpayers.

Sippn

patient renter said...

Do you realize the repercussions of letting them fail?

Do you realize the repercussions of continuing to bail them out?

Ultimately though, their business is unsustainable, so bailouts or no bailouts, pain will be felt either way.

cheese said...

" they have no pension costs and 10% of GMs health costs - so who really pays for Toyota's pension and health costs...taxpayers."

Just because they have no pension costs and a reasonable benefits plan does not mean we are footing the bill. I only get a 401k plan at my employer and they only pay half the health plan costs of about $500. Coming from a union family I had rediculous heathcare growing up, but was it $1000 better than what I get now, I don't think so. The unions have gone too far in most every industry and are going to take us down. It is the typical american mentality. I am entitled to more, more more. Why don't we step up to the plate and take some concessions to work through this mess.

The realist said...

"Ultimately though, their business is unsustainable, so bailouts or no bailouts, pain will be felt either way."

They are trying to fix the problems. Give them a chance. I would hardly call a business that makes products with a 5-7 useful life unsustainable. We will never need cars again? Or do you want our economy to collapase into another great depression, have the dollar sink to nill and pay $100,000 for that Toyota Camry?

They legacy costs will continue to get smaller and smaller as old retirees die off and new empolyees are not offerred the same costly benefits. We will eventually come out of this recession and people will buy cars again and loan can be repaid. But then again, we could spend billions on unemployment benefits and more foreclosures and more stimulus checks and on and on.

I am conservative as they come, but I am also realistic.

Megan said...

AP
AIG repays more of $85 billion Fed loan
Friday November 7, 2:52 pm ET

Max said...

AIG repays more of $85 billion Fed loan

Link please. All I can find is a "restructuring plan."

Anonymous said...

Cheese, don't disagree with you... I pay both my own also.

Somewhere along the line, tax laws and union agreements allowed the big three to pay retirees benefits from current operating cash, rather than from when it was "earned"... 20 years ago. This is very similar to social security and a problem there also.

Its got to be a pay/save as you go.

The big three have survived despite the handicap. I have a soft spot for German iron and some good memories of Japanese tin.

Like a lot of other leaps in technology, it appears the Japanese government subsidized or outright paid for battery development for the Prius.

Its no problem, while they invested in a US industry destroying technology, we paid for their security.

Some balance is required.

Sippn

Sold in '05 said...

"Its not like Toyota isn't damaged by the current economy, their low profit announcement just swamped their stock market, but they have no debt and little "legacy" costs - they have no pension costs and 10% of GMs health costs - so who really pays for Toyota's pension and health costs...taxpayers."

That's a ludicrous statement. Toyota pays it's workers as well or better than any other factory workers outside of the big three, it pays a large fraction of their health care costs and offers retirement plans and 401k matching. The taxpayer is NOT on the hook for Toyota workers.

Toyota hasn't been stupid enough to pay an assembly line worker what a lawyer or doctor makes plus FREE full boat health care (which doctors and lawyers don’t get), and their employees won't retire when they are fifty on $100000/yr pensions like the state of CA street sweepers. I don't know what their retirement medical plan is but I'd bet that it is a bridge plan carried on until Medicare kicks in. I've yet to see a news story on unhappy Toyota workers in the U.S.

The problem with GM and Ford is the UAW ran amok with pay and benefits for unskilled labor and the company CEO's over the years knew that it would hurt someday, but not on their watch. They even let the UAW set production minimums for each plant! What company in its right mind lets the WORKERS decide how many units of product will be produced?!

We should be ENCOURAGING all of these companies to swiftly move into bankruptcy reorganizations. All legacy contracts would be reopened for realistic negotiations. Factories could be operated as needed for actual demands, and $80 / hr bolt shooters would get the choice of $40 / hr or unemployment. Bankruptcy is not the end of a company; it is EXACTLY the tool GM and Ford need to be competitive with the rest of the world. Unrealistic pensions move to the government insurance program and pay out a fraction of the original, just like the airline pilots whose companies went through BK. That's where the taxpayer should come in. NOT with bailouts to the head office that just delay the inevitable and do nothing to cure the problems with the underlying business.

Also, I do have some skin in this game. I have three close family members that either currently works in this industry or in one case is drawing one of those legacy pensions (one GM white collar, two Ford one white, one blue).

RV6Flyer said...

Somewhere along the line, tax laws and union agreements allowed the big three to pay retirees benefits from current operating cash, rather than from when it was "earned"... 20 years ago. This is very similar to social security and a problem there also.

This is what happens to every pension eventually. As the company slows in sales or size, it ends up being underfunded because the actual money is not there.

When things were good during the 90's pension plans were robbed as they were "overfunded." When my 401k has a 20% move, I don't say, gee I am ahead of my projections, I guess I will take some of the extra money and buy some hookers instead of having some extra for the lean times.

patient renter said...

Or do you want our economy to collapase into another great depression

More interventions here won't prevent a great depression, it will make one more likely, just as the massive government interventions didn't stop the first great depression but rather exacerbated it.

You can read America's Great Depression by Murray Rothbard for more.

RV6Flyer said...

http://biz.yahoo.com/ap/081107/aig_loan.html

CHARLOTTE, N.C. (AP) -- American International Group Inc. reduced the amount it owes the U.S. government by another $2.3 billion as the insurer continues to use the Federal Reserve's new commercial-paper-funding program.

That headline is a bit misleading. They are just using a different government facility to borrow money.

Darth Toll said...

pr, Yep the government interventions will surely cause GD2, or what some have called the Greater Depression or perhaps the Grand Depression.

The question I always come back to: Is this by design? Those that argue for incompetence vs. evil have a lot of splainin' to do to justify their position. The TARP was very simply a looting operation where Paulson and friends could implode various wounded animals and loot them for pennies on the dollar. Other operations like FNM, AIG, BSC were all very similar in design to the TARP. Paulson made it very clear that he wanted the Treasury to have no equity stake in the banks and he would recommend veto against any provision that allowed an equity stake. What does this tell you?

So meddle they will, and cause a depression while they're at it - but don't think this is an "accident" or "incompetence".

Darth Toll said...

Here's a pretty good article making the case for infrastructure spending instead of senseless TARP programs:

http://www.financialsense.com/fsu/editorials/barry/2008/1107.html

Anonymous said...

"Toyota hasn't been stupid enough to pay an assembly line worker what a lawyer or doctor makes plus FREE full boat health care (which doctors and lawyers don’t get), "

Its confusing, but that is what they cost AFTER all the legacy costs.... they're current wage is consistant with US Toyota pay.

Sold - I didn't make it up, its off the news wires regarding pay and benefits.

RV6 said "This is what happens to every pension eventually. " no... only large old style companies and governments. Now days, many retirements are separate and independent of the original employer (401Ks, private pension plans) Aren't most union pension funds independent also?


Sippn

Anonymous said...

One article, maybe Dean Baker wrote it, says that it takes 2 persons to build a Detroit car carrying 5 retirees on their back.

Chapter 7.

Sippn

Anonymous said...

History serves as the best predictor of the future -an old adage but one that rings true.

I am a fan of Old classic cars made by Studebaker. I drive a 55' every day.

For those who don't know, Studebaker was an independent, not owned by GM, Ford, or Chrysler. They were the FIRST automaker to reach 100 years in the vehicle business, decades before GM and others. And along with AMC they were the LAST of the independents to fold. The last car they made was in 1966.

The general consensus is that their worker Union, played a significant role -via 1) high wages/benefits, and 2) lack of productivity from those overpaid workers. The other part of the failure was stiff price war competition by the big 3 and out-dated (expensive) factories, making it difficult to keep up. There's a very good economics research paper written many years ago that analyzed this the Studebaker Union thing very well and applied it to how Unions aren't always the best thing. You can probably find it on the internet somewhere

Read this:
Studebaker was the only nationally-known wagon manufacturer to survive the transition from horses to horsepower. In the early 1930's, during the Depression, the First union act was passed, allowing Labor Unions to organize. The workers at Studebaker were among the first automobile companies to organize into an Industrial Union -- becoming Federated Labor Union 18310 under the American Federation of Labor (AFL).

After WWII Studebaker returned to building automobiles that appealed to average Americans and their need for transportation and mobility. However, ballooning labor costs (the company had never had an official United Auto Workers (UAW) strike and Studebaker workers and retirees were among the highest paid in the industry), quality control issues and the new car sales war between Ford and General Motors in the early 1950s wreaked havoc on Studebaker's balance sheet. Professional financial managers stressed short-term earnings rather than long-term vision.

Hoping to stem the tide of losses and bolster its market position, Studebaker allowed itself to be acquired by Packard Motor Car Company of Detroit. The merged entity was called the Studebaker-Packard Corporation. Studebaker's cash position was far worse than it led Packard to believe and in 1956, the nearly bankrupt automaker brought in a management team from aircraft maker Curtiss-Wright to help get it back on its feet.

So let me point out some similarities:
1) Legacy (union) costs high -HUGE GM issue
2) Huge model transition costs -GM needs to dump the out of vogue SUV line at huge losses.
3) Stiff competition, price wars for scare sales. For Stude it was GM, Ford, Chrys. For GM/Chrys it is Toyota, Honda, nissan.
4) Merger acquisition, for Stude it was Packard. For Chrysler maybe GM, or merger (bailout) with US government. If it goes this way, they better check the books and business model plan several times over.
5) Short-term thinking. For GM, Ford, they were blinded sun shining off the SUV gold, and didn't see in the long-term that consumers were focusing on better MPG, more green minded cars (prius, hybrids).

Anyway I'm sure there's more.

SORRY for the long post. I just felt a burning similarity and wanted to let you guys consider the history of what used to be the #4 car company back in the 1950's -and why it was no longer around.

Eric

RV6Flyer said...

Sippn, a 401k is not a pension. Defined benefit plans not on company balance sheets will still have the same problems of being underfunded. Their balance is set by actuarial tables based on the defined benefit and life expectancy--just like an annuity. If the account has a banner year, it does not need to be funded by the employer, yet if it has a big down year and the employer does not have the cash to property fund it, it can't meet the obligations of it's retirees.

Anonymous said...

Yes but not the issue.... why does GM have such huge pension obligations to former employees that are loaded into current product?

I once worked for a small employer where some years, the DBP required a contribution, never more than 10-15% of payroll, then went fully funded without need of contributions for years.

In CA, state employees contribute less than 10% depending on the performance of CAPERS, etc.

At GM, we're talking about maybe 250% per payroll dollar..... "5 retirees covered by 2 workers"

Sippn