$15B Detroit Bailout Approved
There will certainly be more on this shortly:
After weeks of tense discussions with the heads of the U.S. auto industry, Democratic Congressional leaders have reached an agreement that may just clear the way for the Big Three to get the money they need to survive … for now.
CBS News correspondent Kimberly Dozier reports that significant progress came Friday night, when Democrats from both the House and Senate agreed to bail out the struggling General Motors, Chrysler and Ford with federal funds.
Several officials say the White House and congressional Democrats have agreed on $15 billion in loans, which is less than half of what the car chiefs were seeking.
They say the breakthrough came after House Speaker Nancy Pelosi bowed to a demand by President Bush that any aid come from a fund that had been intended to help Detroit produce more fuel-efficient cars.
Pelosi said the House would consider legislation next week to provide “short-term and limited assistance” to the U.S. auto industry.
Interesting to say the least.
>
Sources:
Dems, White House Agree To Auto Bailout
CBS Dec. 6, 2008
http://www.cbsnews.com/stories/2008/12/06/business/main4651796.shtml
Lawmakers and White House agree on auto aid plan
Reuters Saturday, December 6, 2008; 8:19 AM
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/06/AR2008120600535.html
Democrats, White House Said to Reach Accord on Automaker Aid
John Hughes and Laura Litvan
Bloomberg, Dec. 6 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajNUC0L.wwwE&
December 6th, 2008 at 9:38 am
Unfortunately, not a surprise at all…
My current investment thesis is that the powers that be will pursue the least logical, most expensive plans that involves maximum possible losses to taxpayers, a lot of money printing, zero upside, and no oversight. It’s a sad day for us all, indeed
HCF
December 6th, 2008 at 9:40 am
If only the finance industry were held to the same level of inspection as the automakers.
December 6th, 2008 at 10:00 am
“Pelosi bowed to a demand by President Bush that any aid come from a fund that had been intended to help Detroit produce more fuel-efficient cars”
an oilman cometh – an oilman goith
December 6th, 2008 at 10:02 am
I wonder if the opposition will try to block this? What are the chances Shelby will mount a spirited defense?
December 6th, 2008 at 10:05 am
Who is this Bush guy?
December 6th, 2008 at 10:06 am
HCF Says:
December 6th, 2008 at 9:38 am
Apart from giving us your highly subjective investment thesis how about a few facts and logic.
This is a capital intensive and volume sensitive industry that directly and indirectly employs 3-4 million people and generates trillions of dollars of economic activity when you roll in the parts suppliers, service vendors, dealers (over half a trillion alone). It also contributes billions to town and state budgets across the land (not to mention loaning cars for thanksgiving parades).
Yes they have structural problems, but they are not fatal, as recently as three years ago they were making tons of money. Their immediate problem is very simple. They have lost over 40% of their volume. If the market was operating at it’s “natural” level of around 14-15 million units (it peaked at 17.5 million) instead of the current annualized rate of 10 million they would have ample cashflow to effect the needed structural changes. Letting the D3 go down would have cataclysmic consequences many of which we don’t even comprehend. It’s a measure of the extent to which this country is a prisoner of its own myths and misinformation that there’s any debate about this. Can anyone imagine Germany debating whether to let BMW, Mercedes and Porsche fail. These btw are the most unionized and amongst the most profitable auto companies in the world.
December 6th, 2008 at 10:14 am
OT- just now on fox news, a guy from morningstar said that morgan stanley bond is yielding 15-16% right now. what does it mean ? is this type of investments not available to individual investors ?
btw, this same guy also said that we are on a v-shape recovery.
thanks.
December 6th, 2008 at 10:19 am
$65+ million spent on lobbying efforts pays off .
http://www.cbsnews.com/stories/2008/12/03/cbsnews_investigates/main4646424.shtml
December 6th, 2008 at 10:39 am
In the blizzard of coverage on this point, the issue of importance is not whether the Congress and the incoming Obama Administration will save the auto industry, but how it will be accomplished.
The preference of key Democrats is for the big three to avoid bankruptcy. A bankruptcy of GM or Chrysler, (apparently Ford has a better balance sheet right now,) would pose an enormous strain on already overwhelmed Federal and State safety nets. The potential numbers are worse than what has been reported in the press.
Every time Pelosi approaches a microphone on this issue, she makes a clear, declaritive statement, (which is rare for her.) ” No bankruptcy.” The President-elect is a little more coy. However, one of the least reported facts of the Obama “grass roots” campaign success is that he received TREMENDOUS support from labor. Hard to believe he would turn against labor so quickly and on an issue important to him and the Democrat party in general.
That said, what Presdent Obama will soon learn is that even when votes should be cast for the “greater good” his own political party will extract a political price for a key vote. Alternately, Republicans will stand, fight and lose on the principal as it helps galvanize their base. Also consider that most of the newer auto plants are non-union and are located in the South where Republicans still have a few seats.
Like TARP, something will get done, but it will not be pretty and it may not be the last time we will hear about an auto industry bail-out…err…loan…
December 6th, 2008 at 10:48 am
Granted that unions are a problem, but the US automakers sell no cars in Japan, except for the odd Mercedes here and there, no non-Japanese automaker sells much. The US used to push Japan on trade policy but no longer does…….
December 6th, 2008 at 11:00 am
I am puzzled at the degree of lashing out at any non-financial industry requesting government assistance while simultaneously, the entire financial industry is on life-support due to the decisions made by groups of supposedly “smart” individuals while being paid millions annually with unbelievable bonuses at the end of each year.
These grossly over-paid individuals have nearly taking down, not just the US financial system but the entire global financial system! Don’t take my word for it. Stick your head out the window and see for yourself what is going on around you.
It is now so fashionable to trash the CEOs of any distressed industry that actually makes anything REAL in this Country….Detroit built SUVs because that is what the American consumers wanted. How many “cracker boxes” do you think they would have sold prior to the last run-up in oil prices? Practically none!
And the elites in this Country would be saying basically the same thing (they are saying now) when the Automaker became distressed years ago well before the most recent run-up in oil prices.
As everyone knows…… no one wants a small, fuel-efficient car unless it is “fashionable”. People associate status with the type of car they drive. Everyone wants a big, status-conscious vehicle that says “Look at me. I am so important and sucessful. I have more than you….Look at me!”
Contrary to a lot of the FKIAs we hear mouth their opinions, Detroit actually tries to anticipates what consumers want that they can build with a decent profit margin. I don’t see anything new here. This is old stuff.
Detroit like every other industry has never been anxious to build (in-mass) a product that is a guaranteed money-loser only to be profitable based upon the rise of a commodity out of their control. They live in the here-and-now.
Sure it would be nice to have a product- line that is ready and waiting for the right circumstances to come together to trigger consumer demand for it;but, it doesn’t work that way. Consumer impulse is dynamic. It takes years to bring a new design to market. Detroit has to be careful not to get whip-sawed by the market and the fickle consumer. They are not as stupid as some try to make them out to be.
The whole discussion just seems like such and overt double-standard to me by the very people who had a big part in blowing the whole damned ec0nomy in the first place.
Lastly, it isn’t just the “stupid automaker executives” that are having trouble, it is every industry in America. I guess that makes us all a bunch of idiots. You know, I think that is getting pretty close to the truth of the situation.
December 6th, 2008 at 11:09 am
If only the auto industry had the same level of representation from an internal government department as the financial industry had with the Treasury department. Beg, grovel for $15B yet look how quick and with such opacity over $100B was GIVEN to AIG. The double standard is shameful for the nation. It has become a nation of two societies. The inner autocracy and everyone else.
December 6th, 2008 at 11:26 am
@BG; Amen. Amen indeed. The level of hypocrisy by those jackals in the financial industry who have nearly ruined this country (it’s not over yet) and their sychophant enablers (hello CNBC) is breathtaking and absurd.
But then again, anyone who has ever worked on Wall Street shouldn’t be suprised by this behavior one iota. It’s still sickening.
December 6th, 2008 at 11:29 am
Stuart,
The AIG price-tag is now $150B. It still boggles my mind. These guys played Russian-Roulette for years and just laughed at the implied risk, continued to rake in the money and DO nothing!!
Plus, it begs the question: “Is anyone, anywhere being held accountable for this disaster?” I haven’t heard of a single one, have you?
December 6th, 2008 at 11:30 am
ottovbvs @10:06 writes:
“Yes they have structural problems, but they are not fatal, as recently as three years ago they were making tons of money. Their immediate problem is very simple. They have lost over 40% of their volume.”
Yeah, and as of 3 years ago Countrywide and Indymac…among others…were also making tons of money. The only problem, of course, is the loss of loan volume…..
C’mon….why do you think the Big 3 were making tons of money a few years ago? Do you think it had anything to do with the 0% financing offered in conjunction with easy home equity extraction? ["You can buy an SUV with the loan proceeds and deduct the interest too!"]
The Big 3’s troubles are a variant of the same problem that pervades our entire economy: “Growth” has been predicated on excessive debt. Bring the debt down to a more reasonable level and the growth vanishes. Eliminate 0% financing, subprime car lending, subprime house lending and 125% Home Equity Lending…and the Big 3 would have been in cardiac arrest a long time ago.
December 6th, 2008 at 11:44 am
Dan Duncan says: The Big 3’s troubles are a variant of the same problem that pervades our entire economy: “Growth” has been predicated on excessive debt. Bring the debt down to a more reasonable level and the growth vanishes. Eliminate 0% financing, subprime car lending, subprime house lending and 125% Home Equity Lending…and the Big 3 would have been in cardiac arrest a long time ago.
In reference to above, all roads (the road to perdition in this case) lead back to Wall Street, if you know what I mean.
December 6th, 2008 at 12:14 pm
To Mannwich:
And to think there was a simpler time when “The Highway to Hell” meant Sex Drugs and Rock-n-Roll. At least that hangover was worth it?
“Yes, I have a blistering headache. I don’t know where I am right now; hell, I don’t even know her name. I burned through my cash—in fact, I’ve lost my wallet. I’m late for work and…uh oh…I’m going to have a hard time explaining all this to my soon to be ex–Wendy.
“Damn, what happened last night? I hardly remember a thing.”
Smile.
“But I have a hunch it was all woth it.”
But what do we have with this hangover?
A house with too much shit in it.
Reminds me of that line:
“I wish I didn’t know now, what I didn’t know then.”
Maybe youth isn’t wasted on the young after all.
December 6th, 2008 at 12:20 pm
Pelosi did the right thing here (unfortunately for the stock market bears).
And why not? Obama can just bring back the financing for the “fuel efficient vehicles” that Pelosi and Bush have temporarily taken away.
I’m wondering how much of the rally yesterday afternoon was due to inside knowledge of Pelosi’s change of heart. (Probably a lot).
December 6th, 2008 at 12:25 pm
An interesting chart from BigPicture in Dec. 2005 http://bigpicture.typepad.com/comments/2005/12/chart_of_the_we.html shows that without Mortgage Equity Withdrawal’s, our GDP growth would have been negative in 2001 and 2002, less than one quarter of one percent in 2003 and 2005, and one percent in 2004.
God Bless America(n’s)
December 6th, 2008 at 12:29 pm
Some have argued that there’s a “double standard” with regard to financial company bailouts versus auto industry bailouts.
I’m one who would like to see a lot less money going for bailouts to anyone. But setting that aside, one of the differences between autos and financials is the cost structure. I think that the autos are worth giving government money to if they significantly reduce their cost structure. Absent that, I would say just let them die. The cost structure isn’t the problem with the financial companies, and besides, financial companies do fire workers, and there is no “jobs bank”. It is absurd that the taxpayers should have to pay for the “jobs bank”.
So the two industries are not directly comparable.
December 6th, 2008 at 12:39 pm
“First, crack open the kneecap with your teeth, then gnaw on the tendon until it comes free, then chew until it becomes pliable – at that point salt it and turn it into bootstraps. After you have two bootstraps, take hold with both hands and pull yourself upright.” – F.R. Right, author, “How the CRA and Bleeding-Heart Liberals Ruined the Car Business, Too!”
December 6th, 2008 at 12:53 pm
@ottovbvs:
I sympathize with your views on the Detroit 3, but disagree with your conclusions. Yes, a collapse of the auto industry would be terrible for this country. However, Chapter 11 for one or two of GM, Chrysler, and Ford does NOT equate to a collapse. If government intervention is necessary, it should be to back the ‘counterparties’ of the Big 3, i.e. their suppliers, dealers, etc. Equity holders do not need protection, management does not need protection, and the unions do not need protection. Bailouts should penalize those responsible first and foremost, not taxpayers first.
To be consistent, I have been completely against the bailout of the financial system too… Money cannot be freely given out without severe penalties to shareholders, management, and unfortunately workers.
HCF
December 6th, 2008 at 1:01 pm
Right, the two industries are not comparable.
The auto industry is largely characterized by excess and incompetence.
The financial industry is largely characterized by excess and blatant, criminal FRAUD.
December 6th, 2008 at 1:03 pm
DL said:
> Some have argued that there’s a “double standard” with regard to financial company bailouts versus auto industry bailouts. … So the two industries are not directly comparable.
I was not arguing that the two industries were comparable at all. I was saying that there should be a certain level of inspection that needs to be cleared before the government hands out money to an industry.
Clearly, the financial industry enjoyed a far less scrutinizing level of inspection than the level given to the auto industry. Whether the level for the finance industry should be raised, or the level for the auto industry be lowered….. the level should be consistent.
December 6th, 2008 at 1:26 pm
@Bob the unemployed Says:
Money makes the world go round, Detroit car companies do no.
There are 10 in-source car companies doing just fine.
My job went to India in 2001, the IT industry was decimated, employment never recovered in the industry. today no one studies computer science/IT and nobody cares.
So how are textiles different from car companies in Detroit?
Why is sugar and agriculture protected?
December 6th, 2008 at 1:55 pm
Bob @ 1:03
Scrutiny is all well and good. But mere reference to “scrutiny” only begs the question as to the conditions that will be imposed for the granting of money.
I suspect that one of the things going one with these hearings is to send the message out to other corporate CEO’s (who are thinking of asking for bailouts) that getting a bailout won’ be easy and it won’t be automatic. That’s an important message to get out, since the U.S.A. cannot ultimately bail itself out by piling on more debt.
December 6th, 2008 at 3:06 pm
Gentlepersons, start your engines.
If this bailout is approved, a Corvette-powered Santa Rally is primed and ready to go IMO.
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID147612
1987 Santa Rally was good for 18%.
Food for thought.
A crazy year-end short squeeze could go much higher IMO.
December 6th, 2008 at 3:25 pm
PeterR @ 3:06
“A crazy year-end short squeeze could go much higher IMO”
Is the short interest all that high?
December 6th, 2008 at 3:43 pm
It seems to me, we’re going to see much more of this next year (and rightfully so, the pendulum has swung way to far in this country where the workers bear ALL of the risk, time for it to swing back)…..
http://www.boston.com/news/nation/articles/2008/12/06/laid_off_workers_occupy_factory_in_chicago/
December 6th, 2008 at 3:46 pm
@BG
Your point is a good one but I don’t think we should provide bailouts based on need but based on the consequences. For financials, no bailout would have portended the end of the fiat money system as we know it. For automotive companies, a bailout is already available: bankruptcy ch 11. If people are willing to fly airlines that are going through ch 11, people will buy cars from companies that are going through ch 11.
December 6th, 2008 at 4:06 pm
The general background noise and resistance to bailing out Detroit is due to the marketplace having previously determined that the Big Three are incompetent.
No amount of lipstick is going to change this. In fact, no matter the sums involved, the scalped view the money as going down a rat hole. If, as previously mentioned, the companies instead were Mercedes, BMW etc the money would be forthcoming with no hesitation because they are viewed as viable institutions. GM, Ford and Chrysler? You have to be kidding. It is for this reason that financial institutions were given the benefit of the doubt. Many had been 100 year old companies that had built solid reputations. GM, Ford and Chrysler have done the opposite over the last 40 years.
If we were a truly free market economy they would go out of business as the other 50 auto companies went out of business between 1910 and 1940. In their stead all the better run auto companies would build and open new factories to take advantage of the new marketplace, hiring 100’s of thousands. The free market would invent a better mouse trap in a few difficult years.
Now we no longer believe in such a market. We will pay dearly for this shortcoming.
December 6th, 2008 at 4:08 pm
I say the SUV and energy price issue is a red herring.
In my opinion the big three are where they are because they made crappy cars and the Japanese were able to sell higher quality cars for higher prices. They made poor technical decisions and they made poor economical decisions.
When was the last time GM actually made money consistently? 2005: -10.6B, 2006: -2B, 2007: -39B . SUVs were still selling like hot cakes in 2005. There were some accounting issues in 2000-2004 and a quick search can’t even get me the numbers as the results were restated.
I think these companies need to be shaken up big time. They need to find a new way of running their business that is more sustainable. I guess that applies to the entire economy. The more I think about this the more I realize there is just something fundamentally wrong with the current economical model of free markets and globalization somehow steered by central banks and credit. It just seems like one big pyramid scheme.
December 6th, 2008 at 5:18 pm
i see lots of ‘noise’ about letting the big 3 collapse. but those that expound that don’t offer another choice to solve today’s problems other than batten down the hatches. which will inevitably lead to guess what? more battening down of the hatches,until there is no more room for hatches at which point its to late to fix it. part of the problem of a bankruptcy of one of the big3 is that when they file, all payments are on hold until the court can decide they can pay it. and these are not simple companies. that could take months and there will be no ‘quick’ fix to that. so their parts suppliers will be among the first to get clobbered. so that means it will likely lead to their filing also. which which will impact the other 2. and guess what the transplants use the same suppliers (after all there aren’t many folks in those businesses), and thats from the transplants themselves. then the dealers will get it next, as they do a lot warranty work in their repair shops, and then there is the rebates for deals. this will probably lead to more bankruptcies from this group too (and possibly take out those that have more than one dealership so foreign brands could and would be impacted. then the health care payments won’t happen taking out hospitals, insurance companies , doctors and dentists with them. then banks will get hit with defaults on their loans, possibly leading more banks collapsing. and if they could get the most important part of surviving a bankruptcy, debtor in possession loans, they might could go chapter 11, but that requires long term commercial financing, some thing that is frozen at the moment, which leaves chapter 7. of course there is also the problem of getting some one to buy those cars from them, as i don’t recall if there has ever been a car company that has filed, and recovered. i think the last one that did was Studebaker, and i would guess you might know what happened to them. part of their issue is a lose of buyers, and the down draft offered by their captives. best ex is GMAC, they no longer are financing %50 of GM sales like they used to, instead they have maybe %6. and GMAC is having trouble because of a frozen long term commercial market frozen up by the banks etc. and they can’t securitise their loans to get money to make loans either. and the down draft hasn’t just hit the domestics, none of them is doing real well, Toyota is down %34, Honda is down %31, and Nissan is down %41.
December 7th, 2008 at 10:08 am
why all the crying about a measly 15billion ??
after allocating trillions to the financial sector ??
December 7th, 2008 at 11:33 am
It’s not the amount of JUST $15 billion of this bridge loan that bothers a lot of people. Its a simple facts B3 haven’t been able to compete and turn a profit. It’s also a fact the B3’s current market value is only worth 1/3 of that $34 bil they want. It’s also a fact that this will be not the last time we see them on capitol hill begging for money!
Stop turning this into a class warfare: blue collar vs white collar. Who says white collar worker wanted or approved this $700 bil wall street bailout bullshit? Many of mine office coworkers hates bailouts period. Bailouts DOESN’T allow bad business to fail and that will only contribute to a bigger problem into the near future.
The $15 bil or 34 bil or $700 bil would have been better spent in helping US citizens adapt/adjust to the credit problems, retrain and find jobs in different industries. I hate this comparison of Hoover done nothing to help prevent or relief 1st Great Depression in 1929 and that Roosevelt did in 1932… yet we as a nation didn’t fully recover until 1942 and got involved in WW2 where manufacturing jobs were created.
I hate this message we are teaching the next generation, “boy and girls, if you screwed up, you can go hide in big daddy’s pocket”. Just remember, we are not bailing out anyone here but burying ourselves deeper into national debt. You may not be paying price now but to pass that burden to the our kids would be the most selfish things we as a nation can possibly do.
December 7th, 2008 at 12:12 pm
“Stop turning this into a class warfare”
Capitalism Must have slaves – doesn’t it?
December 7th, 2008 at 12:47 pm
Nobody mentions *bankruptcy* and the *renegotiation of pension benefits* because they are sacrosanct to the communists in charge.
No matter what, Big Auto is going down on Obama’s watch. Its advocates will suffer more for this $15 billion *bailout* than others who had a hand in the several hundred billion dollar handout to Wall Street.
They will suffer more because the lumpen masses at least understand cars.
December 7th, 2008 at 2:54 pm
“HCF said”: My current investment thesis is that the powers that be will pursue the least logical, most expensive plans that involves maximum possible losses to taxpayers, a lot of money printing, zero upside, and no oversight. It’s a sad day for us all, indeed”
I agree. Without taking sides in an ideological way, I find this to be sound investment thinking. I am certainly a political person but I put that aside when I am making investment decisions.
They are going to do political stuff that may or may not be logical or make economic sense and we may not agree with any of it. But we have to play the ball as it is kicked to us, no matter where it is.
I agree completely with Stuart about fraud at AIG. They could be the first firm in history to be bailed out purely because of their CDS exposure and all go to jail at the same time.
December 7th, 2008 at 4:11 pm
Detroit is meaningless compared to Wall Street because the addiction to money is some orders of magnitude bigger compared to cars. Nobody is interested in either industry but the financial industry is by nature the champion of all free riders, just add that cars are a domestic problem and money an international confidence game, resulting in the money addiction making them invincible.
December 7th, 2008 at 6:49 pm
AJ Says:
December 7th, 2008 at 4:11 pm
Detroit is meaningless compared to Wall Street because the addiction to money is some orders of magnitude bigger compared to cars. Nobody is interested in either industry but the financial industry is by nature the champion of all free riders, just add that cars are a domestic problem and money an international confidence game, resulting in the money addiction making them invincible.
???????????????????????????????????????????????????????????????????????????????????
I can see what detroit produces… real goods, a vehicle, albeit, not exactly what the market wants,
but a product that I can actually use it to get from point A to Point B.
But to spend trillions on financial derivatives that gives absolutely no benefit to
an avg joe like me, is class warfare.
December 7th, 2008 at 8:36 pm
Why is everyone so worried about a bailout for Detroit’s Big 3??? With the dropping gas prices, the people in this country are just stupid enough to say, “See, I told you it wouldn’t last”, as they run out to their auto dealers to start buying huge, gas eating SUV’s again. The CEO’s will just sit back and grin as their profits start to roll in again. Well, maybe it won’t happen if the banks keep the requirements tough for the same stupid people who are looking for another way to bury themselves deeper in debt.