Wednesday, November 19, 2008

Comments: Auto Bailout

Maybe I should have waited a few days before buying what I bought late yesterday. LATE DAY TRADES: GCI, CBL, FR, SLG, NYT, NWSA  C'est la Vie.  SL Green is taking another hit this morning.  I recognize that all of those buys were controversial and I will try not to get spooked, giving each of them a year to work out their problems.  S & P did recently reiterate its sell recommendation on the New York Times,   BusinessWeekwhich is easily the most contrarian buy of yesterday's controversial lot.

I watched a few minutes of the testimony of the auto execs and the President of the UAW yesterday.  I happened to see Bob Corker, the junior Republican Senator from Tennessee who is starting to impress me, ask some questions to the head of the UAW (I may vote for Corker when he runs again, having previously voted for the Democrat Harold Ford-yes I did vote for Obama but I also voted for Lamar Alexander) .  The line of questioning had to do with the union contracts with the big three that made them uncompetitive with the Japanese companies who make cars in the U.S.  Corker asked the UAW's Gettelfinger how long the car companies had to pay a worker who was laid off, over and above unemployment compensation, in the laughably inappropriately named "job bank".  The UAW President did not know.  He said that he would have to consult the union contracts, and the look on Corker's face was just priceless, stunned disbelief.  The President's of the auto companies were almost stumped by any detail of their operations, but Nardelli of Chrysler chimed in that the pay came to about 95% of their regular compensation.  The Democrats appear to believe that limiting compensation of the top executives as a condition to another 25 billion, on top of the 25 billion already granted, is all the tough love that the auto companies and the UAW need.  I wonder if the swing voters in the last election will see it that way.

Robert Samuelson wrote in Newsweek noted that GM's labor costs totaled $71 in 2007 compared to Toyota's $47.Samuelson: How to Bail Out General Motors | Newsweek Voices - Robert J. Samuelson | 
Samuelson pointed out that health benefits for retirees contributed 35 billion to GM's cash drain since 2005.  The UAW will not make any concessions in return for the bailout.  Instead, as Samuelson points outs, Gettelfinger said the bailout is needed "so the auto companies can meet their health-care obligations".  Auto Workers Union Rules Out Concessions To Help Detroit BailoutThe car makers have way too much debt as it is and adding more unsecured government loans would certainly add to the already excessively debt-ladened balance sheets, raising the spectre that the government and the existing creditors will both find themselves in the same sinking boat later.  

GM and Toyota have about the same sales in the U.S. now.If Toyota Passes GM In U.S. Sales--Does It Mean Anything? - Behind the Wheel - Phil Lebeau -  But Toyota does it with about 1/3 rd of the dealerships and far less brands. GM has 6,468 dealers in the U.S. and recently delayed incentive payments to them for 2 weeks to preserve cash. U.S.  Toyota has fewer than 2000 dealers. The American companies are just way too bloated for long term survival in a market which already has to many companies, too much capacity, and too many nimble competitors to the big three who are not disadvantaged with their legacy costs and union contracts that would be unduly out of line even for the most successful and profitable companies.   The deal being sought smacks of union welfare.  It would be hard to argue that the entire American auto industry is run without much regard for shareholders or bondholders, but solely to support the demands and needs of the UAW. 

If the U.S. wants to loan money to the auto companies, the best way to it is in bankruptcy court, where a loan made as a debtor in possession has priority over all other claims.  GM's President scoffed at the idea of a pre-packaged bankruptcy saying it would cause consumers to turn away from buying a GM vehicle due to concerns about the warranty coverage. But if no one makes concessions and there is no plan for long term survival, then the only other option would be to use TARP funds to help GMAC and Ford Motor Credit securitized their auto loans and make them more available to buyers at low rates.  GMAC recently limited car loans to consumers with FICO scores over 700.  Autoblog 
Paulson said the other day that credit for student and auto loans had frozen up.  So, maybe the best way to salvage the situation in the short term is to free up credit for consumers to buy new cars. 



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