Auto Loan Makes Too Few Dollars Even Less Sense

December 4, 2008, 5:40 a.m., and . . .

Dec. 5 Updates:
Louis Uchitelle, "U.S. Loses 533,000 Jobs in November," New York Times, December 5, 2008 (in addition to layoffs, extensive depressing details about depression).
David M. Herszenhorn and Bill Vlasic, "Auto Executives Still Find Skeptics," New York Times, December 5, 2008 (report of Dec. 4 Senate hearing).
David Stout, "Frank Sees ‘Disaster’ if Auto Industry Fails," New York Times, December 5, 2008 (report of Dec. 5 House hearing).

What Are Auto Execs Smoking?
Plan Smoke and Mirrors Without Detailed Projections
From one hour ago see, James Rowley and Linda Sandler, "GM, Chrysler May Accept Bankruptcy to Receive Bailout, Bloomberg, December 4, 2008 -- excerpted below, at the end of this blog entry. And for a creative alternative variant of Chapter 11, see J. Ronald Trost, "Another View: How to Save the U.S. Auto Industry," New York Times Blogs, November 26, 2008, and accompanying comments.

And here's an intriguing suggestion from Michigan's Michael Moore:

"You could buy ALL the common shares of stock in General Motors for less than $3 billion. Why should we give GM $18 billion or $25 billion or anything? Take the money and buy the company! (You're going to demand collateral anyway if you give them the 'loan,' and because we know they will default on that loan, you're going to own the company in the end as it is. So why wait? Just buy them out now.)" Michael Moore, "Saving the Big 3 for You and Me," December 3, 2008.

Advocates for an auto industry bailout have been asking all who question the wisdom of such a move, "How can you turn your back on the Big Three? Don't you realize how important they are to the American economy? Think of the lost jobs. Why aren't you willing to save this industry?"

Answers: I don't. I do. I have. I am.

What I don't think makes sense is a "bridge-loan to nowhere." I don't think it will save the industry, provide employment, put cars back on dealers' lots, or generate orders for suppliers.

The Big Three have already laid off 166,000 workers during the past five years. GM is proposing to lay off an additional 30,000 employees. The UAW is willing to abandon the program that supports those already laid off, and the company's contributions to funding health benefits for retirees. [Source: Bill Vlasic and Nick Bunkley, "U.A.W. Makes Concessions in Bid to Help Automakers," New York Times, December 3, 2008; and note, with regard to the widely repeated assertion in the media that GM's market disadvantage is that it must pay workers $74 an hour compared with Toyota's $45 an hour: "Base wages between the Big Three and the foreign companies are roughly comparable, . . . $28 an hour at the Big Three compared to about $25 an hour at Toyota’s plant in Georgetown, Ky."); Steven Mufson, "As Hearings Resume, UAW Offers Concessions; Urging an Auto Bailout, Union Retreats on Terms Of Health Care, Jobs Bank," Washington Post, December 4, 2008.]

These layoffs haven't, and won't, put GM in the black, but it will minimally cut some costs. ("[UAW President Ron] Gettelfinger asserted that labor made up only 10 percent of the cost of a car. 'To be honest with you right now, if a UAW membership went into these facilities and worked for nothing, according to our research department, it would not help the companies that much,' he said." From Mufson story, linked immediately above.)

Not only will layoffs not help, they will only make the industry's problems worse. Auto sales are down about 40%! ("Vehicle sales [for November] in the United States sank . . . General Motors, down 41.3 percent, Ford Motor, down 30.5 percent, and Chrysler, down 47.1 percent . . .." Nick Bunkley, "Another Month of Miserable Auto Sales," New York Times, December 2, 2008.)

That's the problem. And why is that? It's at least related to the fact that 1.2 million Americans have lost their jobs this year, with another 250,000 (or more) this past month. Half of the Big Three's workforce live in Michigan, where unemployment is at 9.3% and 20% of the entire population is now dependent on food stamps and other social programs for survival.

Tell me, how is adding to the number of unemployed going to increase auto sales?

And without increasing auto sales how are these "bridge loans to nowhere" going to "save the auto industry" -- including GM's 6000-plus auto dealers, and the network of suppliers throughout the country?

If the proposed bailout would double sales, result in the rehiring of all laid off auto, dealer and supplier workers, and enable the three companies to pay back the loans in six months, that would be one thing. But it won't. GM is headed for bankruptcy; it claims to need $4 billion sometime in the next two weeks to stay in business -- and another $4 billion next month. Prospects for an immediate economic turnaround are non-existent. Even the companies aren't talking about paying back the "loans" until 2012 -- and those projections are just pulled out of their tailpipes.

There's an inherent inconsistency in the bailout advocates' argument, one of those "you can't have it both ways" problems. On the one hand they say, "Our problem is not our fault, or at least not entirely our fault, because it's been brought on by the current recession and resulting loss of sales." The conflict is that if the problem is not of their making the solution can't be either.

If they had a backlog of orders for a new model, high gas mileage car that their dealers were demanding, but that they couldn't begin building without a genuine "bridge-loan" they would be able to pay back in February, that would be one thing. A loan would solve their problem, enable the factories to start turning out cars, keep the dealers in business, the UAW workers employed, and return the corporations to profitability. But to the extent the problem lies in the downward spiraling economy and lack of consumer demand, it is a problem beyond their ability to control, and one no amount of loans will solve.

Think about it. If the economic history and prospects for a hemorrhaging business in your hometown were, while involving proportionally smaller losses, otherwise comparable to those of GM is there any local banker who would loan that business massive amounts of money one month before it was going into bankruptcy? I doubt it. So why should the taxpayers?

(Later this day [December 4] Senator Shelby made a similar observation: "The senior Republican on the panel, Senator Richard Shelby of Alabama, said the automakers’ plans aren’t 'serious' and have 'few concrete details.' 'If you made this presentation to get a bank loan I suspect that any sensible banker would summarily reject your request,' Shelby said." John Hughes, "U.S. Auto Chiefs Appeal to Congress for Emergency Aid (Update5)," Bloomberg, December 4, 2008, 13:43.)

What's Wrong With This Picture?

Of course, from my perspective, focusing on corporations rather than consumers is walking into our economic recovery efforts backwards, a "trickle-down" rather than a "trickle-up" strategy that hasn't worked so far and isn't likely to in the future.

Roughly 70% of our economy is the result of consumer expenditures. The best way to revive any given industry, including autos -- or even the entire economy -- is to get more money into the hands of people who buy stuff rather than the CEOs of corporations that are, unsuccessfully, trying to sell stuff.

There are lots of possibilities including, but not limited to, the following:

(1) increase the number of persons covered, the length of the coverage, and the amount received for unemployment compensation, food stamps, and comparable social programs;

(2) fund workers to rebuild our nation's infrastructure, such as roads, bridges, schools and parks, preferably with government-run WPA type projects, or if not that then by funding comparable states' projects;

(3) what better time to bring ourselves up to a world-class standard of health care with a universal, single payer system, the savings for consumers and corporations from which would be available for consumers to spend on other things, and for businesses to invest (and to better compete globally with companies in other countries that do have public health care programs);

(4) provide lower interest rates, different (lengthier) mortgage terms, and reassessment of the value of homes to reduce the number of foreclosures and those who were formerly homeowners becoming homeless -- Washington's latest idea is often misrepresented as providing this kind of relief when in fact, "cheap mortgages would be available only for people buying houses, not the roughly 50 million families that already have mortgages and would want to refinance at a lower rate. As a result, the plan offers no direct relief to the millions of people who face foreclosure . . .." Edmund L. Andrews, "Washington's New Tack: Helping Homeowners," New York Times, December 4, 2008; Renae Merle, "Mortgage Distress Reaches Record Highs; Delinquencies, Foreclosures Rise Steadily," Washington Post, December 5, 2008, 12:47 p.m. ("one in 10 home mortgages is now in some form of distress");

(5) increase the nation's reserve of brain power and global competitiveness by providing additional financial support for those (of all ages) capable of benefiting from a college education or job retraining program who are currently unable to find work and for whom the next two or three years could best be spent in a classroom enhancing their, and our nation's, skills.

Now here are some additional recent stories documenting these assertions of mine:

"On the same day that the industry reported its worst sales month in 26 years, the three Detroit automakers delivered new business plans to lawmakers in the hope of winning support for $34 billion in federal loans . . . substantially higher than the $25 billion that the three companies had initially hoped to get from Congress two weeks ago. . . .

But G.M. . . . said Tuesday [December 2] that it was in such dire straits that it would deeply cut jobs . . . as part of its plea to get $12 billion in federal loans and an additional $6 billion line of credit. . . .

G.M.’s president, Frederick A. Henderson, said the company would be insolvent if it did not receive federal assistance, including an infusion of $4 billion in cash before the end of the year. . . .

Still, the company said it would have been able to survive on its own if not for the continued deterioration of the United States vehicle market, because of the weakening economy and tight credit, which has made it difficult for consumers who do wander into dealerships to get loans.

“The company would not require government assistance were it not for the drastic collapse of the U.S. economy which has devastated the company’s current revenues and liquidity,” G.M. said. . . .

G.M. also said it planned to reduce the number of salaried and hourly workers in the United States workers from 96,000 currently, to 65,000 to 75,000 by 2012. It will also reduce its North American factories from 47 to 36, and its dealers from 6,450 and 4,700.

Bill Vlasic and David M. Herszenhorn, "Pursuing U.S. Aid, G.M. Accepts Need for Drastic Cuts," New York Times, December 2, 2008.

"The [Michigan] unemployment rate is 9.3 percent . . .. The total of Michigan residents who receive some form of public assistance, like food stamps or home heating credits, is now 1.82 million, or close to 20 percent of the population, a record for the state." Monica Davey and Susan Saulny, "Even in Michigan, Not Everyone Wants a Lifeline," New York Times, December 2, 2008.

The Fed's "beige book," a compilation of anecdotal reports from businesses across the nation published roughly every six weeks, found that "overall economic activity weakened across all Federal Reserve districts since the last report."

Consumer spending weakened almost across all sectors of the economy, especially for vehicles. . . . Services business "generally contracted in most districts."

Part of the problem was that lenders have continued to restrict credit. "Credit standards rose across the nation," the beige book said, "with several districts noting increases in loan delinquencies and defaults, especially in the real estate sector." . . .

[P]rivate businesses shed 250,000 jobs in November on a seasonally adjusted basis. It was the biggest drop in seven years and "offers evidence that the labor market continues to weaken," ADP Employer Services said in its monthly payroll survey [Automatic Data Processing, "National Employment Report"].

Based on data from nearly 400,000 companies, the report showed employment declines across the board as large, medium-size and small companies shed jobs, and employment contracted in all sectors of the economy. . . .

The numbers from the ADP report are "terrible," wrote Ian Shepherdson, chief U.S. economist with the High Frequency Economics consulting firm, in an analysis of the employment numbers.

With payrolls deteriorating in both the manufacturing and service sectors, "there is nowhere to hide," he said.

A separate study by the Institute for Supply Management showed that economic activity in the service sector fell to the lowest level since its index for the sector was first reported more than a decade ago. . . .

Neil Irwin and Howard Schneider, "Economic Weakness Pervasive, Fed Says; All U.S. Regions, Most Industries Hit by Recession," Washington Post, December 4, 2008, p. D1.

The economic decline took a turn for the worse after the market shocks of October. In November, the problems only deepened.

Cash-poor Americans, fearful for their jobs and victims of a steep decline in stock prices, pulled back on spending. Businesses laid off workers, cut wages and reduced hours. Real estate developers and owners suffered.

That bleak portrait — effectively a confirmation of the conventional wisdom of the last few weeks — was released on Wednesday afternoon [December 3] by the Federal Reserve in the latest edition of its beige book . . ..

At the root of the problems is a significant slowdown in spending, as Americans retreat from large-scale purchases and try to save money amid the worst downturn in a generation. Retail sales fell in most major cities, according to the beige book, while sales of automobiles “deteriorated,” particularly sales of more expensive cars like sport utility vehicles. . . .

Manufacturing activity slowed last month in all 12 districts included in the beige book. Both residential and commercial real estate companies reported problems. Vacancy rates were higher . . ..

Lending by banks slowed as well . . ..

Michael M. Grynbaum, "Fed Report Shows Downturn After October Shocks," New York Times, December 3, 2008.

And here is this morning's [December 4] Bloomberg story about a possible prepak bankruptcy:

General Motors Corp. and Chrysler LLC executives are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multibillion-dollar government bailout, said a person familiar with their internal discussions. . . .

Staff for three members of Congress have asked restructuring experts if a pre-arranged bankruptcy -- negotiated with workers, creditors and lenders -- could be used to reorganize the industry without liquidation, a person familiar with that matter said. . . .

General Motors shares traded in Germany fell 1.4 percent to the equivalent of $4.83 as of 11:03 a.m. The stock has plunged 80 percent this year in New York Stock Exchange composite trading. . . .

GM and Chrysler told Congress Dec. 2 that they need $11 billion in government loans just to survive the year as the auto industry slump deepens. To get the money, the companies agreed to slash payrolls, shed brands and shrink dealerships. Bankruptcy was not part of their plans.

GM, Chrysler and Ford Motor Co. asked for a $34 billion bailout package, about a third larger than the $25 billion . . ..

The Democrats’ goal of preserving a U.S. auto industry is not doable without a bankruptcy, said Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles.

Workout Requirement

“A workout requires everybody’s agreement,” he said. “. . . Bankruptcy is the only thing that can work because GM and the government need the ability to force people to go along with the plan. Paying everyone in full is prohibitively expensive.”

About 77 percent of billion-dollar companies survive bankruptcy, according to LoPucki’s database, while the others sell their business. . . .

The government could guarantee the warranties given to consumers on cars bought from a bankrupt automaker, said Mark Bane, a bankruptcy lawyer with Ropes & Gray in New York. Government money could also “ensure that parts suppliers will be paid,” he said.

Less Money

Less government money would be needed in a prepackaged bankruptcy, which might last only two months, compared with two years or more for a regular bankruptcy, according to Bane. In a prepack restructuring, an automaker would go into court after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed.

Government aid might be needed only for the period when the company was gaining consent from its constituencies -- which might take as long as six to 12 months, Bane said. . . .

Any assistance must be “based on realistic assessments of what the auto market is going to be and a realistic plan for how we’re going to make these companies viable over the long term,” [President-elect] Obama said yesterday [December 3]. . . .

James Rowley and Linda Sandler, "GM, Chrysler May Accept Bankruptcy to Receive Bailout, Bloomberg, December 4, 2008.

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