Will our 43rd president help the auto industry fend off the threat of bankruptcy? No. Over the weekend, General Motors Corp. (NYSE: GM) and Chrysler owner, Cerberus Capital, tried to get $10 billion of the $810 billion bank bailout bill to help finance their merger. Yesterday, Bush turned down the request. While Barack Obama supports help for the auto industry, John McCain does not. And since no reason was given for the turn down, we are free to draw our own conclusions for Bush's decision.
I think the case for not bailing out the auto industry has been severely weakened by the decision to bail out Wall Street. After all, if it's OK to give our money to the executives of big banks that got us into the financial crisis so they can pay themselves multi-million bonuses, there is no meaningful reason why everyone should not get a bailout.
I think that GM and Chrysler got themselves into their current mess by continuing to push gas guzzling, but highly profitable, minivans and SUVs rather than investing the profits in fuel efficient vehicles. And the industry has already gotten approval for $25 billion in loans to pay for fuel efficient vehicles that it should have built with profits earned during the boom years.
While it is a stretch to describe GM and Chrysler as financial services firms so they can qualify for some of that bank bailout money, it's not as far fetched as it would seem. In recent years, financial services accounted for 40% of all corporate profits. And as I posted in January 2006, a look at its financial statements made it clear that GM has turned itself into a bank that happened to sell cars: "for the first nine months of 2005, GM limited its $6 billion in vehicle operating losses due to the $2.2 billion it made financing those vehicles."
I would imagine that bankruptcy filings could be in the future of GM and Chrysler since they have probably exhausted all other forms of private financing. This could change, though, depending on tomorrow's election result. John McCain has made it clear that the $25 billion is enough of a government handout for the auto industry; however, Barack Obama wants government to do more to help the industry.
I think that the industry's best short-term hope is that plummeting gasoline prices bring people back to the showrooms for those popular gas guzzlers that fueled the auto industry profits earlier in the decade. Unfortunately, that would lead them to defer again the decision to build a new breed of electric-powered vehicle that does not ship hundreds of billions of dollars worth of our money, in the form of gasoline payments, to people who don't like us very much.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
Reader Comments (Page 1 of 2)
11-03-2008 @ 11:23AM
Jeff said...
This may not be the most intelligent approach, but it is hard to argue with.
The government should only afford this bailout if GM is mandated to produce autos for the American consumer and our future (imagine that?)
Republicans then wouldn't end about how we are communist.
11-03-2008 @ 11:46AM
Phil said...
WELL WE HAVE A SOCIALIZED WALL STREET NOW ! SO WHY NOT A SOCIALIZED AMERICAN AUTO COMPANIES LOL I FIND IT FUNNY THAT BUSH CAN GIVE A WELFARE BAILOUT FOR WALL STREET BUT NOT THE AMERICAN AUTO INDUSTRIES? BUT IN WALL STREET WE HAVE RICH BANKERS ! BUT THE AUTO INDUSTRIES HAVE REGULAR PEOPLE ? YOU KNOW JOE THE AUTO WORKER? NOT JOE THE LYING PLUMBER.
11-03-2008 @ 11:51AM
Keith Hawksley said...
Peter,
A Democrat? It shows with your biased comments. John McCain did NOT state that he is against support for the Automotive industry and in fact, said on October 31st that, "auto industry could not be allowed to fail". Although, he was cautious about his remarks on how to support the industry, he never said he does not.
I thought I could get away from the bias reporting in the the "newspapers" by reading this article, but I guess the Democratic venom has friends everywhere
11-03-2008 @ 12:09PM
bill said...
George Bushes intelligence is showing again. Time we elect a president who understands something about history. During world war 2 it was the automobile industry that saved this nation from extintion and it will be the industry that saves it again if its still here. Bush thinks with his ass not his head. Let all the banks fail but save the country. Bush needs to realize his legacy to America is shot with no chance to improve and now he wants to put the nail in the coffin himself.
11-03-2008 @ 12:27PM
Phil said...
Keith , why is it when a conservative republican's like Bush/ McCain has no problem spending 6.2 trillion $borrowed from communist China$ on two wars and call that freedom? But try to spend just half that borrowed money from the communist Chinese on America, and American people for jobs in this country ? the same republican conservative's call that communism / socialism ? we are a 2/3rds consumer economy ? we should be putting money in the form of good paying jobs in Americans hands so they can spend it ! That is whats going to get us out of this recession!
11-03-2008 @ 12:44PM
VG said...
Her we go again. We are living in a world/country that does not accept accountability. If we wanted real change then we would allow certain industries to fail/succeed based on how they are managed and how they serve the public. President Bush receives way to much credit for the demise of current society. Does everyone forget that the Democrats have been in control of the government the last two years? When all is said and done in ten years, President Bush will receive more praise for the good he intended for our country. We all need to wake up! Thank God, He is in control!!! We were formed as a Christian Nation, not a Muslim Nation.
11-03-2008 @ 12:52PM
Mary said...
Watch "Who killed the electric car" if you actually care about this subject, and then tell me if you think GM needs to be bailed out with your money.
These industries need to DIE or CHANGE, and they will DIE before they choose to CHANGE.
11-03-2008 @ 1:08PM
Brian said...
What killed the American auto industry were the unions. The unions continued to plunder the companies until there is nothing left of them. Now the unions want the US tax payer to pick up the tab so they can continue to plunder the U.S. treasury. It is reality time for the unions; you kill the company and it eliminates your jobs!
11-03-2008 @ 1:09PM
william lindblad said...
You can watch who killed the electric car all you want, but the one in question would have cost about 60g's to market. The tech was not there to make it practical. It still doesn't quite make it. Current will be about 30 and it has to get down to less than 20 to be practical. The closest out there is the Tesla, and that is six fig's, but it looks good and sure can move!
The entire auto industry is in trouble - world wide and if they all start to fail we are going to be in for one mean DEPRESSION.
11-03-2008 @ 1:11PM
Phil said...
VG , if that is the case why is it the taxpayers has given a welfare bailout of 700 billion to wall street? Thats socialism.And one more point , we have had a Republican controled house and sen for 12 yrs until jan 07 ! and 8 yrs of GW . And this is the best they can do ! So please be accurate about what you say ! like joe the lying plumber ! Another real American!So now cerberus a private equity firm of ultra rich wants American Chrysler taxpayers to subsidize their unemployment? only in America.
11-03-2008 @ 1:24PM
Phil said...
Brian , Unions make up only 7% of the U.S. workforce . Thats all unions put together, police ,fire,teachers, and so on !so your thoughts about unions is inaccurate.And in the U.S auto industries Ford,GM,and Chrysler are building three times as many cars and trucks with 2/3rds less UAW members they had 5 yrs ago! And its not the UAW that wants the taxpayer money ! Its Cerberus a group of ultra rich men ! NOT stockholders !So look at the real story and facts!
11-03-2008 @ 2:58PM
Jason said...
It's funny how no one faults the foriegn companies for pushing suvs and pickups, yet that's the reason they say GM, Ford and Chrysler failed. GM has 30 cars that get 30 MPG or better. Can Toyota, Honda, or Nissan say that. And as for suvs and trucks, GM's get the best mileage of all the companies. Unions are the knife in the back of the Big 3. You notice the foriegn companies don't have unions.
11-03-2008 @ 3:01PM
jpdr1100 said...
Lindblad, Tesla is about to file for bankruptcy. Not a good role model.
11-03-2008 @ 3:11PM
Thomas Paine said...
What has a federal funds (tax dollars) subsidy of any of our major manufacturers got to do with Socialism? Nothing. But...
if that subsidy is continuous, like for oil companies, then that is a problem. Still, not Socialism. Not even close. As long as the subsidy is..
for a temporary boost, or to kick-start an industry, it is not only the only (practical) way of doing it, it is also part of our Country's History.
What the hell does our schools teach anymore? Are all of these people so ignorant that they don't know how America developed...
our Railroad System; our Public Utility System - water, phone, electric; our Aviation Industry?? Let's back-up a bit: our Canal system; Steamship builders; Telegraph system.
etc etc etc. What the hell do you modern geekatoids think was the primary financing of these ventures? An IPO?
I swear to DOG, it must be a real PITA to be so dammed programmed that whenever someone simply mentions the word Socialism, you start drooling and barking.
Now Fascism - now there's a word you should be worried about. Like when the line between industry and government begins to fade.
NO... not when government finances industry, but rather when industry dictates government edicts. Think: no bid contracts (can you say Halliburton?)
11-03-2008 @ 3:55PM
LM said...
GM, Chrysler, Ford, and most other manufacturers have been borrowing (then "lending") money to buy their own product back under leasing programs, since nobody wanted to afford the ridiculous prices they wanted for automobiles. Now they're having to eat those vehicles when they are turned back in, and nobody wants to buy them now at anything like the "residual" prices built into the leases.
The largest single "expense" currently held over the heads of the American auto manufacturers is the gigantic contribution negotiated for the UAW healthcare fund, to create another enormous pool with which they can buy politicians.
BTW, I drive a 2005 Tahoe (which I'm still paying for) that gets 17.7 mpg, and the ONLY "repair" it's had in 113,000 miles is a replacement for the third brake light. When I found that it was a$285 part from a dealer, I got one on eBay for $125. Just one set of tires (still over half tread), original brake pads still have 90% of the original thickness, and bought the first set of wiper blades last month. Oil changes run about $30 every 2-3 months, and that's it! Total cost of operation (other than depreciation) is not much more than a "furriner"..........
11-03-2008 @ 4:20PM
OLDS said...
Well Mr. Bush, you just made up my mind.
Between your Supreme Court Justices more than likely going to over rule State Courts favoring the FDA and not helping the auto industry and bailing out Wall Street and all the rich CEO's. Hello President Obama !
11-03-2008 @ 5:45PM
ROGER said...
THE AUTO MARKET KILLED THE VALUE OF USED AUTOS WHO IN THERE RIGHT MIND WILL TRADE A CAR IN FOR LESS THAN HALVE OF WHAT THEY PAYED.WHEN YOU DRIVE THE NEW CAR OFF THE SHOWROOM FLOOR USE LOSE 50% OF THE VALUE RIGHT AWAY THEY HAVE KILLED THERE OWEN BUSINESS.
11-03-2008 @ 6:52PM
Sandy said...
If the good old USA had not killed off the electric car - Companies such as GM and Ford would be in an entirely different position (with demand outstripping supply) but instead they are stuck with outdated hugh petrol guzzlers that nobody wants anymore, all thanks to petrol companies lobby groups. Thanks George another brain wave.
11-04-2008 @ 1:06PM
brian said...
Buck Fush. Honestly, can this dimwit tie his own shoes? He would'nt know something positive for the country if it fell on his thick head. Investigate his crooked administration....NOW!
11-05-2008 @ 6:01AM
michael 64 said...
HOW SOON WE FORGET. ALMOST 8 YEARS WITHOUT ANOTHER ATTACK.BOOMING STOCK MARKET FOR 7 YEARS. HOUSING BOOM .LOW INTEREST RATES.VICTORY IN iRAQ.NO ABORTION OR GUN CONTROL SHOVED DOWN OUR THROATS.CHANGE IS COMING AND YOU WILL NOT LIKE IT.GEORGE BUSH DID A GOOD JOB WITH SOME TOUGH CARDS HANDED TO HIM.HIDE YOU WALLET AND YOUR GUNS THE DEMOCOMMIES ARE ON THE MARCH.WELFARE. FOOD STAMPS. MIDNIGHT BASKETBALL.AND A LOT OF GUILT DUMPED ON YOU FOR BEING A WHITE CHRISTIAN CONSERVATIVE.