Tuesday, November 18, 2008

Thoughts on the Detroit bailout (3)

GM and Ford are together worth all of $5.5 billion, according to the stock market today. What sense does it make to pour $25 billion into keeping them alive a little while longer? Now their execs are trying to scare us into helping, arguing that a collapse would be "catastrophic" for the economy. But as far as the market is concerned, it's already happened. The best solution would be to have some other auto company come in and buy their assets out of bankruptcy, then start up the plants with lower wages. That would make them instantly competitive.


CDLIC said...


Mark Gerber said...

Your solution sure sounds appealing; however, I am wondering if this might cost the US taxpayer more since a buyer of the assets in bankruptcy wouldn't acquire all the pension and healthcare liabilities. Many of those liabilities would defacto transfer to the federal government (pension guarantee and medicare/medicaid) and state governments. Even those liabiities not born by the taxpayer may end up being born indirectly by society if some people affected start to fall through the cracks into poverty etc. I believe these companies have about four times more retired employees than active employees! Up to now, they have at least be bearing the bulk of these retirement obligations.

CDLIC said...

I just watched a few minutes of the Congressional hearings regarding the CEOs from the auto industry begging for Congress to let U.S. taxpayers bail them out of the financial mess in which they now find themselves. The Congressmen have been asking if the industry will be able to survive and pay back the proposed billions to be lent. The executives have responded by stating they believe the U.S. taxpayer will be repaid and the automakers will pull out of this mess but the U.S. taxpayers must take a risk and believe in them.

Here is my question for each CEO: how about you put up X% of your personal assets as a good faith gesture, and if the company goes under or is unable to repay the loan to the U.S. taxpayer in X time, you forfeit your assets? My guess is none will go at risk; nevertheless, each is willing to put the U.S. taxpayer at risk.

This too is exactly the problem with politicians: they spend U.S. taxpayers money but if the money goes to waste -- as most often happens -- politicians are NEVER at financial risk for the loss -- no responsibility; no market mechanism to flush out incompetence. This is the cause of most of the problems faced by countries: no risk on the part of those controlling the destiny of a country, state, city, town, etc.

Does anyone have a solution to this problem – those in power given authority to make decisions but no responsibility for decisions resulting in loss?

Scott Grannis said...

cdlic: How about tying politicians'
paychecks to growth in the economy and/or to returns in the stock market?

Scott Grannis said...

mark: re the pension and healthcare liabilities. If memory serves, the companies do have assets set aside for those liabilities but they probably don't cover the whole tab. So the government would end up having to absorb those liabilities along with the assets. But that is going to happen no matter what, from the looks of things.

Jason said...

The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.

GM bailout nonsense