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Automakers in need of more money

Anthony Randazzo
November 2, 2008, 8:06pm

A Bloomberg News report today said General Motors and Chrysler might ramp up merger talks this week as the companies wait to see what happens with the election. The two major automakers have already stated their desire to merge in some way, but GM says it will need the U.S. government to provide financial aid to help complete the deal. Bush Administration officials worked last week with GM and Chrysler on a plan to give General Motors up to $10 billion in financing to lock down the merger. The problem for GM is they do not have enough capital to finance Chrysler's debt on their own, and would face significant "restructuring and transition costs associated with a merger." Reuters reported last Tuesday that GM could ultimately get $10 billion, including $3 billion from the Treasury Department in exchange for equity in a merged GM-Chrysler. Reuters also reported the government could assume some of GM's pension obligations. David Cole, chairman of the Center for Automotive Research (CAR) in Ann Arbor, MI said last week: "The government recognizes that it needs to be involved, and they have two big pots of money to work with," referring to the $700 billion bailout and $25 billion auto loan program. But there's a problem with that logic. The $25 billion scheduled to be loaned out quickly is to cover costs the Big Three–soon to be the Big Two–will incur as they fight to achieve the new CAFE mileage standards by 2020. So the government won't use that. And the $700 billion has been earmarked for banks and, now, insurance companies. Fear not, however, for there are many ways to manipulate the system. GMAC, the finance firm of General Motors, has been actively pursuing becoming a bank holding company. This is what Morgan Stanley and Goldman Sachs did to qualify for bailout cash. Essentially, the move would make GMAC a bank with toxic holdings (Chrysler debt?) that the government could take an equity stake in. At the very least this is better than increasing the national debt further by shelling out another $10 billion on top of the trillions we have already redistributed. One of the biggest problems with federal bailouts and loans is they increase the national debt. Beyond the numerical value of the money the government spends, there is interest on the money they are borrowing to loan out. And even with some of that money being paid back with interest, or even with a positive "return" on the equity stakes, we are still delaying paying off our current debt which is racking up even more interest. Or in the case where the government can structure loan repayments to recoup any increased interest payments on delaying paying our national debt, it will be pulling that money out of the private sector, which could use it as capital to build the economy. And the less money we have going into growing the economy, the less taxes the government brings in. Anyway you slice it, the more loans and bailouts we offer, the worse off we'll be fiscally in the future. If GMAC-turns-banks plan goes through, then the $700 billion "recapitalization plan" will wind up adding to its list of assets:
  • traditional banks (BOA, Citi),
  • financial firms turned banks (Morgan Stanley, Goldman),
  • insurance firms (AIG and others), and
  • automakers (at least GM, potentially Ford in the future)
  • And all this at time when the government should be seeking to divest what it owns to the private sector as part of the answer to today's problems. The government is buying up just enough to have a "national interest" in these firms that will screw with their operational philosophy, but not enough for most to think the government is nationalizing them. Many of the arguments for bailing out automakers center on jobs and maintain the current economy. A report in The Detroit News today notes that auto manufacturers and related business employ 3.1 million Americans. Sean McAlinden, chief economist at CAR argues that every direct job at Ford or GM creates five more jobs at related suppliers, dealers, and businesses that support auto industry workers (such as grocery stores, bars, or home builders). "The cost benefit to the economy (of helping automakers) is better than any individual buyout offered on Wall Street," McAliden said, noting that one Wall Street job spins-off about 2.5 jobs and a high-tech job creates only another four. So that's the jobs argument, that no other industry in America impacts employment than automaker factories. And it's true that automakers employ a lot of people. In a city like Detroit, the cuts by the Big Three have had the most to do with the city's near 10% unemployment rate. That's 525,000people without jobs in a city that's not getting much better anytime soon. No wonder jobs are such a big deal in the eyes of those focused on the present. The lukewarm nature of the federal government's nationalization means that ideological arguments will not cut stone in an environment that is focused on the present and not the future. Just keep the crisis from getting any worse today. Spend whatever is necessary to save us from recession today. Lets make sure we all can have a house, car, the American Dream, etc. today. There is a systemic problem there in the American attitude that has such a low pain tolerance when it comes to money.

    Anthony Randazzo is Director of Economic Research


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