Sean Sez: How To Fix The Big Three
Filed under: Sean Sez
Sean Sez: A new segment on A-Train Finance written by none other than Mr. Sean Sullivan. Enjoy.
America is falling apart. The Dow has lost over 5000 points in the last year alone and venerable institutions that were perhaps taken for granted in better times are dissolving in front of us. Wall Street has taken the brunt of the blame and losses during this crisis and rightly so. Even if they were not properly regulated like they should have been by the government, as finance experts, they should have known better. However the problem with Wall Street is that much like a drug dealer it has gotten its customers (not only Americans but most of the western world) hooked on its product to the point where we don’t know how to live with out them. Government intervention was necessary although I am still not convinced the government is actually doing anything that is affecting the markets with the exception of saving AIG.
Detroit, unlike Wall Street, has been hurting for the last 10 years. The Big Three have slowly been losing market share to foreign rivals, foreign rivals who now make their cars in America unlike American car companies which are increasingly moving to Mexico. If GM goes under you have to buy a Camry instead of a Malibu, that isn’t so bad for the average American, right? Unfortunately it isn’t that simple. GM, Ford, and Chrysler are a huge part of the American GDP and there are simply not enough competitors to come in and take over for them. We as a country have put ourselves into a difficult spot here; on the one hand these companies really are poorly run cash burning machines that produce cars that for the most part are not profitable or not relevant. On the other hand they are responsible for millions of jobs and being able to produce vehicles domestically is a matter of national security and as proven in World War II can be the difference maker in a war.
So what is a fiscally conservative politician to do with such a problem? On the one hand we can let all 3 fail, which on a long term (we are talking twenty years here) scale would probably be the best thing to do, new companies would spring up to try and take the business the old car companies had and would be more efficient, the industry landscape would look a lot like it did in the early 20th century before the companies consolidated. However letting them fail would have an enormous impact on tax revenue, GDP, and a thousand other unforeseen consequences. The government let Lehman fail to save face after saving Bear Sterns and saying it was a one time thing. If they could take it back now, they probably would. The consequences of letting the largest American Manufacturer fail would be catastrophic in the short term. The clueless finance guys who say it won’t have a big effect are fooling themselves. The government must do something to preserve our auto companies.
I propose a plan that would save face for everybody involved, restore confidence in American manufacturing and long term, and make the government money. We must nationalize the auto companies. This nationalization would be much like a bankruptcy with the exception that the stock holders would get money (this needs to happen or people will look at as a bankruptcy which cannot happen or nobody will buy their cars). The government would buy Ford for 6 billion, GM for 5 Billion and Chrysler for much less (sorry Steve Feinberg) as it is privately owned and ultimately in my plan will no longer exist.
The government would now have complete ownership of all three companies. The first thing to do would be to wind down Chrysler, the marketplace would simply be better off with only two players right now and Chrysler is by far the company of least consequence. The profitable Chrysler brands would be divvied up between Ford and GM and the rest scuttled. Step two would be the government assuming all pensions, and healthcare costs for retires. These would now be on government balance sheets and would be paid out the way a standard government employee pension would be paid out, and yes they would have to be reduced as the people receiving those pensions are partly to blame for the current mess the industry is in.
A significant change would have to be made to the car companies to make this worthwhile and as the government could direct both GM and Ford’s board on their actions. The government would be able to force the companies to produce at least half of the cars they make as clean diesel, plug in hybrid, and natural gas. This would greatly reduce our dependence on foreign oil, which would be worth the cost in and of itself so far. The companies would also have be heavily restructured to be leaner and without a burden of future retirees benefits.
With the employee restructuring, newer cleaner products and without the burden of union contracts and retiree benefits the now big two would be extremely profitable companies. The government would now be able to hold an IPO (hopefully by 2013) for the two companies to recoup the costs it incurred from taking on the retiree benefits and company operations.
Would this work? Probably not as smoothly as is written here, the government usually finds a way to do things worse than private companies. However just giving the auto companies a loan today is not the answer; their business model is broken and cannot be fixed with a loan. This plan goes against my political beliefs, but I see it as the only way to save the auto companies, which unfortunately is 100% necessary.
November 17th, 2008 at 5:31 pm
Very well thought out and different idea. They need to be unwound and perhaps nationalizing them would be the best way. It would be slower than bankruptcy to alleviate some of the shocks and would not be the Big 3 getting money only to have the same problems again 5 yrs later type of scenario.
November 18th, 2008 at 11:21 am
This seems like a pretty good plan. We definitely need something though. I can’t believe they haven’t done more already.
November 22nd, 2008 at 5:07 pm
Good Post! It’s a different idea to say the least. However, when the federal government has 100% ownership of such a huge company that is never a good thing.
I know everyone wants to talk about the overhead cost of all these companies but, let’s face it they has just made some bad cars.
November 22nd, 2008 at 6:33 pm
@ Rick Vaughn
The quality of the cars has been on par or better than Asian and Euro cars for the last 5 years, do a little research on where cost are and you will see that it is simply health care and pension costs that are bleeding these companies dry. GM and Ford still have 8 digit yearly sales figures so I don’t think it is quality issues causing a problem with the number of cars they sell.
November 24th, 2008 at 9:26 pm
Given that the market cap of GM and Ford together is less than $5Billion, by loaning the Big3 $25Billion, the Government is not only buying the automakers, but we taxpayers are over-paying by about 200%!
However, we need to save those jobs, sadly enough. I don’t think Michigan has enough coffee shop openings for 500,000 more unemployed people!
Now, when we do pay $25Billion for companies only worth $10B, what we should do is cut off imported cars altogether! Why should we compete with our own Government’s car companies (which we overpaid 200% for!)?
When I have been in France for business, I am always picked up by the local Salespeople in their French cars. They apologize immediately at the airport, but they also tell me if they don’t buy French, workers don’t work and no one buys our computer products. The bubble-up (vs. tickle down) theory at work. We need to think that way too!
I have had my share of BMWs and Mercedes and have decided that a good old Chrysler is the best thing to drive in Michigan. I care about the factory worker who put my mini-van together - if he is out of work, then we will all be out of work eventually (or we’ll have to move to Texas or Boston or anywhere else but here!).
If they give Citibank $20B at the drop of the hat, then lets throw money at the Big3 too. Let’s stick our kids and grandkids with trillions in debt so we can retire fat and comfortable. We should all be ashamed…
November 25th, 2008 at 9:20 am
@ reh
to address your points
-Given that the market cap of GM and Ford together is less than $5Billion, by loaning the Big3 $25Billion, the Government is not only buying the automakers, but we taxpayers are over-paying by about 200%!
yes they would be doing that, but then the government would also be on the line for a lot more than 25 billion as they would have to pay all the pensions, I wrote an article about this, the reason I don’t think it is going to happen is that nobody in congress has the balls to take this kind of risk on any more, especially when they can make themselves look so good by stressing out the automakers for few weeks before they throw more money at the problem.
-what we should do is cut off imported cars altogether! Why should we compete with our own Government’s car companies (which we overpaid 200% for!)?
For the last 15 years or so one of the primary pieces of both Bush and Clinton’s presidencies has been opening up free trade, in fact Bush just got back from South America where he was trying to convince countries not to put up trade barriers as they will be harmful in the long run. Contrary to a lot of opinions America is a major exporter and if we put up trade barriers then so would everybody else which would completely destroy the world economy as we know it. Also to address those French cars, they are terrible quality because they don’t have to compete, the only reason American cars are now good quality is that they have to compete with imports.
-If they give Citibank $20B at the drop of the hat, then lets throw money at the Big3 too. Let’s stick our kids and grandkids with trillions in debt so we can retire fat and comfortable. We should all be ashamed…
Actually they have given Citi $45 billion so far and have guaranteed over 300 billion more to buy bad assets. If this economic storm keeps up and trillions more are spent by the government perhaps the best thing to do would be to shop for a new country to move your kids to…
November 30th, 2008 at 8:45 am
Sadly, we have given thought to moving to Canada for our children’s future. Their great grandfather fought in WW1 for Canada, and they can claim Canadian Citizenship before the age of 21. Canada isn’t a perfect place, but they are an exporter of natural gas and oil (we get more energy from Canada than OPEC!).
Ironically, my family emigrated from England in 1907 for ecomonic reasons (England was the great power in 1907 and the economy was facing the same things we are today!). My family had to leave England and they choose Canada to land first (we still have many relatives in Toronto). There was simply not a future for them in England.
By the time my kids are your age, the US will be in $30Trillion in debt (at least, not counting social security). How is that going to be paid back?
Sean doesn’t sound like a Native American Indian name to me, so when did your family leave England, Ireland, Germany, Italy or where ever? I bet it was for ecomonic reasons!
December 5th, 2008 at 4:12 pm
I am a euro mutt, German, French, but mostly Irish, part of my family dates itself back to pre-America, when Detroit was a fur trading outpost, but most of my family came over around the same time yours did, from Ireland. They settled in New York City which my dad moved from in his 20s. I have to say that my relatives went through a lot to to have their decendents live the good life in America, it is a shame what has happened here. My aunt claims a duel citizenship with Ireland, if you guys can get duel with Canada it would be a great insurance policy to have just in case.
December 6th, 2008 at 8:57 am
The Economic problems will worsen and the bailout may not work as people are just not sure about tomorrow, let alone the coming few years.
December 9th, 2008 at 5:08 pm
http://online.wsj.com/article/SB122875608562688401.html
check it out, the government may be following a very watered down version of my plan. A little half assed if you ask me without the government taking on retire costs they won’t make as much money back but still it is a start.