Wednesday, November 19, 2008

Automaker Bailout: UPDATE - Bailout Semantics

I again have to start with, This topic really makes me conflicted.

If you are interested, please listen to these two podcasts:

Both of these programs really made me think hard about the consequences of both acting, and not acting with reguard to the automotive industry. 

Here is what Mitt Romney has to say, the best argument I've seen against a "bailout". 

I have been thinking about what the term "bailout" means. This is what Wikipedia has to say about the word (and more). An excerpt,
"bailout, in economics and finance, is an injection of liquidity given to a bankrupt or nearly bankrupt entity, such as a corporation or a bank, in order for it to meet its short-term obligations. Often bailouts are by governments, or by consortia of investors who demand control over the entity as the price for injecting funds.
The bailing out of a corporation by government is controversial because bankruptcy can be seen as being caused by the failure to satisfy consumer demand; the bailing out is thus an instance of government intervention on the market overruling the will of consumers. The bailout also chooses winners and losers. For example in the most recent bailout by the US government some companies were allowed to fail while other companies were bailed out."

Ok, so, my question is, what's the difference between that, and a loan? From what I've heard about the nature of these "cash injections" they are more like loans. We, the people, the investors into these companies (AIG, Bear-Stearns, et al) will be paid out first, and other people will get paid out differently depending on the way the terms are structured, but from what I've heard this is more of an investment into these different companies and markets. The US gov't did this with Crystler back in the early 80's when Lee Iaococca steered them back on course and we the people turned a profit on that loan. I ask again, what is the difference between a loan and a bailout? Again I turn to Wikipedia- Loan:

"loan is a type of debt. This article focuses exclusively on monetary loans, although, in practice, any material object might be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.
Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money."

Everything before the last break was written last night/early this morning. I love it that my girlfriend beat me to the punch on that article from Mitt, too funny.

I was talking to Jeff about this difference between a bailout and a loan, and he had a good point; a loan becomes a bailout when the terms of that loan are so much better than the company could dream of getting (at the time). Basically, the government is giving these companies such good terms on these loans that compared to what normal lenders would be requiring (ie more money down and worse interest rates), the government is effectively giving the money away, hence, bailout.

However, this doesn't completely capture the problem in my opinion. We get two birds with one stone by helping out the auto industry, a potentially profitable investment for our tax dollars (sure the return sucks, but it's not a total loss), and the tax revenue generated by keeping the car companies alive (not to mention less cost for unemployment, etc.)- assuming that history is an indicator and we get our money back.

Some of this was taken from a response to an email comment I received last night- I hope to post bits and pieces of the comment as I found it to be very insightful and heartfelt.

The bad side I see is structural. Obviously the big dogs at the top are less than functioning members of the company. I'm not talking about all the voices of dissidence against poor corporate policy decisions; ie taking a personal hand in systematically destroying the public transit systems, keeping CAFE standards low, or lobbying against the Koyoto protocol. I know that there are young intelligent people who work at these companies and who are trying like bastards to improve the company from within. That's who I'm not talking about.

Who I am talking about are the leeches who run this economy. Seriously, business people, up in the front office, wheeling and dealing and sucking asshole to keep their job security. What do they really do? Keep the books? Make sure money moves from A to B and back again? When did they design a new product? When did they turn a gear or wrench? Ok yes, I'm being extreme here, but they are seriously the fuckers that I'm pissed off about. And you KNOW that if we pump 50 billion into the automotive coffers, those bastards are still going to walk away with tens of millions for their salary, while good people lose their job and get nothing.

Also you should know that even if they go bankrupt, it will be a restructuring bankruptcy. There is no way that they will just disappear. The airlines almost all went bankrupt back in '02 and they are looking like they'll be turning a profit this year, even with this insanity. Finally, let me say this. I don't want the US automotive industry to disappear. I guess I am just asking the question, what does it mean to be a "US" company anymore? For GM to become a viable business almost everyone that I have heard speak on the subject says that their play is outside of the US at this point. Their overseas market has been practically untouched (until very recently) by the economic slowdown. This means that even if they get money from the gov't, they will still have to shift their product to more foreign sales, which we all know means more plants in foreign countries, with foreign engineers, and less American people in jobs.

Finally, I think that the best way to deal with this entire problem is to actually help the workers. One of the worst problems the Big 3 have is their fixed overhead costs related to taking care of the aging baby boomers who are now retiring, getting sick, and dying- these things cost LOTS of money that the Big 3 just doesn't have right now. I've got an idea! How about we have some universal health care so the Big 3 doesn't have to be financially responsible for these people's insurance. That is a big source of inequality between the Big 3, Japanese Auto, and Euro-Auto makers. So maybe instead of bailing out companies, we need to bailout the American people. It would allow for stronger bargaining for higher salaries (you don't pay my health insurance no mo, give me money bitches!), no more pressure about changing jobs (most of us change jobs every 2-3 yrs on average), and old people would no longer worry about paying for their 20 sets of pills they have to take everyday.

Anyway, that's all I have to say about this subject. I think I've gotten it all out. Good Luck to you Big 3, I hope to see you on the Flip-Side.

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