Detroit wants their bailout

Interesting developments for Obama this past week well beyond his election. Detroit is busy trying to get their bailout and stepped it into high gear in the post-election euphoria. The CEOs of the big 3 popped down for a call on the Democratic Congressional leadership to get some cash for their abysmal companies. GM will be out of cash by June at the latest (some are speculating by Spring) and Ford is only slightly better (in part because they put their entire corporation up as collateral for a 26 billion dollar loan earlier this year). Chrysler is held by venture capital so it does not report - but Cerebrus (who bought Chrysler for a song from Daimler) was pushing GM for a buyout in late summer (not a good sign).

These three companies are the embodiment of the old paradigm - big unions, bloated middle management, and largely unsalable products. Market share losses have really accelerated in the past 12 months but were already in rapid decline last year. The economic meltdown doesn't help them but it is not the cause of their failure. Thus it strains credibility to think that they should get a government bailout without significant restructuring.

However, Henry Paulson threw a wrench into the whole deal with an upgraded bailout package for AIG - after crafting an intial 80 billion bailout that ballooned to 130 billion a few weeks after and then this past weekend scrapping that original deal in favor of a new 150 billion package that is much more favorable to AIG. The problem is that AIG, much like the big 3, created their own mess. Thus, the specter of moral hazard (rewarding bad behavior will only beget more bad behavior - hence the hazard) has now been formalized by the government. If AIG can play a game of chicken with the government and win - well surely the big 3 can do the same.

The problem Obama will quickly confront is this - yes we can doesn't equate to yes we will. Unions need a bailout, CEOs need a bailout, and middle management needs a bailout - this will keep the cake walk going and everyone employed. This kicking of the can down the road has been going on for 35 years (at least) and if the government caves and gives the big 3 a bailout, it only prolongs the agony.

The government should not be in the business of picking winners and losers- the market should handle that - but the government is now assuming that position and everyone is busy feeding at the trough. When the government refused to support Lehman's toxic loans, no one wanted to buy and they vanished almost overnight. Lehman was sliced and diced among suitors for the more interesting parts of the business and the remainder was left for auction. What is the real result of letting the big 3 go into bankruptcy? I mean, we the taxpayers already know that we will eventually foot the bill on the pensions (airlines already unloaded theirs after 9/11) so that point is moot - and the shareholders have dogs for stocks now so the intrinsic value can only drop from 2 bucks a share to zero. The benefit of going into bankruptcy is that the union contracts can be shredded which saves the companies money, management has to make a plan that focuses on getting out of bankruptcy (i.e. making a product that someone wants) and the company must shed lost of dead weight (factories, dealerships, etc). In essence, bankruptcy forces clarity.

The government should step in to help the big 3 but with very strict conditions - unions have to cave, white collar jobs have to go at a faster clip, and the product lines have to be of utility. Obama has made some murmurings that the big 3 should focus on making more fuel efficient cars in the future (ummm, we've all been saying that since the 1979 oil crisis and the early 80s recession gave the Japanese companies a crack at our market with spectacular success). Oh - and GM and Ford do make lots of very successful fuel efficient cars, just not in America where it is not "profitable". Note they can make cars in Europe and Brazil that consumers want and buy which are compact and fuel efficient - but something mysterious prevents that from occuring in America.

We all know that the government will not take a hard line with the big 3 - lobbyists and unions will keep the status quo going until the companies fall in on themselves - problem is that that prospect is scarily close now and no one is blinking. To wit - AIG threw a tantrum wanting more and they got it, so shall the big 3.

So Obama confronts the mess of having to throw more good money at these companies to keep them on life support rather than possibly implementing "change". Will he effect "change" by taking a hard stance on unions and lobbyists to drive a turnaround at the big 3? Not when the bitter pill puts tens of thousands of union jobs out of work to save the company. Not when you are trying to force companies to make fuel efficient and desirable cars and those companies resist at every turn.

This matter will have to come to a head shortly after the Inaguration - Bush has said no deal beyond 25 billion and has given no indication that this will change in the lame duck period. Meanwhile the companies will be hemorrhaging cash as the economy continues downward and will be unable in the Spring to fund their basic needs as the cash on hand dwindles.

The bailout will be big, the long term effects negligible and the political costs very high. Tax cut for the middle class? With two wars, Wall Street getting close to a TRILLION dollars, a broad economic slowdown, and house sales largely moribund, the cash cannot be printed forever. At some point, revenue that has flowed out will need to be replaced in the form of payments to the government. Taxes will have to go up for ALL, and pretty significantly. How will Obama spin that one? We'll wait and see.