GM, Ford Seek Taxpayer Bailout

On July 15th Financial Week reported GM to cut jobs, bonuses, and dividend to stave off fears over bankruptcy.

General Motors today said it will improve its finances through 2009 by laying off salaried workers, making more cuts in truck production, suspending its dividend and borrowing at least $2 billion as it rides out its worst U.S. sales in a decade.

In total, the automaker said it expects to improve its cash position by $15 billion through the end of 2009.

"We are responding aggressively to the challenges of today's U.S. auto market," CEO Rick Wagoner said in a statement. "We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix.

"Today's actions, combined with those of the past several years, position us not only to survive this tough period in the U.S. but to come out of it as a lean, strong and successful company."

GM said at the end of the first quarter 2008 it had liquidity of $23.9 billion, with access to an additional $7 billion in credit. While GM contends it has enough liquidity through 2008, it said the actions announced today will cushion it against a prolonged U.S. downturn.

Wagoner Is Disingenuous

Its now perfectly clear that Wagoner was being disingenuous. If GM had the cushion it needed, it would not be seeing government (taxpayer) assistance. This headline tells the real story: Ford Seek $50 Billion From U.S., Double Request.

General Motors Corp., Ford Motor Co., Chrysler LLC and U.S. auto-parts makers are seeking $50 billion in government-backed loans, double their initial request, to develop and build more fuel-efficient vehicles.

The U.S. automakers and the suppliers want Congress to appropriate $3.75 billion needed to back $25 billion in U.S. loans approved in last year's energy bill and add $25 billion in new loans over subsequent years, according to people familiar with the strategy. The industry is also seeking fewer restrictions on how the funding is used, the people said today.

Presidential candidate and presumptive Republican nominee Sen. John McCain today gave his support to the proposal.

"Our auto companies are rising to the challenge building the next generation of American cars, but are doing so in times when credit conditions cripple the funding for the facilities and technologies to take the steps to the future," he said in an e- mailed statement.

"We should fund it and take action that will assist Detroit and its suppliers in making it through this difficult time of transition," he said in the statement.

My Comment: McCain is a fool and if Obama supports this mess he is too. GM and Ford are perpetually in a state of "transition", losing money on every car produced all along the way. There is no evidence that GM or Ford is rising to any challenge. Both overly relied on trucks, SUVs, and ridiculous concepts like the Hummer. Market share of both is collapsing, and rightfully so.

Besides, GM is not really a manufacturing company at all, but rather a subprime lender that sells cars. The market for subprime has dried up so GM needs another "transition". GM had a miracle opportunity to dump GMAC and Rescap at absurd prices and failed to do so. GM executives are clearly incompetent.

Yes, GM has some battery technology, but had GM focused on that instead of SUVs and subprime financing, it would be better positioned now. But the key issue is the marketplace and market competition is what should be leading the way, not taxpayer sponsored bailouts.

"This is a horrible idea, another transfer of funds to failed ventures," said David Littmann, senior economist for the Mackinac Center for Public Policy in Midland, Michigan, which describes itself as a supporter of free-market ideals. "If this were a good idea, the market would price the debt accordingly and give them the money."

"We've seen these kinds of bailouts for the financial companies, why not the automakers?" said Aaron Bragman, a Troy, Michigan-based auto analyst for Global Insight Inc. "The big problem is that a lot of people in Washington don't see a value in the U.S. auto industry because they have a foreign plant in their district that is doing just fine."

Aaron Bragman vs. David Littmann

Littmann clearly understands solid economic theory. To which I will add, GM is insolvent and praying for a miracle. If that miracle is to come, it should not be at taxpayer expense.

Bragman is essentially saying "We've done stupid things before so let's continue doing them". Bragman's logic reminds me of the childhood gambit that I am sure all of us used at some point in our lives. It goes something like this.

Mom: Why did you do that?
Me: Well Joey did it too!
Mom: If Joey jumped off a cliff would you follow him?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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