12/15/2008

New Op-ed at Fox News: Auto Bailout a Bad Investment

My newest piece for Fox News starts this way:

General Motors’ bonds are currently yielding a whopping 56 percent. But, with the interest rate on U.S. government bonds paying close to 0%, are people rushing out to buy these General Motors’ bonds? Do people really think that this is a great way to make a killing? Hardly.

General Motors’ high interest rate means one thing: investors who have their money on the line don’t believe that these bonds will get paid off. In fact, this interest rate is so high that investors don’t even believe that General Motors will make it to Christmas two years from now without declaring bankruptcy -- a bankruptcy where bondholders would get little or nothing back.

The extraordinarily high interest rate shows that a bailout obviously won’t fixed the problem. . . .

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25 Comments:

Blogger John said...

UAW reps voted weeks ago to do away with the jobs bank, a Japanese auto makers idea, not the union, still being used by them. Wages are virtually the same, the problem is in the benefits. And a big part of that problem is that the transplants have no retirees yet. The Big 3 are covering 8000,000 people with health care and pensions. Are they to be bargained away?

12/15/2008 11:48 AM  
OpenID murstein said...

There's one thing in your article I've seen mentioned many places, but have yet to understand. First, the quote:

"For example, while Toyota has fewer than 1,500 dealers, GM has almost 7,000, but it can’t terminate dealers because of state regulations."

I have yet to locate an explanation of *why* or *how* having more dealers costs more money. Can you explain it?

12/15/2008 11:51 AM  
Blogger Paul Revere said...

Where is the insightful analysis on AIG and Citigroup bailout? They have already received $150 & $300 billion respectively.
AIG & Citi's bonds maturing in 2012 yield ~14%. This is after being provided explicit Federal guarantee. Isn't AIG & Citi also a bad bailout?

12/15/2008 1:36 PM  
Blogger Phil said...

I'm not so sure that declaring Airbus must be inefficient because of its geographically distributed manufacturing is quite right - after all Boeing moved to an out sourced model for the 787 and large pieces come from Japan and elsewhere. Of course both companies have encountered their share of problems, but at least empirically it seems that the cost of moving wings, fuselages and all the rest around is less than one would naively think.

12/15/2008 1:42 PM  
Blogger DC said...

The auto industry is far too important to this country to allow it to fall by the wayside. Too many people have been viewing bankruptcy as a panacea for the industry woes. As a conservative, I am all for having companies suceed or fail on their merits, and if it were just one company I would support the notion, but to allow an entire industry to fall into bankruptcy is nothing short of lunacy. The negative ramifications of such a drastic move are far too great to overlook. The government should not write a series of blank checks either. They should make mandatory binding arbitration a pre-condition to receiving the loans. By doing so, they can allow the companies to avoid bankruptcy, while still protecting the interests of the taxpayers. This is a situation which will require some flexibility from all partires involved and mandatory binding arbitration would be the least painful way to attain this.

12/15/2008 2:17 PM  
Blogger BigDog said...

There is no doubt that political considerations are the driving factors behind the bail out considerations in Washington. If the bail out is indeed intended to enable these companies to return to profitability, why does/did the draft legislation have so many 'purposes' explicitly articulated that can significantly hinder their return to profitability? The top purposes in the legislation were "stimulate manufacturing" whether profitable or not, "preserve and promote the jobs of 355,000 workers directly employed and over 4.2 million workers indirectly employed in the industry", "aggressively produce energy efficient vehicles"...should it not be for management, not Congress, to decide what and how to get back to a viable business model?

The necessary transformation restructuring for these companies will not be possible as long as they have their current set of stakeholders, especially the unions. Otherwise, a value vulture such as Warren Buffet would be scooping up these companies at the huge discounts they are at today. Interestingly, Warren Buffet, Obama's close friend and adviser, has taken a 7% stake in a Chinese auto company that just announced their electric car...for $20,000. GM has already said the $40,000 Volt will be a loss maker for several years.

If the lawmakers really believed that betting taxpayer money on this bailout is not risky, will they commit to accepting a $1 salary and $1 pension until these loans are returned?

12/15/2008 2:40 PM  
Blogger KO said...

Well Phil it’s not the distribution of work that matters it’s the reason. If you are getting better economics by out sourcing or buying from another area then do it. However, if the reason is political and there is no economic benefit then you have to raise the sell price. Hopefully Airbus will do this so we can sell more Boeing planes.
GM does not deserve a bailout because they all (management and the union workers) got good money making SUVs and Trucks. Now that this one crop has failed why should the rest of us that didn’t share in the original benefit bail them out? Chapter 11 is not “out-of-business” the airlines went through it and they are still there. The only reason the auto industry and their investor’s want the bailout money is to have one more party using other people’s money. Our Congress should not get the idea that they know how to spend my money better than I do.

KO

12/15/2008 5:51 PM  
Blogger 1 said...

"Where is the insightful analysis on AIG and Citigroup bailout?"...

Its out there on the net already...

Consider the results of a google search: bailouts +bad idea...

"least empirically it seems that the cost of moving wings, fuselages and all the rest around is less than one would naively think"...

Well phil I'm one of those naive people who have a hard time believing that moving such large parts from different manufacturing facilities is a money saver...

O.K., the naive question, 'how do we know its cost effective to manufacture that way?'...

Note this 2003 Puget Sound Business Journal article: Boeing site decision has location experts divided

12/15/2008 7:46 PM  
Blogger 1 said...

"Where is the insightful analysis on AIG and Citigroup bailout?"...

Its out there on the net already...

Consider the results of a google search: bailouts +bad idea...

"but at least empirically it seems that the cost of moving wings, fuselages and all the rest around is less than one would naively think"...

Well phil I'm one of those naive people who often wondered how having geographically diverse manufacturing facilities for Boeing products for instance could be a money saver...

Do you have any idea why it might be a money saver versus what might be a long term political investment for instance?

I often wondered if have geographically diverse manufacturing has a down side...

From the 2003 issue of the Puget Sound Business Journal: Boeing site decision has location experts divided

12/15/2008 7:53 PM  
Blogger 1 said...

"Where is the insightful analysis on AIG and Citigroup bailout?"...

Its out there on the net already...

Consider the results of a google search: bailouts +bad idea...

"but at least empirically it seems that the cost of moving wings, fuselages and all the rest around is less than one would naively think"...

Well phil I'm one of those naive people who often wondered how having geographically diverse manufacturing facilities for Boeing products for instance could be a money saver...

Do you have any idea why it might be a money saver versus what might be a long term political investment for instance?

I often wondered if have geographically diverse manufacturing has a down side...

From the 2003 issue of the Puget Sound Business Journal: Boeing site decision has location experts divided

12/15/2008 7:54 PM  
Blogger Martin G. Schalz said...

Finger pointing and accusations.

When will all of this stop, and when do we see that the basic problem is that the Credit Market is in lockdown.

If folks could get car loans, would the Big Three be in trouble? What will it take so that folks can get financed to purchase a vehicle?

Speaking of the Credit Market, did it not supply the Big Three with short term liquidity before all of this?

Before Congress just handed out money without strings attached, to the banks, did not GM seek to merge with Chrysler?

So here we are, after Congress once again fouls up, and the backlash is directed at the Big Three who right along with so many other companies, entities, and whatever, line up for a free handout like the banks get, and yet all but the Big Three are ignored in the Media. WHY?

Perhaps the Big Three, like you and I, can no longer secure a loan, and now they must issue Bonds at such a high rate so that they may have a minimal chance of staying afloat, rather than pursuing 'normal' means of raising cash for short term needs.

Life would be so much simpler for the Big Three if they could sell what they have in stock, and continue to produce cars for the market for folks to buy. Did I remember to mention that folks can't get a loan to buy cars?

12/15/2008 8:46 PM  
Blogger Truth said...

Lynn Tilton (CEO of Patriarch Partners) was on CNBC Squawk Box on Friday…relevant insights to this discussion…Fixing the Financial Crisis: The truth of the situation can be ignored no longer (http://www.cnbc.com/id/15840232?video=960926779.)

This is the same woman who predicted the financial crisis on Bloomberg TV back in 2006 (http://www.blinkx.com/video/lynn-tilton-on-bloomberg/87JL8lMSQmrDI4ALaa5zdQ) so perhaps she’s worth listening to now.

She proposes direct lending to businesses through a new “Provisional Federal Bank (http://www.patriarchpartners.com/Lynn_Tilton_WashPost_NYT.pdf)”…Liquidity must be made available not solely to big banks where Treasury-injected capital has been amassed to fill the cavity left by gambling losses, but rather expressly to deserving American companies and their people who will reignite our sputtering economy. A provisional Federal Bank must be initiated to foster enterprise and to provide job opportunities for every American.”

12/15/2008 8:53 PM  
Blogger snoop said...

gettelfinger won't give an inch, don't give a dime!

12/15/2008 9:32 PM  
Blogger Scott said...

Anyone who has grown up or lived in Detroit, knows that the reason for the current mess falls squarely on the shoulders of the UAW. I could give you many first and second hand accounts of how the unions protect and promote laziness and shoddy workmanship. But in the end, all you would have to do is buy anything made in Detroit in the last two decades to figure out how the story goes.

Let's say a guy on the line at one of the big 3 figured out a better/more productive way to do something. Is there anyone so deluded as to believe that the UAW would let him take that to management?

Suppose a guy puts a screw in a panel all day long. After a few months that screw backs out and causes a rattle / problem on the car, and the car ends up at the dealership for repair (OEM pays for that). The manfacturer identifies the problem and wants to correct it by retooling that job so that the fastener is now riveted or welded in. Guess what the UAW does? "Well, you're gonna have to put our 'screw driver' into the jobs bank and hire and train a 'riveter' or 'welder'." GM crunches some numbers and comes to the grim reality that it will be less expensive to just keep making crap and pay dealers to fix it, then to make a quality product.

Of course at some point the customer stumbles accross Lexus or BMW and you never see them again.

UAW workers do not take any pride in the cars they build. They build over priced junk and try to guilt trip Americans into buying it.

12/15/2008 11:24 PM  
Blogger todd said...

DC quit hiding under the 'conservative' cloak. No true conservative is for this ridiculous bailout. The industry is not collapsing - just the inefficient, inept US portion of it. The people have spoken. They don't buy a product when it's junk, so why isn't our representative government listening to who put them their in the first place? The lack of understanding about the American citizen is amazing and it is this along with immigration and prescription benefits that has caused the President's true conservative support to abandon him.

12/16/2008 4:59 AM  
Blogger Paul Revere said...

the reason for the current mess falls squarely on the shoulders of the UAW

Scott you have now moved to the realm of anecdotes.
The real reason for the current mess falls on all those mortgage banks and investment banks.
I know brokers affiliated with Countrywide who got shady appraisers to get a high appraisal, provided the customer with a ARM and then Countrywide repackaged this loan with a bunch of similar ones and sold it to Fan & Fred who in turn gave it to investment banks that used this at a leverage of 60 to 1.
So why did our $700 billion go to these folks? And, more importantly why did the esteemed Southern Repub Senators vote yes to this nonsense. Here is the list of guys that voted yes for $700 billion and no for $14 billion.

Bennett (UT) and Hatch (UT)
Burr (NC)
Chambliss (GA) and Isakson (GA)
Coburn (OK)
Coleman (MN)
Corker (TN)
Ensign (NV)
Grassley (IA)
Gregg (NH)
Hutchison (TX)
Kyl (AZ) and McCain (AZ)
Martinez (FL)
McConnell (KY)
Murkowski (AK)
Thune (SD)

12/16/2008 9:58 AM  
Blogger Justin Murray, CFO said...

Martin G. Schalz -

Great theory, but the existence of a "credit crisis" has been thoroughly debunked, most famously by the Federal Reserve Bank of Minneapolis. All forms of credit, except for the LIBOR rate, have been steadily increasing, even before a penny of bailout money was spent or even discussed. All this means is that the top 8 banks in the US were having trouble. They don't make up the banking industry by themselves, there are more banks.

There is plenty of credit to go around. The only "crunch" is that lenders are not willing to lend to unqualified borrowers anymore. In essence, the "crunch" is little more than banks behaving like good banks and not like reckless businesses.

If GM has a good restructuring plan, the money will be there. The reason they're going to Congress is they don't have a good restructuring plan. Chrystler is even more absurd as they're a private corporation owned by an organization that can easily fund this themselves but don't want to.

12/16/2008 10:07 AM  
Blogger Tbone said...

According to Forbes:

Labor cost per hour, wages and benefits for hourly
workers.

Ford: $70.51 ($141,020 per year)

GM: $73.26 ($146,520 per year)

Chrysler: $75.86 ($151,720 per year)

Toyota, Honda, Nissan (in U.S.): $48.00 ($96,000 per
year)

According to AAUP and IES, the average annual
compensation for a college professor in 2006 was $92,973 (average salary
nationally of $73,207 + 27% benefits).

Bottom Line: The average UAW worker with a high school
degree earns 57.6% more compensation than the average university
professor with a Ph.D., and 52.6% more than the average worker at
Toyota, Honda or Nissan.

Many industry analysts say the Detroit Three, must be on
par with Toyota and Honda to survive. This year's contract, they say,
must be "transformational" in reducing pension and health care costs.

What would "transformational" mean? One way to think
about "transformational" would mean that UAW workers, most with a high
school diploma, would have to accept compensation equal to that of the
average university professor with a PhD.



Then there's the "Job Bank"

When a D3 (Detroit 3 carmaker) lays an employee off,
that employee continues to receive all benefits - medical, retirement,
etc., etc., PLUS an hourly wage of $31/hour.

Here's a typical story....

Ken Pool is making good money. On weekdays, he
shows up at 7 a.m. at Ford Motor Co.'s Michigan Truck Plant in Wayne,
signs in, and then starts working -- on a crossword puzzle. Pool hates
the monotony, but the pay is good: more than $31 an hour, plus benefits.

"We just go in and play crossword puzzles, watch
videos that someone brings in or read the newspaper," he says.
"Otherwise, I just sit."

Pool is one of more than 12,000 American autoworkers
who, instead of installing windshields or bending sheet metal, spend
their days counting the hours in a jobs bank set up by Detroit
automakers as demanded by the United Auto Workers Union - UAW - as part
of an extraordinary job security agreement.




Now the D3 wants Joe Taxpayer to pick up this tab in a
$25 Billion bailout package - soon to be increased to $45 Billion if
Nancy Pelosi and Hillary Clinton have their way.

The "Big 3" want this money - not to build better autos.
No. They want it to pay the tab for Medical and Retirement benefits
for RETIRED auto workers. Not ONE PENNY would be used to make them
more competitive, or to improve the quality of their cars.

We ALL have problems paying for our Medical Insurance -
but the Democrat leaders in Congress now want us to pay the Medical
Insurance premiums of folks who have RETIRED from Ford, GM and Chrysler.


Not a good deal for us.

How about Chapter 11 - and getting rid of these
ridiculous union contracts

12/16/2008 1:43 PM  
Blogger Martin G. Schalz said...

Scott; I concur with much of what you stated, but as far as quality goes, you are incorrect. The vehicles that the Big 3 build are high in quality, I can assure you.

I have personally spent many hours of my own time (unpaid) to ensure that the parts that I supplied to the Big 3 were of the highest quality.

My work was geared towards efficient assembly techniques but I was also called upon many times to ensure that any quality issues that arose, were dealt with.

My work consisted of two goals and sometimes was a wee bit of a headache for me, as the Production end of things was geared towards getting as many parts out as possible.

Then there was the Quality end of things, where I had to ensure that nothing could go wrong, and if it did, it had to be dealt with in a fashion that would prevent bad parts going to the customer.

The warranty costs of bad parts being shipped to the Big 3, do take a big bite out of profits, I can assure you. It was designed that way to ensure compliance with the Big 3's quality goals.

So there I was, stuck in the middle, so to speak. Ensure high quality, but do not slow down production. To that end, I had to devise ways of keeping production needs met, while yet ensuring that the operators could not overcome built in error proofing, as said operators were constantly under pressure to produce as many parts per shift as possible, yet we had to maintain the highest quality possible. The aforementioned did not always go hand in hand, of course.

The Big 3 had no problems communicating their issues about quality to the company I worked for. Even though I am not an engineer, I was called upon time and again to make the customer (the Big 3) happy.

Many a time have I gone to an auto assembly plant. Yes, you are correct Scott, in your observations, but as a supplier to the Big 3, we did our best to ensure that no bad parts got to them.

Many a time at the bar, did I hear UAW workers complaining about the QA Dept. Go figure.

The Big 3 design damn good stuff to sell to us, and they work hard to ensure the quality. They have to. After all, the Japanese manufacturers are competing against them.

The vehicles that we Americans build are damn good, and I hope it remains that way.

A. The Big Three do not make overpriced junk.

B. Yes we have problems with the UAW in some areas, and if this current mess does not shake them to their core, then they will fail, and rightly so.

Company Culture must change. We must not continue with the past, yet we must learn from it, rather than ignore it, and then take corrective action based upon the errors of the past if we are to survive.

Dr. Deming was correct about instilling a proper culture within a company. Why do we not listen to his teachings...

12/16/2008 5:14 PM  
Blogger Paul Revere said...

I left a comment yesterday responding to Scott. Please post it.

12/17/2008 8:58 AM  
Blogger Marusia said...

Today’s big news – Toyota delays Mississippi assembly plant.

““Mississippi Gov. Haley Barbour said at a news conference that the state has invested $200 million in the plant, while local governments have invested about $35 million. He said Toyota plans to work with state and local governments to mitigate extra costs caused by the delay.

"While we definitely are disappointed (and) wish it wasn't happening, we understand that these companies like Toyota have to operate in the private marketplace and have to do so successfully," Barbour said.”

It looks to me like the US taxpayers had no problem in giving Toyota 235,000 MILLION dollars to build a 300,000 MILLION dollar plant in the USA. But yet we bicker in loaning the Big 3 35 million. And we will continu to hand over millions of dollars for the foreign auto industry here. But first we will destroy our own auto industry.

http://www.google.com/hostednews/ap/article/ALeqM5hfsR7rqXhTUR3qWJxiuIpPp-rP4wD953DH680

12/17/2008 1:12 PM  
Blogger Jon said...

Frankly, the best hope is for GM to swallow its pride and try to tie-up somehow with Toyota.

Jon

12/17/2008 11:42 PM  
Blogger Martin G. Schalz said...

Dear Mr. Murray. Not being a CFO, does leave me in a position where I do not understand market forces as well as you do. I do not 'see' the current crisis in the fashion that you do, but I do truly appreciate your time to respond to my theory of things.

As an example, I did predict the market downfall in time to redeploy my money, shall we say, into commercial paper for the time being. That in and of itself is in line with what you posted, as is everything else you posted. I agree.

However, I would like to point out two things here, via the magic of cut and paste.

First, a quote from I.

"If folks could get car loans, would the Big Three be in trouble? What will it take so that folks can get financed to purchase a vehicle?"

Now, a quote from you sir.

"There is plenty of credit to go around. The only "crunch" is that lenders are not willing to lend to unqualified borrowers anymore. In essence, the "crunch" is little more than banks behaving like good banks and not like reckless businesses."

I agree with the above in theory, but if many, and I do mean many, are disqualified from obtaining loans for whatever reason, the Big Three cannot sell cars, which was one thrust of my post.

As I was coming home today, I noticed one used car lot had a sign out front that told would be customers that they only needed PLPD insurance to purchase a vehicle. Quite a change from the normal requirement of Full Coverage.

Many a person here in Lansing MI is taking a big hit in the pocket book over the mess we are now currently in, and it is not just automobiles. Many companies here cannot sell product because folks cannot get a loan, much less smaller companies getting short term loans for payroll, materials, and logistical costs of getting product to market so that they can sell product.

What I realy want to know, is what your viewpoint as an CFO is, and can you explain it to us all as you did in your last post?

I for one am all for a free education from one of your experience, and I look forward to your explanation. 90% of the solution to a problem, is the correct identification of said problem.

I thank you for your time.

12/18/2008 5:50 PM  
OpenID MHyman said...

Screw the auto industry--I tire of listening to persons who have never in their working lives paid for healthcare, get 85% of their final salary for retirement, get paid for not working, and have the chutzpah to think that the rest of us have some moral obligation to them going in addition to having to listen to fables that their existence is an economic necessity.

If I had but one "group" to bail out of economic misery, it would be the disabled American veterans. Continuously cheated of disability pensions by a government agency which excels in shuffling paperwork, the majority of disabled veterans have to wait years in order to receive their just due--if they get it at all.

This is nothing new, and it has existed since the time of the Civil War. However, it's about time it was finally made right.

Bail out AIG, automakers, investment houses, and similar entities? They can all go to hell.

Until I see money--and a good deal of it--allocated to bail out veterans, no one should even have the nerve to suggest that anyone or anything else would take precedence.

12/20/2008 2:31 PM  
Blogger Pierre said...

Very interesting. Before seeing John's question on Facebook, I had had a look at the same WSJ table today. As of Friday 19, the yield on these same bonds with a July 2033 maturity had increased to $59.58. Since the Canadian government is lending money to GM and Chrysler at 5.3%, it's easy to calculate the risk assumed by Canadian taxpayers! My only question would be whether it is appropriate to compare long-run yields with short-run interest rates. And I have been unable to find yields on GM bonds maturing earlier. Of course, this would not change the qualitative argument.

12/21/2008 10:53 PM  

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