The Bottom of the Money Pit?
It looks as though there is at least some resistance to extending “bailout money†to the U.S. automakers, although I’ll only believe it’s over when it’s over. And, of course, universities and big-city mayors are looking for some of the money too. (I have to thank Chad Turner for the university link, I had completely missed it.)
Anyway, according to this AP article, “bailout fatigue†has set in on Capitol Hill. The article says:
The Senate Democrats’ measure would carve out a portion of the Wall Street bailout money to pay for loans to U.S. automakers and their domestic suppliers, but aides in both parties and lobbyists tracking the plan acknowledge they do not currently have the votes to pass it.
But why would automakers need a special loan package, direct from Treasury, when all the banks are now flush with excess credit? After all, the original bailout bill was (supposedly) passed so quickly to avoid the problem of non-financial companies being frozen out of the credit markets. If, even after all of these low-cost “injections†of capital, banks still won’t loan money to the car makers, maybe it’s not a good idea to loan them money?
I know, I know, I’ve heard all the “too big to fail†arguments; if GM and Ford fail, it’s not just those workers who lose their jobs, it’s the suppliers and dealers, etc. The problem is that we can make the same argument about any large industry – the airlines, the banks (I hate using that one), telecom – all of these industries have various suppliers and other businesses connected to them. If we just keep shoveling tax dollars into “troubled†industries, we won’t have industries, we’ll have large government agencies.
We simply have to realize that (1) we’re talking about using tax dollars to bailout private companies; and, (2) when we “bail out†companies in this manner, we’re prolonging the pain of business failure, not preventing it. It’s not like the U.S. car companies have been a glaring example of efficiency. These guys have been limping along for years.
Faced with serious competition from the Japanese in the 70’s, the U.S. automakers were forced to deal with (among other things) grossly underfunded pension liabilities. The “big 3″ became the “big 2,” and they’ve been trying to unwind those bad deals ever since. In fact, one of the reasons 401k plans (and defined contribution plans, in general) became prevalent is that corporate America realized they could not keep going with defined benefit plans.
Of course, if you have high fixed costs and a shrinking market share, you keep your debt down, right? Not these guys.
If you look at the balance sheets from Ford and GM for the last several years, you find debt-to-asset ratios near one (i.e., their total debt is at/above what their total assets are worth). Honda and Toyota, on the other hand, have debt-to-asset ratios near 60 percent.
What are some of the high fixed costs GM and Ford face? According to a Standard & Poor’s market report: “Even labor costs have become largely fixed because of union contracts, which may restrict layoffs or require automakers to pay certain laid-off workers benefits worth up to 95% of their take-home pay.†(I am unable to provide a link to non-subscribers.)
It’s bad enough that our government is seriously considering loaning billions of tax dollars to unproductive, highly levered companies. But it’s even worse when you compare the amount of the proposed taxpayer loan ($25 billion) to the market capitalizations of Ford and GM (approximately $4 billion and $2 billion, respectively).
What’s the market capitalization of Honda? Nearly $40 billion. Toyota? About $100 billion. Which one would be the better investment for your money?
NM
A little extra: For anyone interested, there’s a nice debate at The New Republic and the Corner (National Review); read both pieces to get both sides of the argument.