And that $25 billion for Detroit…

In all the publicity around the $700 billion bailout for wall Street that became law last Friday, the fact that Congress last Tuesday also appropriated $25 billion to prop up ailing US-based carmakers passed almost unnoticed in the US.
But it was not unnoticed overseas. (A hat-tip, indeed, goes to Frank al-Irlandi, who drew this to our attention earlier today.)
Of course, this bailout considerably distorts the global “free market” in cars– not that any such thing ever actually existed. Non-US carmakers, including those who operate production lines within the US, are reportedly furious. The FT reported on Saturday that German car-makers are already lobbying to be allowed access to these funds.
The FT reporters there note that European and Asian banks were successful in their efforts to gain access to the federal bailout loans being made available to the US-based (but often foreign owned or foreign funded) banks.
Regarding access to the car industry loans, they write:

    While the aid package does not specifically exclude foreign carmakers, one European executive said it was “clearly a bail-out” of the Detroit-based industry.
    The loans would help carmakers modernise their plants to build more environmentally friendly vehicles. They are available only to plants that are more than 20 years old, excluding all but a handful of foreign-owned facilities.
    Stefan Jacoby, the US head of Volkswagen, said lobbying had already started, with Tennessee and Virginia – the two states where the German carmaker has a US presence – also taking part.
    The Department of Energy has yet to flesh out the legislation with detailed regulations in a process that will take at least six and maybe as long as 18 months.

I wrote last night that as the current crisis continues we have to guard against “any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a ‘cleansing’ act of war.”
Obviously in these tough times there will be some significant degree of economic nationalism, as we have already seen. Indeed, the WTO in its current form may well be one of the major casualties of the crisis as it evolves. However, I still believe that the crisis can be dealt with and overcome by the world’s nations in ways other than war. To the three reasons for relative optimism that I listed yesterday I would certainly add the fact that today, 63 years after 1945, all the world’s major nations have long experience of working together in a rules-based system that addresses issues in the economic, political, and security arenas.
Also, after all the experience of warfare the world has had since 1939– from Hiroshima to Iraq– no responsible leader could realistically today think that going to war will “solve” any actual problems.
We are not in the 1930s. Reason, calm, and a sense of fairness can prevail.
But it depends on us all having informed and fair-minded publics, as well as wise leaders…

15 thoughts on “And that $25 billion for Detroit…”

  1. First of all, it’s not a “handout” [FT] but a 25-year loan, at 5% interest. Secondly, the US automotive industry is huge but shrinking. Some analysts expect that U.S. sales this year could be as low as 13.0 million cars and trucks, a precipitous downturn from last year’s 16.2 million. Next year won’t be any better. Thirdly, #25B is a drop in the bucket. Total value of 13 million cars at $25K each? $325B. Fourth, the design of better products will take years, and GM and Ford don’t have years. Fifth, the $700B overall package can presumably be used to buy all sorts of troubled loans, including car loans and inventory loans to car dealerships. Finally, why should we presume that GM and Ford will still be around in 25 years?
    The problem isn’t only that GM and Ford (Chrysler is foreign-owned) have lagged in technology, but that they have been out-gunned by foreign companies who produce higher quality products cheaper, the latter in part because they have avoided some employee-related costs such as retired medical.
    news report: GM has performed strongly overseas, but plummeting demand for its most profitable products in the U.S. has led to losses of $57.5 billion in the past 18 months, including $15.5 billion in the second quarter. Light truck demand at GM fell 19 percent in September, as sales of the Trailblazer dropped 31 percent and demand for the Tahoe fell 52 percent. sales of Chevrolet full-size pickups fared comparably better, edging down just 5.5 percent.
    news report: Ford has burned through nearly $11 billion of its cash stockpile in the past year and reported a second-quarter loss of $8.7 billion. The loss included $8 billion worth of write-offs because tumbling truck and SUV sales decreased the value of Ford’s North American truck plants and Ford Motor Credit Co. The company has $25 billion in long-term debt.
    After the products are manufactured, they have to be sold (GM and Ford have ceased leasing, which accounted for 25% of production.) news report: Hundreds of thousands of new cars and trucks that would have quickly made their way to people’s driveways a year ago are now stacking up on dealer lots across the country, with potential buyers worried about whether they’ll keep their jobs, be able to pay for gas, or qualify for a car loan. For auto dealers already suffering under the worst U.S. sales downturn in 15 years, the increasing cost of the credit they use to keep inventory in their showrooms means every Ford Focus and Jeep Grand Cherokee with a sale sticker in the window is chipping away at dealers’ razor-thin profit margins every day and threatening to send more of them out of business. The National Automobile Dealers Association projects that as many as 700 dealerships could close this year, out of 21,461 as of Jan. 1. The last decline of this magnitude occurred during the recession of the early 1990s.
    With GM and Ford hemorrhaging tens of billions, should the US taxpayers pump more money down this rathole? GM and Ford debt now trade at distressed levels. GM’s Big Board-listed 6.25% convertible debt (GPM) was trading Friday at around $7.50, which is just 30% of its face value of $25. It carries a yield of 28%, assuming investors take advantage of an optional redemption in 2018. The current price is below the recovery value of 50 cents that senior debt holders often get after a bankruptcy. The GM convertible probably offers a better risk/reward than GM’s common shares, which finished Friday at 9. GMAC, which is 51% owned by an investor group led by Cerberus Capital Management, also is on the ropes (soon to be rescued by US taxpayers, we may presume).

  2. in ways other than war
    NATO, to defend against the Russkies, needs a strategic airlift capability, right? Well, they just got it.[In other news, the Dow plunges below 10,000 — lowest point in four years reached; stocks down sharply across globe]
    news report: This week, the Strategic Airlift Capability (SAC) took a big step forward after the 12 SAC nations completed signature of the SAC Memorandum of Understanding (MOU). The MOU brought into force the Charter of the NATO Airlift Management Organisation (NAMO).
    The NAMO will acquire three C-17 aircraft to meet strategic airlift requirements of the SAC member nations. The participants include ten NATO nations (Bulgaria, Estonia, Hungary, Lithuania, The Netherlands, Norway, Poland, Romania, Slovenia and the United States) and two Partnership for Peace (PfP) nations (Finland and Sweden).
    The C-17 fleet will be based at Papa Airbase in Hungary, and the planes will be certified and registered by the host nation. SAC programme acquisition and sustainment will be managed by NAMO, a NATO Production and Logistics Organisation (NPLO) with a Board of Directors and the NATO Airlift Management Agency (NAMA).
    To operate the C-17s, a Heavy Airlift Wing (HAW) will be created under the initial command of a US Air Force officer with a Swedish Deputy Commander. The HAW will be manned by international crews assigned by the participating nations and will conduct missions based on [US?] national requirements.

  3. I wrote about the $25 billion “loan” two days ago. The European car-makers responded immediately by asking for an even bigger loan. This is Smoot-Hawley By Subsidies.
    A very dangerous development.
    The U.S. car-makers don’t need the loan to develop new technology for more fuel efficient cars. The technology is available. They need to save their financial arms which have more bad loans that Countrywide had bad mortgages.
    Europe and the U.S. should not go on a race on such subsidies. It would be a race to the bottom.

  4. Just of war and terrorists here may be some singes tells who feed the best and crated these terrorists:

    Yemini president alleges terror cell ‘operating under slogan of Islam’ had connections to Israeli intelligence, refuses to provide any details

    What’s about Iraq and what’s going on for 6 years under state of chaos and lawlessness?

  5. The really frightening thing is that this guy knows what he is talking about.
    http://tinyurl.com/52wkxu
    If sustained this would make it the third worst fall in the history of the FTSE 100 index. (it turned out to be the worst)
    Does this mean we’re close to that fabled moment in stock markets – the point of capitulation – when investors lose all hope and dump their stock at any price?
    According to the theory, there can be no sustained recovery until the markets are in the clutches of utter despair.
    Not everyone subscribes to the pseudo-economic psycho-babble. but give a pitbull a chance
    But it certainly looks hairy out there.

  7. To connect the dots explicitly here – the Bush administration had to loan $25B to Detroit if McCain had any chance of gaining Michigan. Now that McCain has essentially ceded the state, some Republicans might be wondering why they yet again compromised their “free market” principles over that one.
    I can’t offer the analysis that Don has on the $25B loan to GM and Ford (and he’s right, it’s a loan), but I have slightly different perspective because my father is a car dealer. He has Toyota and Chevrolet franchises.
    One interesting behavior of customers since gas prices went up is to trade in larger trucks or SUV’s for smaller cars, or even to buy a third economical car for commuting. (The dealership is located an hour outside of DC.)
    Usually, these are panic strategies that are economically self-defeating. Often depreciation leads to a trade-in that isn’t going to do much more than cover the cost of the remaining loan, and you’d come out ahead paying $300/month in gas for the tank you were already driving. (We aren’t considering environmental impact.) Paying for the insurance and maintenance and depreciation of an additional car doesn’t even come close to what you’d save in gas.
    The free flow of credit has not only led people to buy big houses with questionable mortgages, it’s been easy to buy a car you can’t afford. I have no statistics on car repossession now, unfortunately. It’s culturally the thing to have a nice car, and salespeople will of course encourage you to go for the maximum that you’re willing to pay. (Please refrain from indulging in sleazy car salesman stereotypes–we’re talking about my father, a good, honest small businessman.) Financing has been easy to get, and many people have indulged against their better interest.
    From what my father tells me, there are a lot of dealerships hurting. His fortunately is not. He recently received an offer to buy a floundering dealership in a nearby location.
    Toyota had a surprisingly steep drop in sales last quarter for such a powerhouse of a company (especially when you consider the popularity of the Prius, Highlander, and now hybrid Camry), but not as much as the American companies. Still, my father thinks very highly of Chevrolet, a GM franchise. The Silverado is the second highest selling vehicle in the country. The Malibu and Impala do great. In 2010, Chevrolet will release the Volt, an electric vehicle.
    High gas prices have finally forced a shift in the car industry–they will have to produce smaller cars to meet demand. Will that mean moving to non-fossil fuel-powered cars sooner? I think that depends on which administration is elected.
    And there will continue to be a high demand for cars, b/c there is no intense public awareness for the need to change the essential transportation infrastructure, or the fundamental principles of how we plan our development.

  8. To connect the dots explicitly here – the Bush administration had to loan $25B to Detroit if McCain had any chance of gaining Michigan. Now that McCain has essentially ceded the state, some Republicans might be wondering why they yet again compromised their “free market” principles over that one.
    I don’t think that you’re quite “connecting the dots” correctly. It’s not the “Bush administration” that initiated this amendment. It’s a Democratically controlled Congress with Barney Frank, Nancy Pelosi and Sen. Stebanow (D-Mich) pushing the bill. This has as much to do with supporting unions as it does with support for corporations. It’s all about keeping those jobs in America that Obama keeps talking about.

  9. The first of the Icelandic banks went down this morning.
    http://news.bbc.co.uk/1/hi/business/7656387.stm
    Royal Bank of Scotland lost 40% of its share value at one point this morning.
    I still haven’t figured out if the Europeans will be sending food parcels to the US or the other way around.
    I expect both will be sending parcels to Iceland.
    At this point a chorus of Bobby McGee seems apropriate
    Busted flat in Baton Rouge, headin for the trains,
    Feelin nearly faded as my jeans.
    Bobby thumbed a diesel down just before it rained,
    Took us all the way to New Orleans.
    Took my harpoon out of my dirty red bandana
    And was blowin sad while bobby sang the blues,
    With them windshield wipers slappin time and
    Bobby clappin hands we finally sang up every song
    That driver knew.
    Freedom’s just another word for nothin left to lose,
    And nothin aint worth nothin but its free,
    Feelin good was easy, lord, when Bobby sang the blues,
    And buddy, that was good enough for me,
    Good enough for me and my Bobby McGee.
    Ah now I understand the Bush doctrine of spreading Freedom.

  10. (HC) “no responsible leader could realistically today think that going to war will “solve” any actual problems.”
    Both US Presidential candidates disagree with you. The new Pentagon approach eschews traditional war, but embraces “stability operations” in any country that denies US “access”.

  12. The Pope is humming a version of Bobby McGee: “He who builds only on visible and tangible things like success, career and money builds the house of his life on sand”.
    And Henry David Thoreau: “In short, I am convinced, both by faith and experience, that to maintain one’s self on this earth is not a hardship but a pastime; if we will live simply and wisely; as the pursuits of the simpler nations are still the sports of the more artificial. . .for my greatest skill has been to want but little”.

  14. We don’t have a well informed public here in the US of A. I work with all college educated people and it is amazing what they don’t know.
    I thought bush was bringing the freedom of the grave and the democracy of death to other countries – and soon, to the homeland.

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