Bailouts . . .Old and New

Yesterday, the CEO's of Chrysler, Ford and GM testified before the Senate Treasury Committee pleading their case for a $25,000,000,000 government bridge loan for their ailing American auto industry. Once again we are debating the question, should the American taxpayer bear the burdens of failed corporate America?

This testimony came just a few hours after Henry Paulson, Treasury Secretary, testified before the same committee concerning the current status of the previous $700,000,000,000 bailout. With about $60,000,000,000 left of the first $350,000,000,000, the Treasury is not going to ask for the 2nd half of these bailout funds but will wait and let the new Obama administration figure out the disbursements.

Huh? Less than 90 days ago, "the sky was falling" and Congress had to pass the bailout package or our economy was doomed. Now, at least half of this money is not needed - or, at the very least, not needed until January. Unfortunately, as these hearings continued, the news didn't get much better.

The Treasury has not and will not use the approved bailout funds to purchase illiquid assets. In September, Paulson told Congress (and the American people) the bailout funds would be used specifically for this purpose. Yesterday, Paulson told the Senate Banking Committee the process of purchasing these bad assets was too complicated to carry out. Shouldn't he have known this before he made his "doomsday" case to get this massive bailout approved?

To add further insult to the American taxpayer, (and Congress) we also learned very few banks have benefited from the $290,000,000,000 which the Treasury has already been dispersed. Nine very large banks have received the lion's share of these funds. Wasn't this bailout package supposed to be available to ALL banks?

During the auto industry hearings on Capitol Hill yesterday, Jon Tester, Montana Senator, asked the three CEO's if their companies have seen any freeing of the credit markets because of the first disbursement of the $350,000,000,000 bailout. The answer from all three was a resounding "no." What? Three of the largest American corporations have not seen any benefit from the first bailout package? So, this bailout has really done nothing for corporate America or for Main Street America.

This just begs the question, who has this massive bailout benefited? My guess is the "nine very large banks." So much for the first bailout . . .now the American auto industry needs a $25,000,000,000 bailout.

After spending more than 20 years working for two of the what-used-to-be-the-Big-Three, the American auto industry is very dear to my heart. After stringently opposing the first bailout, I found myself a bit more conflicted about bailing out the auto industry. It's only $25,000,000,000, a figure much, much less than the first bailout.

So, who or what has caused the financial crisis in the U.S. auto industry? Does the cause really matter any more? Like the excesses and failures of Wall Street, there is plenty of blame to go around in the auto industry. Mismanagement, government regulation and deregulation, unfair trade agreements and the union are all to blame. Ultimately, if you spend more than you make, you can't survive - personally or commercially.

A couple of years ago, Ford Motor Company was profitable in every country in the world except the United States. During yesterday's hearings, Richard Wagoner, GM Chairman, was asked how could GM be profitable in Russia and not the in the U.S.? The elephant in the room was U.S. production costs and the UAW. American auto companies can't compete when union contracts quadruple production costs.

Alan Mullaly, CEO of Ford, was paid $28,000,000 to leave Boeing and come to work for Ford. (I actually like Mullaly and think he is doing a really good job turning Ford around.) The problem, he made $28,000,000 before Ford ever saw a $1 of profit from his managment. In 17 years with Ford Motor Company and their "Pay for Performance" incentive plan, somehow paying him $28 million up front doesn't sit well with me. In yesterday's hearing, Banking Committee Chairman Chris Dodd stated the CEO of Chrysler, Robert Nardelli, was paid $200,000,000 to leave Home Depot and go to work for Chrysler.

Toyota, Honda, Nissan and Hyundai all have non-union plants in the U.S. They import a high percentage of their parts and assemble their cars here. Their profits return to their home countries of Japan and Korea. Importing anything into the U.S. is much cheaper and easier than exporting anything except profits.

China, Japan and Korea all have a very socialistic view of automotive technology to support their automotive industry. The U.S. government has unsuccessfully tried to do use incentives to get Detroit's Big Three to do the same.

The systemic risk of the failure of the American auto industry is huge. Some reports show 3,000,000 jobs could be affected if the Big 3 fail. Other reports show the employment of one in ten Americans could be affected. Wagoner stated GM purchases goods from suppliers in 48 states. Mulally stated Ford has depots with employees in all 50 states. This morning Lori Montgomery writing for the Washington Post said, "The U.S. auto industry employs 240,000 workers. It is the largest purchaser of American-made steel, aluminum, iron, copper, plastics, rubber and electronic chips. Last year, it bought $156 billion in U.S. auto parts, supporting jobs in all 50 states. Auto sales typically account for 4 percent of the gross national product."

In this morning's editions of the Wall Street Journal and the Washington Post, General Motors has a full page ad entitled "There's a belief that GM is not doing enough." Here, GM explains the steps they have taken to cut costs and remain solvent.

A new Gallup poll shows Americans are split (47% for and 49% against) about bailing out the U.S. auto industry.

You can put me in the 49% against bailing out the auto industry. Twenty-five billion is not enough and will only prolong the inevitable. With or without this government loan, one or two of the Big 3 will likely fail and file for bankruptcy. One will likely not survive. Bankruptcy of any of these companies will hurt our American economy but it will bring needed restructuring to the American auto industry.

Capitalism is based on a free market. Our government cannot continue to blur the lines by bailing out our free market system. We will never see the end. Which industry or business will be next? Every sector of the American economy is suffering. They all need help. The only way we can find a true bottom to our economy is to let it happen. Government bailouts are just artificial scaffolding falsely supporting the roof of our economy. Like the markets and the auto industry, the economy must find the true bottom before it can start to rebuild on solid ground.