GM & Chrysler on the Brink -- Part 3

[Imran Siddiqui]

But in that case, the problem is systemic. The deep recession has been caused by the policy of driving up the GDP number by running up the deficit.

Which means that there is no evidence that GM's problems are caused by its own inefficiency. It could simply be the eventuation of an anomaly inherent to the current programming of the economic matrix.

If GM cannot survive without government assistance, while other automakers like Ford, Toyota, etc., can then obviously their own inefficiency or incompetence is to blame here. Res ipsa loquitur.

Not according to reliability surveys.

Testers, like the Consumers Union, tend to rate the fleets of Japanese car makers like Toyota and Honda to be far more reliable than those of Ford or GM.

Irrational risk avoidance is still irrationality.

Fool me one, shame on you, fool me twice...

I don't really consider it all that irrational at all to force a brand to prove itself in the reliability field, as reliability is something that is found out over time and not just at once.

Furthermore, the gas efficiency cannot be denied.

[Vanguard]

If GM cannot survive without government assistance, while other automakers like Ford, Toyota, etc., can then obviously their own inefficiency or incompetence is to blame here. Res ipsa loquitur.

Why?

This is only true if you redefine "inefficiency" and "incompetence" to mean "losing a lot of money during a market collapse".

Testers, like the Consumers Union, tend to rate the fleets of Japanese car makers like Toyota and Honda to be far more reliable than those of Ford or GM.

Consumer Reports doesn't test them. They use a survey. Like any other survey.

They come up with different results. But there is no reason to think their methodology (on this matter) is any better than other surveys.

Furthermore, the gas efficiency cannot be denied.

Sure, but gas is now $1.60 a gallon. And money is flooding the economy.

If GM starts selling millions of full sized SUVs again, does that mean they will suddenly become hugely "efficient"? And highly "competent"?

[Imran Siddiqui]

This is only true if you redefine "inefficiency" and "incompetence" to mean "losing a lot of money during a market collapse".

If companies are surviving and another established company in the same market is failing during an economic downturn, I think it is quite obvious that the failing company is not as efficient. One cannot blame the fact that it is starting up and hasn't had time to set it legs, as GM has been around for many, many years.

It's what recessions do, correct the market, sweep out the inefficiencies. Obviously, it appears GM is inefficient.

If everyone was being swept out to sea in the auto market, then perhaps you may have had a point.

They come up with different results. But there is no reason to think their methodology (on this matter) is any better than other surveys.

Obviously, then, some surveys show GM or Ford cars to be less reliable. So why would it be irrational to rely upon them? Not everyone has to time to go through all the surveys out there.

If GM suddenly starts selling millions of full sized SUVs again, does that mean they will suddenly become hugely "efficient"? And highly "competent"?

Inefficiencies are not usually apparent during growth periods. Which is why every once in a while the market needs correcting. Then we can see which companies aren't worth surviving. Some companies, unfortunately, are too lobbyist-upped to fail.

[Zkribbler]

I've heard that all European governments have taken steps to prop up their nation's car companies. GM & Chrysler have asked for bridge loans; Ford has asked for a line of credit. I haven't heard about Asian car companies asking for bail outs, but I have heard they are all losing money.

Does this mean that all auto manufacturers in the world should be allowed to fail?

[Imran Siddiqui]

If allowing them to into bankruptcy and then having the government extend credit that would normally get if the banks were fubared means "allowed to fail".

What's wrong with bankruptcy?

As DanS put it on page 1:

a prepackaged bankruptcy of sorts for GM and Chrysler. I guess this would include government-guaranteed Debtor-In-Possession financing.

[Zkribbler]

My understanding of this scenario is that (a) consumers will not buy cars if they believe the warranties are worthless; and (b) bankruptcy does not provide the infusion of cash necessary to tide the companies over until consumers start buying again.


BTW: This is a GREAT time to buy a new car. Dealers really, really, really want sales. :desire: One dealer in my area is offering two cars for the price of one.

[Imran Siddiqui]

Originally posted by Zkribbler
My understanding of this scenario is that (a) consumers will not buy cars if they believe the warranties are worthless; and (b) bankruptcy does not provide the infusion of cash necessary to tide the companies over until consumers start buying again.

And if the government provides backing for the credit, what's the problem?

Why does every other company/industry (aside from banking) have to go through bankruptcy when its in financial dire straits?

Furthermore, seeing as how this recession may last a few years, how much would the government have to provide to "tide the companies over"?


As Megan McArdle puts it:

http://meganmcardle.theatlantic.com/archives/2008/12/bet_ron_gettlefinger_is_kickin.php

The biggest concerns about bankruptcy are two:

1. How will the Big Three obtain Debtor-in-Possession financing in a credit crunch?
2. How will they convince people to buy their cars if there's a risk that the warranties will be no good, or Detroit will fail and hence stop making parts?

The government is in a pretty good position to answer that question; it can be the lender of last resort, and if necessary, it can guarantee the warranties, and loan Detroit the money to build a "parts bank" to insure customers against liquidation risk.

[Zkribbler]

Why does every other company/industry (aside from banking) have to go through bankruptcy when its in financial dire straits?

Because if "every other company" fails it won't lead to the loss of an estimated 2 million jobs in the U.S.

And if the government provides backing for the credit, what's the problem?

That might be okay. But if we sign on as guarantors, we can either break even or have to pay. If we're the lenders, we get principal and interest back if the car companies survive , while -- if they don't--we lose the same amount as if we were the guarantors. We stand a better chance of winning if we're the lenders.

[Imran Siddiqui]

Originally posted by Zkribbler
Because if "every other company" fails it won't lead to the loss of an estimated 2 million jobs in the U.S.

Well if "every" other company falls, it'll lead to more losses .

Seriously, though, is this the "too big to fail" thing? Because one can argue that for a lot of companies (Wal-Mart being one, which, btw has 2.1 million employees).

That might be okay. But if we sign on as guarantors, we can either break even or have to pay. If we're the lenders, we get principal and interest back if the car companies survive , while -- if they don't--we lose the same amount as if we were the guarantors. We stand a better chance of winning if we're the lenders.

Debtor-in-possession lenders (the government here) are close to the front of the line to get their money back.

Also if we decide to turn it over to a "car czar" (loans without bankruptcy), political considerations will play a far larger role than with a bankruptcy judge.

[Vanguard]

Originally posted by Imran Siddiqui

This is only true if you redefine "inefficiency" and "incompetence" to mean "losing a lot of money during a market collapse".

If companies are surviving and another established company in the same market is failing during an economic downturn, I think it is quite obvious that the failing company is not as efficient.

.......(one line excerpted so I could answer it below)

It's what recessions do, correct the market, sweep out the inefficiencies. Obviously, it appears GM is inefficient.

This is nonsense. You are just defining any company that fails as "inefficient". This is tautology without definition.

You could equally well say that anyone who gets killed in a hurricane was "genetically unfit to survive a hurricane". It is true--- in some sense. It just doesn't mean anything.

One cannot blame the fact that it is starting up and hasn't had time to set it legs, as GM has been around for many, many years.

GM has been a large company for a long time. That is why it has extremely high pension and medical costs.

But the fact that it has been an industrial giant for the past forty years does not prove that GM is "inefficient". It just means that GM has high costs, and they have to sell a lot of cars to cover those costs. When they aren't selling a lot of cars (like now) they can't do that.

Because they were big in the past, they have to be big now. It is as simple as that. Efficiency has nothing to do with it.

If everyone was being swept out to sea in the auto market, then perhaps you may have had a point.

Toyota, despite its incredible "efficiency" is losing money. More money than it has ever lost in the seventy years it has existed. And it is making no prediction for profits next year either.

Nissan isn't exactly looking great either. Which large car companies are profitable right now?

Inefficiencies are not usually apparent during growth periods.

Why would they not be apparent? If you are wasting resources, then this should be more apparent during periods of growth, when such resources are more expensive and you use more of them.

Which is why every once in a while the market needs correcting. Then we can see which companies aren't worth surviving. Some companies, unfortunately, are too lobbyist-upped to fail.

"Market correction" is just Wall Street spin. It is what you say to keep your job after you have lost all the client's money. It doesn't mean anything.

[Zkribbler]

The Wal-Mart analogy fails because (a) it has competitors to pick up the slack -- as opposed to the entire auto industry; and (b) Wal-Mart pays lousy, while auto manufacturing are some of the last middle-class wages in the U.S.

As I understand the Car Czar, he is to be a monitoring agent. I agree, if he starts imposing political mandates, he'll only mess up the chances for the auto industry's survival.

A debtor-in-possession has the best chance of bringing the companies through this mess. However, the current rescue plan does not contemplate decapitating management.

[Dinner]

To be fair the loans given this week are only bridging loans designed to keep the companies a float until the new Congress and President come in and Republicans lose their ability to be obstructionists. I think that it will be very good to have a comprehensive plan to work out the industry's issues without Republicans simply trying to kill it for political reasons. Their sole goal in all of this was union busting and trying to blame everything on the unions when in fact the unions only played a minor role and the restructuring will already solve the cost issue by the end of 2010.

The UAW is a big backer of the Democratic Party and the GOP knows it thus they've been trying to kill the auto industry as a round about way of killing the UAW. The whole industry is in crisis because of the financial crisis; nation wide auto sales have fallen from 17.5 million to just 10.5 million in a single year and it looks like another huge drop will occur in 2009. We must not forget that Republican deregulation caused this financial crisis. That's where the blame for our looming depression really lays.

[Imran Siddiqui]

Toyota, despite its incredible "efficiency" is losing money.

Is it failing enough that it requires government handouts to keep itself afloat?

But the fact that it has been an industrial giant for the past forty years does not prove that GM is "inefficient". It just means that GM has high costs, and they have to sell a lot of cars to cover those costs. When they aren't selling a lot of cars (like now) they can't do that.

Most well run companies realize that times aren't always good.

To deny GM's inefficiencies is silly. GM wasn't making money on small cars, they were making money on the financing of small cars. The reason they were doing ok when gas was cheap is because they were making money on light trucks and SUVs and failed to have any foresight to realize cheap gas wouldn't last forever (you'd have thought the 70s would have taught them that lesson).

I wonder, do you define inefficiency by what companies you personally think are efficient or not? I can't think of a better measure that those who are not well run enough to respond to an economic downturn.

[q=Zkribbler]The Wal-Mart analogy fails because (a) it has competitors to pick up the slack -- as opposed to the entire auto industry; and (b) Wal-Mart pays lousy, while auto manufacturing are some of the last middle-class wages in the U.S.[/q]

If you want, you can expand "Wal-Mart" to the entire retail industry. As for how much it is paying its employees, is that the only reason to save a company that will fail?

I agree, if he starts imposing political mandates, he'll only mess up the chances for the auto industry's survival.

And how confident are you that an executive branch official won't start imposing political mandates? If he can be fired at any time, and Michigan's votes are important enough (and they are), I think that's a pretty big pull.

A debtor-in-possession has the best chance of bringing the companies through this mess. However, the current rescue plan does not contemplate decapitating management.

Which is why bankruptcy with the government as DIP is the best option, easily.

[Dinner]

BTW Obama's new version of the Works Progress Administration is looking extremely promising. They're saying it might be as large as $850 billion all dedicated to infrastructure projects and public works. New roads and bridges will be built and existing ones repaired, public parks will be built and existing ones will get new improvements, and we might even see some new high speed rail built as well. Hell, California has already approved bonds for $10 billion to start work on our bullet train network but some Federal matching funds would really come in handy.

[Dinner]