Posts filed under ‘The land of life, liberty and the pursuit of happiness’

NO bailout for the auto industry

To the President, President-Elect, Senate Chairperson, House Speaker and my Senators and House Representatives:

I am writing to voice my strong objection to the purported plans to provide taxpayer funds to select businesses in the auto industry. Never minding the unconstitutionality of taking stakes and lending to private industry (the constitution does not seem to matter anymore anyways), here are other reasons that such a bail out would be unjustifiable.

The current financial market turmoil is not a primary factor for their financial infirmity.  There is plenty of capital in the world (Warren Buffet has been openly investing, e.g. in GE); however, no one is willing to lend or invest in the auto makers in Detroit (cheaply) because of the inherent structural deficiencies in their businesses.  Investors face almost certain losses (or unfavorable returns) sans dramatic, difficult and painful restructuring in their business models that would require herculean efforts to achieve given the plethora of stakeholders involved.  Otherwise, given their current share prices, value investors, such as Warren Buffet, would be lining up to buy them and invest in them.

The Big Three problem’s arise from a combination of management decisions, union bargaining and government policies.

Unions: The monopoly power of the UAW allowed them to extort, with the threat of debillating strikes, very rich terms and benefits on behalf of their members – terms that essentially allowed their members to borrow against the future to capture above-average wages and benefits in the past and present.

Management: Management focused on the short term in allowing these concessions to the unions, made bad product development decisions or shirked from making painful but necessary restructuring decisions and allowed politically easy solutions to delay the need to look to the future.

Congress: Congress made the decision to legislate fuel mileage standards under a “two fleet” framework which forced these automakers to build loss-generating small cars in the US while they were already building profitable ones abroad.  Congress no doubt set this up specifically to cater to union pressures to ‘preserve’ union jobs in the US.  While truck/SUV sales were booming, this covered the losses they were making on their small cars.  The market today no longer has the demand for the more profitable trucks that the Big Three depended on for the past so many years to “keep going”.  So the Big Three are left now with producing a lot of small cars, each at a loss.  GM has openly admitted that their Volt, even at $40,000 a piece, would lose money for the company.  How will a bail out help?  Let them keeping producing cars at a loss so 3 million workers can continue to take home rich wages and benefits?  Perhaps they will retool and restructure and become profitable again – but it is for investors, bankers and private party to make that assessment and take that risk, not a group of 500 odd people betting with the hard earned money of 110,000 tax payers.  But the “two-fleet” policy was of Congress’s making and bailing them out is, in many ways, taxpayers paying for Congress’s errors.

There is also the issue of equal protection under the law.  This is a core principle that cannot be relinquished no matter how dire the circumstances.  What qualifies the auto industry for above-equal protection from bad management, policies and market conditions?  Equal protection under the law would mean the same access to financial markets as others, same liberty to structure their businesses as they see fit – and the same access to bankruptcy courts.  Indeed, bankruptcy may be able to achieve the dramatic restructuring that is required in the industry and let it emerge quickly, smaller certainly, but more profitable, focused on products demanded by the market and still employing millions.

Finally, there are millions of workers in other industries who have or will be losing jobs in the current economic climate.  In an election campaign where the word “fairness” was much bandied about, how can government provide financial support to the auto industry to the benefit of auto workers and not provide similar support to hundreds of other companies, such as Whirlpool, Circuit City, Lazy Boy, SeverallSteel and others whose employees also face layoffs?  Are these workers any lesser than and not deserving of the same benefit as UAW workers?

A bail out would be nothing but a band-aid solution, attempting to trade short-term pain for a long-term morass of throwing good money after bad.

I urge you not to support a bail out.  Any bail out would be purely a political decision, not an economically justifiable one.

In the event you believe that you would be politically wise to support a bail out, I would strongly insist that the following conditions be part of the bail out.

Until all bail out funds provided by the government have been returned as per their financial terms, no amounts remain owed by the auto company to the government and the government has completed divesting any interests held in these companies:

  • No funding should be permitted of any unfunded liabilities, including pensions, health care trusts, retirement trusts or similar benefits for management or workers; this would be tantamount to the tax payers paying for those benefits, a direct usurption of wealth.  In fact, to really get their skin into the game, it would behove to insist that any funds provided by the government be matched by any existing assets in these trusts.  If they believe, as they have been insisting, that they just need this to get over a hump, they would have no fear of putting their own personal assets at risk.
  • No increase should be permitted in wages or benefits.
  • No new legislation may be introduced that restricts the manufacture or import of vehicles by other firms.
  • Focus to be on turning profitable again within the current regulatory framework; not in attempting to meet green or yellow or purple agendas unless they happen to be the path to profitability.

Finally, as leaders who are expected to be exemplars of honor for all the people, let every Senator, House Representative and Executive, including the President-Elect, who go on record as supporting any bill providing government aid to the auto industry, make the following commitment – that should the bail out fail and these firms enter bankruptcy or require additional funds, they will promptly and voluntarily step down from public life for a period of at least 10 years.  These leaders have been entrusted with billions of tax payer dollars.  They are risking the national wealth in supporting a bail out.  As people of honor, the least I would expect them to do is to atone for their misjudgement in the event such a bail out fails.

November 14, 2008 at 9:26 pm Leave a comment

Curious timing of Obama’s resignation

Yes, I am skeptical… of all politicians.  This one seems to reinforce my impression of a man who likes to vote ‘present’ rather than taking a stand on shaping legislation or backing/rejecting it.

Obama has indicated (and urged Bush to) support for Detroit’s bail out request.  Democrats in Congress are scrambling to put together something that will win enough votes to pass.  Had Obama continued in the Senate, he could have not only shown his leadership in crafting legislation and working with Republicans to win backing but also been available to cast his vote to improve Democratic chances to pass an Auto industry welfare, bailout, bill.

But that would put him in a position where he would have to account for his vote and take a side on this contentitious issue.

Rather than face that situation, he appears to have made the decision to resign right away, before any session of Congress gets in progress.  So the Democrats are now short one additional vote in the Senate making chances of passing the bill fairly remote.  On a matter that Democrats, including Obama, have stressed as a do-or-die moment for the industry.

He did not want to show Michigan (or the rest of the country) where he stood on this matter in a manner that could have improved the chances of this bill.  This now affords him the opportunity to verbally extend his sympathies to the auto workers while not having to be accountable for the potential failure of any bill that Congress passes during their lameduck session.

If my skeptical view is correct, I am happier for it; his political machinations, in this instance, may save us from another bailout that is completely ill-deserved.

November 14, 2008 at 7:41 pm Leave a comment

Obama is not ‘inheriting’ this economy

There are already moves to position Obama as having to ‘take over a bad economy left behind by his predecessor Bush’.  While this provides a convenient excuse for Obama to blame Bush for any failures in turning the economy around, let us be clear at the outset – Obama had a hand in shaping the economy that he is taking over.

The current financial and economic turmoil was initiated primarily by the crisis caused by sub-prime and mortgage lending.

While in Chicago, Obama demonstrated with Acorn members in front of banks and filed lawsuits against the banks forcing them to lend to people who would not be eligible for loans in normal circumstances.  It does not require judgement, just common sense, to know that giving loans to people who cannnot pay it back is not a good idea.  Business is in business to be profitable – so they would look to cut their risks from these bad loans.  That led to the packaging, securitization and selling of these loans onto other investors and the Fannie/Freddie Maes.

The immense systemic risk posed to the financial system by Fannie and Freddie as well as the securitization of mortgages was well evident back in 2003.  Obama was in the Senate in 2005 when efforts were made to reform Fannie and Freddie and reduce the risk posed by these entities to the financial system.  He chose to stand by and be ‘present’ while the effort died at the hand of the democrats.  Either he did not have the judgement to realize the risks and therefore did not support the effort or he did not have the political backbone to demonstrate his leadership/judgement against his fellow democrats.  Or he was too busy campaigning for the President’s office to do the job he was being paid for.

While he was in the Senate, he could have taken a more forceful stand against government spending and the deficits but there was no leadership from him on this matter either.  It is Congress that controls the budget, not the President.  Indeed, he was happier to be increasing the spending with earmarks to his constituents.

And, yes, we, the people, also had a role in shaping this economy (or economic crisis).  We borrowed recklessly, spent recklessly, assumed that house prices would continue to go up at rates far outpacing any economic or income growth and we could use them like our personal ATMs.

So for him or his supporters to attempt to claim that he is the victim of circumstances brought about by his predecessor’s policies is blatant ‘spinning’ of the truth.  He, along with other congress members, Democrat or Republic, as well as the people, had a role in shaping the economic conditions that he will be ‘taking over’.

Now he will be trying to clean up a mess that he had some role in creating.

November 13, 2008 at 4:26 pm Leave a comment


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