Conditional Bailout Presents Rare Chance

The economic events of the last several quarters have been exhausting and have inflicted immense pain on many Americans, yours truly included. Obviously, although I am sure well intended, much of the governmental action, particularly in the form of orchestrating bailouts, has not been successful as Wall Street remains in freefall. Today's action suggest a very serious test of the recent lows and a break of those lows with any sort of conviction could send the DOW into the 6000's. Not pretty.

The issues facing the treasury and The FED are massive, and I recognize the simplicity of arm chair quarterbacking without keen insight to the information these agencies are dealing with. However, I would like to comment on the potential bailout the Big 3 automakers, GM (GM:NYSE), Ford (F:NYSE) and Chrysler. I will attempt to be brief, but it is an extremely complex problem.

First, almost daily on CNBC and FOX Business, I repeatedly hear a host or a guest fire the comment out that these firms do not make quality vehicles the public would want. This is total bullshit! I personally own a Chevrolet SUV and a Pontiac sedan and both are superb, particularly the Pontiac GXP. Both have over 60K miles and not withstanding the Goodyear (GT:NYSE) Racing Eagles I have had to replace, I have not spent over $1000 combined on these vehicles. Good God, I hope I did not just curse myself.
GENERAL MOTORS 2009 PONTIAC G8 SEDAN, MOTOR TREND CAR OF THE YEAR FINALIST

The problems the automakers face has nothing to do with a lack of product quality or vision for design and appeal of the current or future vehicles. In fact, outside of Chrysler's Bob Nardelli, who ran Home Depot (HD:NYSE) into the ground, the management is not all that bad in my view. The automaker CEO's do have a pink elephant in the room; the unions.


The automakers were running on the tightest of margins, hampered by governmental regulation, taxes, tariffs, global climate change initiatives (no, I am not kidding) CAFE and emission standards and union demands that are completely illogical and lack any sort of flexibility. They maintain the margins by relying on the consumer to continue turning over inventory every five years or so as outlined by analyst modeling based on long term data. BOOM, the housing market fell off a cliff and consumers got caught up in, with ironic apologies to The Motor City Madman Ted Nugent, a stranglehold.

With consumer expendable income squeezed dry, big ticket purchases are the first thing to be placed on the sideline. Demand for these items has not gone away, but quantity demanded has fallen off a cliff due to skyrocketing gas prices (which have since subsided but the consumer has zero confidence they won't soon return), uncertainty about the economic near term future and the extreme difficulty in obtaining credit, which is the lifeblood to our consumer driven economy. No consumers mean no revenue and with that comes the instant inability to reach those already razor thin margins, and it is not even close.

So, should they be left to wilt under fire and cease to exist, crushing thousands of jobs and creating a untold tiered ripple effect. Without some serious revisions to business as usual, yes.

However, we are presented with an opportunity at this time, and our representatives on the hill should take full advantage of it.

Organized labor under The United Auto Workers is the main culprit hampering the industry in the effort to be competitive with foreign automakers, particularly those with plants in the United States. Legacy costs create a burden that is estimated to represent over $2000 per vehicle in additional costs which in this extremely competitive environment is just a killer. Union contracts force the automakers to pay inflated wages which creates inefficient market conditions which are unsustainable. Blogger Mark Perry, Economics professor at The University of Michigan (Flint campus), provides a chart of the breakdown on his Carpe Diem blog.

Recent negotiations between the Big 3 and the UAW have planted mustard seeds as incoming workers are paid competitive wages while the legacy costs are estimated to fall off dramatically over the next decade. I did recognize that at the table before the congress along with the CEO's of the Big 3 was the UAW representative. It is not the Big 4, or is it? Against the backdrop of bankruptcy, the UAW rep really does not have dog in this hunt. Part of the existing UAW contracts indicate a certain level of paid hours of workers, regardless of fluctuations in quantity demanded and production levels. Would you run your bakery or hardware store like that? Should a bailout, or workout as former Mass Gov. Mitt Romney (R) puts it, move forward, major concessions should come from the UAW. In fact, they promote inefficiency, are unnecessary and should cease to exist in my view.

The government also places tariffs on intercontinental automobile trading, giving foreign competitors a significant competitive advantage. Since trade agreements must be adhered to until the time period of the agreement is exhausted, perhaps Uncle Sam should issue tax incentives to consumers who purchase US autos? This could work, but the issue of consumer credit must be solved or there will be no buyers to grab that incentive.

The government has already signed off to give the automakers 25 million to predominantly deal with the emission standards the government has placed upon the automakers. I know I will be labeled on par with a holocaust denier to speak out that global climate change is a farce, but in light of limited evidence to the contrary (record low in Orlando this morning), perhaps the government could suspend, or I may recommend, eliminate, these cumbersome regulatory restraints and directives? At any rate, with bankruptcy looming, they could use that money to stay alive.

All three US automakers are making impressive progress in fuel efficient vehicles, and most of the GM fleet gets over 30 MPG. The Chevrolet Volt, shown below, should be a huge seller.

GM INNOVATION IN ELECTRIC VEHICLES COMES TO THE CONSUMER IN 2010 WITH THE CHEVY VOLT

I had to laugh watching Chris Dodd and Barney Frank presiding over the hearings with the Big 3 CEO's. If the housing crisis did not unfold, the automakers would not be in the position the currently find themselves in, and Frank and Dodd were asleep at the wheel as that problem emerged (would the fine folks of Connecticut and Massachusetts please toss these corrupt idiots out of office?). Governmental regulatory intervention and organized labor eliminate any fighting chance the Big 3 have to competitively emerge from this debacle. These barriers to competitiveness should be eliminated yesterday.

Since the government contributed to the cause of the problems that saddle the Big 3, government should assist them in the way out, and then get the hell out of the way! The auto industry is not a normal business, and it's importance to America is quite significant. I think some sort of workout, either a bankruptcy with a partial governmental backstop or a bailout/workout with a conservator (Romney?) is necessary as I fear the aftermath and costs of complete failure significantly surpasses that of a workout.

But if the Big 3 are going to take the taxpayers money, they must adhere to conditions, and those would include but not be limited to elimination of the UAW, the restructuring and rewriting of current union contracts, elimination of duplicate models (Saturn Sky and Pontiac Solstice, for example) and the reduction in the amount of dealerships (which does not necessarily include the elimination of product lines). If bankruptcy is the option taken, the government should be cognizant of the effect on warranties (would require some sort of backstop) and the potential impact of the tiered suppliers which could be severely damaged or lost in the ripple effect, including companies like Johnson Controls (JCI:NYSE) and Lear Corporation (LEA:NYSE). Evaluating the landscape on this issue, I find a workout of some sort is critical to our economy at this time.

I find it poetic that during green week, partly because government has forced the industry to spend unnecessarily on green initiatives, we need to pass out armored cars full of greenbacks. A vicious circle indeed. It makes you want to pull the hair out of your head and set yourself on fire.

After that depressing commentary, for our listening pleasure I present Ford truck owner and Detroit native, The Motor City Madman Ted Nugent, with Stranglehold.