Not too much equivocation on it: the big three automakers are facing imminent demise and are playing the Too Big To Fail card. They are asking Congress for $50 billion in loans.
General Motors Corp., Ford Motor Co., Chrysler LLC and U.S. auto-parts makers are seeking $50 billion in government-backed loans, double their initial request, to develop and build more fuel-efficient vehicles.
The U.S. automakers and the suppliers want Congress to appropriate $3.75 billion needed to back $25 billion in U.S. loans approved in last year’s energy bill and add $25 billion in new loans over subsequent years, according to people familiar with the strategy. The industry is also seeking fewer restrictions on how the funding is used, the people said today.
Make no mistake, this is an election year gambit to save the US automobile industry from bankruptcy. These companies have hemorrhaged tens of billions of dollars in the last year, and now they are depending on US taxpayer dollars to bail them out, just like the banks, just like the airlines, just like the entire manufacturing sector…
GM and Ford lost $24.1 billion in the second quarter as consumers, battered by record gasoline prices, abandoned the trucks that provide most of U.S. companies’ profit and embraced cars that benefit overseas competitors such as Honda Motor Co. U.S. auto sales may drop to a 15-year low this year and fall even more in 2009, analysts have said.
“Next year is going to be a make-or-break year in terms of survival,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets, including GM and Ford bonds. “Any help like these government loans would be a huge boost.”
Standard & Poor’s said Aug. 19 that U.S. light-vehicle sales will fall to 14.2 million units this year from 16.1 million in 2007 and drop again to 14.1 million next year. The ratings company said there is a 20 percent chance that this year’s sales will be as low as 13.6 million and 11.7 million next, presenting an “overwhelming challenge” for U.S.-based companies.
“It takes money to make money” versus “Throwing good money after bad.” Here’s the question: Should the Fed bail out the auto industry in the US? Of course in an election year they will. What’s $50 billion when you owe the world $10 trillion, anyway?
“Our plans, which require significant investments, are at risk because of limited access to capital,” said Greg Martin, a spokesman for Detroit-based GM. He declined to comment on whether GM is seeking more than the original $25 billion. “This program will open capital that is necessary to make sure our transformational plans continue at full speed and give us the best chance to succeed.”
Mike Moran, a spokesman for Deaborn, Michigan-based Ford, said the automaker had no comment on any funding beyond the $25 billion already approved.
“The priority is to get the appropriation that has already been approved,” said Linda Becker, a spokeswoman for privately held Chrysler, based in Auburn Hills, Michigan. “Conversations as to why or how we should expand that amount are ongoing.”
Congress needs to appropriate about $3.75 billion to cover the upfront cost of the government loans, according to a July 25 estimate in a letter to House and Senate leaders. The letter was sent by 71 members of Congress urging support on the issue.
Does anyone honestly think these companies will be able to pay the government back? After all, if Bear Stearns gets a rescue deal, why not GM and Ford? Why not any company valued at or above the market value of Bear Stearns?
“This is a horrible idea, another transfer of funds to failed ventures,” said David Littmann, senior economist for the Mackinac Center for Public Policy in Midland, Michigan, which describes itself as a supporter of free-market ideals. “If this were a good idea, the market would price the debt accordingly and give them the money.”
It’s funny how the free market is inviolable unless a major corporation makes massive mistakes like making a product they knew was going to be obsolete.
And yet despeite the fact the Fed can’t afford it, they will get bailed out. It’s an election year, and the auto lobby will assure these loans happen.
The airlines will be next, certainly.
But in the end, who will bail out the American taxpayer?
Be prepared.
Also over at ZVTS.
