Obama's Job #1: Save Big Three (Perhaps)

♠ Posted by Emmanuel in at 11/06/2008 01:13:00 PM
After soliciting the support of the automobile industry during the current election cycle (as Democratic candidates for president typically do), Obama will be put to an immediate test: GM, Ford, and Chrysler are in imminent danger of being driven off to the Great Car Dealership in the Sky. Aside from Americans demanding more fuel-efficient (usually foreign) cars after oil prices went up, all carmakers now have to deal with scarce auto financing. With over three-fourths of cars sold in America on financed terms, this is no minor problem. Indeed, President Bush's [remember him?] reluctance to bail out the auto industry is worrying as these carmakers may not even make it to the start of the Obama years. From Reuters:
President-elect Barack Obama courted distressed U.S. automakers during his campaign and pledged to help them, but the industry's health is so bad it may not be able to wait for him to take office.

"He's not here until January (20th) and that's a long time in the life of these companies at the moment," John Engler, a former Michigan governor and president and chief executive of the National Association of Manufacturers, said on Wednesday.

Engler expects fundamental changes in industry before Obama's inauguration. Engler was not specific. General Motors Corp said on Wednesday it plans to reveal new cost cuts when it reports quarterly earnings on Friday. Results at GM and Ford Motor Co are expected to be dismal. Both GM and Ford congratulated Obama on his election and associated overall U.S. economic weakness with Detroit's worsening financial prospects.

Automakers hold out hope the Bush administration, reluctant to bail out Detroit, will act before yielding power to Obama. Carmakers, their allies in Congress and other industries have called on the Treasury Department to extend loans or other capital as a stop gap.

In coming weeks, companies and their lobbyists plan to "dial up" their urgency. Industry plans to underscore its belief that its immediate problems are not of its own making -- that the dire predicament is closely linked to the global credit crunch and survival depends on federal intervention.

While GM and Ford struggle, prospects at Chrysler LLC are the most uncertain. People involved in discussions about its future say the smallest of the U.S. manufacturers could merge, be spun off or be pushed into bankruptcy if not helped soon. Engler said a Chrysler failure could cost up to 1 million jobs throughout the economy. "It's not just the three auto companies, it's suppliers, all the way down the chain," Engler said.

While Obama is not yet in office, industry sources say he could still pressure the Bush administration and exert leverage on the Democratic-led Congress, if he believes action is needed to avert a broad economic crisis in manufacturing.

House of Representatives Speaker Nancy Pelosi called on Wednesday for a $61 billion stimulus plan to spur the U.S. economy, but said passage later this month would depend on Senate Republicans and the mood of the White House. Pelosi met on Monday with auto industry allies in Congress and key committee chairmen. There is no consensus yet on an aid proposal for Detroit.

Carmakers, their lobbyists and congressional officials have suggested up to $25 billion in direct loans with few or no strings attached to help them through the current crisis, officials said. Government red tape is holding up another $25 billion in advanced technology loans for automakers that was approved in September. During the campaign, Obama called on the Bush administration to accelerate that financing.

The United Auto Workers has suggested billions in congressionally approved aid could go to covering retiree health care costs, freeing up money that companies would otherwise have to contribute for benefits.
Large benefits that the automakers gave to workers during happier times are part of the problem. In contrast to American ones, foreign carmakers are mostly non-union shops, having set up in the south where the United Auto Workers and others are thin on the ground. While the UAW has given in somewhat to competitive pressures to cut down on these benefits, past commitments made by these automakers are a burden carmakers have to bear going forward. from the Financial Times:
The problems facing Detroit’s three carmakers, which are struggling to survive amid the worst trading conditions in 25 years, are quickly claiming a prominent position in president-elect Barack Obama’s bulging “in” basket.

General Motors and Chrysler failed to cobble together support from the Bush administration for a merger ahead of Tuesday’s US election, in spite of efforts to impart a sense of urgency on the need for a government-backed deal.

Mr Obama’s administration may find providing aid to the struggling industry to be equally unpalatable. But it may have little alternative if it aims to avoid a collapse of one or more carmakers.

While Mr Obama will not take office until January 20, a deal between GM and Chrysler – or an alternative effort to save them from bankruptcy – could be struck earlier if current officials are willing to broker a solution with input from the incoming administration.

Representatives of the carmakers and Mr Obama’s administration have been talking for weeks, but lobbying efforts have now kicked into full gear. GM, Chrysler and Cerberus, the buy-out group that owns Chrysler, are clamouring over what they say is an increasingly dire need for help, following a precipitous plunge in US auto sales last month.

That sales decrease was spurred partly by a drop in demand but also by the credit crisis, which has decimated auto lending and helped push GMAC, GM’s auto and mortgage lending arm, to a $2.52bn third-quarter loss.

A bankruptcy of GM – the largest and most immediately cash-strapped of Detroit’s three producers – could take down Ford Motor as well. The two companies share a number of suppliers, many of which are themselves verging on insolvency.

“If one of these guys goes down, it would probably take the entire industry down,” said David Cole, chairman of the Center for Automotive Research, an Ann Arbor, Michigan-based non-profit group associated with the University of Michigan. “The numbers are that stark.” A failure of America’s domestic carmakers and their supplier base would affect some 2m jobs and have a $200bn impact on the economy, Mr Cole said.

GM, Chrysler and Cerberus have agreed on the amount of support they are seeking from the government, according to one source close to the talks. Several industry sources have pegged that number at at least $10bn. But the structure under which that support would be given, if at all, is still up in the air.

“Nobody wants this to be something where they come back every so often and ask for more,” said one person involved in the talks. Proposals for government support range from loan guarantees, a fast-tracking of a current $25bn loan programme – ostensibly aimed at retooling factories to produce low-emission vehicles – direct injections, or a hybrid model, in which the government could guarantee loans in exchange for preferred ownership in the company.

“A loan guarantee could work, and so could a direct injection,” the source said. “But a direct injection brings along issues of governance, which are uncomfortable for everybody.”

Detroit’s Big Three could remain a thorn in Mr Obama’s side well into next year, if the unions and other blue-collar workers, who form part of his constituency, hold him accountable for the handling of a problem he inherited.

“The car companies, because they’re dependent on the finance companies, are a collateral victim of the credit crisis and they shouldn’t be overlooked,” said one source involved in the merger talks. Roger Altman, who worked on the 1979 bail-out of Chrysler as assistant Treasury secretary, is among those advising GM and stressing the need for rapid government support.

Opponents to government aid have been equally vocal, however, pointing to the continuing malaise at government-backed insurer AIG as evidence that dumping cash into failing institutions without dramatically reworking their strategies and management does not work.
Those familiar with the "infant industry" argument may see parallels here. What we have instead is a "geriatric industry" seeking favor from the government. Instead of asking for protection from market forces to launch a new line of business, we have an old line of business asking from protection from the gales of creative destruction. Certainly, the figures being bandied about of 1-2 million automobile-related jobs and a $200B annual industry are not easy to ignore in political-economic terms. This is not a constituency that will be easy to ignore, although the government's ability to prod the dying US auto industry into a profitable direction is certainly questionable given Detroit's proven inability to make cars people actually want to buy--with or without credit.