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Auto Bailout

Zachary Gil
Professor Lewis
Macroeconomics
December 08, 2008

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Big Three Automaker Bailout
The financial bailout of the Big Three automakers Ford, Chrysler and General Motors is a prime example of the recent economic hardship that most consumers have been in touch with. All three automakers are asking for billions of dollars in loans from the federal government to keep their operations going until they can retool and the economy bounces back from its recession. Recent polls taken indicate that the American public is not in favor of granting any loans, at the expense of the taxpayer, because automakers are still misusing company funds. Automakers have acknowledged that their efforts over the last thirty years should have been geared toward keeping themselves competitive with the foreign automakers such as Toyota and Honda. Making reliable and efficient cars should have been the way to go. Instead they chose to go where the money was at the time and banked on popularity of trucks and SUVs. Business started to dwindle a few years ago as gas prices slowly climbed upward but when gas prices made it all the way to four dollars a gallon, consumers looked for new ways to save money and the automakers were left with a lot of trucks and SUVs that were not as popular as they had once been. This leaves Americans wondering if the automakers get the loans, will this be enough or is it just delaying the inevitable

In the midst of the bank bailout, the big three automakers Ford, Chrysler and General Motors have come forward to ask the federal government for loans to help not only stay afloat but to restructure their industry. Without the loans, automakers say that they will be forced to go into bankruptcy causing hundreds of thousands of job losses and the economy will slip deeper into recession. General Motors and Chrysler would like immediate cash loans to stall possible failure, while Ford is asking for a 9 billion dollar credit line to use just in case they need it (Drawbaugh, Crawley).General Motors is in need of $12 billion in loans, with $4 billion of that immediately, as well as a $6 billion credit line (Drawbaugh, Crawley). Chrysler is in need of $ 7 billion (Drawbaugh, Crawley). These recent requests for loans have left consumers speculating if the auto makers are truly deserving of this opportunity for possible revival or if this is just a temporary fix for a problem that will not be able to be corrected. After all, if these automakers have done such a poor job of managing their own money, the probability of them using taxpayer money adequately is slim to none. The whitehouse has refused to dishout for Detroit any of the $700 billion it has already been giving to Wall Street and banks, indicating that money is soley intended to help stabilize the financial sector (Drawbaugh, Crawley). Banks that were given help from the bailout have since put the brakes on issuing loans because they are not certain as to what the future holds for them either. This is affecting the auto industry as a whole due to consumers are now finding it harder to obtain auto loans. The automakers see this bailout money as the only real option that they have for staying in business.

It??™s also tough to figure out where the majority of the blame lies and how this whole mess came about. One could argue that what has these companies in so much trouble is the misuse of company funds even in the possible wake of going out of business. When the CEOs of all three automakers went to Washington to ask for funds to avoid bankruptcy, all three arrived in style. All three CEOs- Rick Waggoner of General Motors , Alan Mulally of Ford, and Robert Nardelli of Chrysler- exercised their perks Tuesday by flying in corporate jets to DC ( Ross, Rhee ). It??™s apparent that having a private jet is one of the perks of running a major automaker, but while some people are losing jobs because the company does not have enough capital to operate, it seems criminal not to scale back spending at all levels of operation. Considering the cost of an average flight, this type of spending could be the best argument not to give the automakers the money that they seek. Ford CEO Mulally??™s corporate jet is a perk that is included for both he and his wife as part of his employment contract along with a $28 million salary last year ( Ross, Rhee ). General Motors and Ford say that this is a corporate decision to have their CEOs fly on private jets and this is non-negotiable, even as the companies say that they are running out of cash ( Ross, Rhee ). Taxpayers and workers who are in danger of losing their jobs could view this as a slap in the face.

Another reason that the automotive industry has not been able to generate the funds needed to stay in business is that it is not able to compete with Japanese automakers due to the overwhelming demand for compact economical cars as gas prices rose to just over $4 a gallon over the summer. Ford has indicated that back in early 2000 it had a team called ???Blue??? that was set up to develop small, fuel efficient cars to compete with the Japanese (Automakers struggle to survive past mistakes). The project did not get very far because no one could think of a way to make money on low priced compact cars with the high labor costs that Ford had to endure. Second, they really didn??™t care because they were bringing in billions by selling the popular trucks and SUVs. At that time gas was cheap and business was good. ??? Blue??? was only a small part of automotive history, but in some ways it tells a big part of the story as to why Detroit auto makers are in such a big mess they could soon be filing for bankruptcy (Automakers struggle to survive past mistakes). For the last 30 years these companies have been in denial about the big picture, focusing what it takes to be on top right now they did??™nt stop to take a look at what might be around the bend. While this was going on the Japanese were perfecting their grasp of the small car market. Industry representatives were able to cut costs and raise productivity but they had to deal with strict government regulations and a tough labor union.

The United Auto Workers ( Unions) have been blamed for being part of the problem and not the solution. Many argue that the automaker bailout is really a bailout for the Union. It seems that the Union will not allow the companies to get rid of capital as the market dictates, such as closing auto plants or initiating more layoffs. ??? UAW President Ron Gettelfinger has urged Congress to act immediately to provide a separate, additional $25 billion in loans so auto companies can meet their health care obligations to more than 780,000 retirees and dependents (Jones).??? Under new legislation the car companies that receive bailout monies would have tougher restrictions on dividends to shareholders and executive pay. Mitt Romney, former governor of Massachusetts thinks that letting the companies go into bankruptcy is the only way to go. In the event of a bankruptcy he proposes these things could help. The automakers are currently at a large disadvantage in costs relative to foreign cars so they would need new labor agreements to align pay and benefits to match those of competitors ( Romney ). The old ways of management must go and new people from unrelated industries should be recruited ( Romney).

If the automakers do in fact get the loans they are requesting, there are a few proposals on where the money should come from. The federal government has made it clear that the money will not come from the $700 billion set aside for the financial sector. Bush wants to pull the auto bailout funds from an existing $25 billion Department of energy program to help U.S. automakers manufacture more fuel efficient cars ( Gillespie ).There are concerns about taxpayer monies going to companies that may not survive, but the thought is that this money will help the companies that have the best chance. This would help the businesses that are in need of cash now, but they would almost be sure to need more cash at the beginning of the new year. Another idea coming from Michigan Republican Representative Thaddeus McCotter is to grant a $25 billion bridge loan drawn half from the Troubled Asset Relief Fund and half from the Energy Department program ( Gillespie). Many called this idea a Washington style promise in that everybody gets something and the most taxpayers can expect is big ugly bill. Some politicians showed their support for this idea, while others think that it is just one of many to come.

The best bet for automakers at this point is to come up with new ideas for business plans that show that they are capable of change and ready to roll their sleeves up and get to work. Although they did have the rule that their CEOs would only travel long distances by private jet, they now seem to be in a no fly zone. Just recently , all CEOs made a trip to Washington, DC in hybrid vehicles. Taking to the road like regular Americans was necessary after the last hearing in November turned into a disaster when CEOs were under scrutiny for using high priced private jets to get to their destination ( Milicia ). One would think that these hybrid vehicles would be what they want to show off to prove that they do have the engineering and technology experience to be trusted with billions of dollars in taxpayer money. It??™s a given that they may not be subjected to the same type of everyday experiences of your average Joe, however it??™s hard to justify taking a private jet to your meetings when your business is in danger of being nonexistent.

There are several reasons for both approving and denying these loans to automakers. Approving the loans could help provide these companies with the time they need to figure out new ways to build better fuel efficient cars. For instance, the hybrid vehicles are a step in the right direction . It??™s almost certain that they could be improved upon. It will also keep hundreds of thousands of people from losing their jobs, homes and the things that they most certainly need on a day to day basis. Not to mention all the pensions that will continue to be paid to the retired workers that have put in their time on the job and feel that they have earned their retirement. On the other hand, as long as the automakers continue to ignore the fact that spending cuts need to be made at all levels of operation until the business can survive on its own, they really do not deserve any loans. While it??™s evident that the automakers will most likely get the money that they seek, the question still remains as to whether it will be enough or if it??™s just a temporary solution for businesses that know the inevitable is approaching. During the last few weeks of 2008 as new events unfold to determine the course of the auto industry, one thing is for sure, Americans will still need cars and the people that make them. The President elect has made many a promise to the American public about what he will do when he gets into office. As President Bush moves out of office and the new President enters, perhaps this should be one of the first items on the agenda.

Works Cited

Gillespie, Nick. “The Great Automaker Bailout : A Question of When, Not If.” 06/12/08:

Drawbaugh, Kevin and John Crawley. “Auto aid still uncertain, job losses feared.” 05/12/2008 1-3. 12/

Ross , Brian and Joseph Rhee. “Big Three CEOs Flew Private Jets to Plead for Public Funds.” Auto Industry Close to Bankruptcy But they get Pricey perk 19/11/2008 1-2. 06/12/2008 .

Milicia, Joe. “Not just another car ride for GM CEO Wagoner.” 03/12/2008 1-3. 8 Dec 2008 .

Associated Press, “Automakers struggle to survive past mistakes.” Industrys huge mess prompts Congressional leaders to ask Bush 08/11/2008 1-3. 06/12/2008 .

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