David Pleasant

The media is all atwitter today over the notion that Democratic leaders are ”ready to provide a short-term rescue plan for American automakers,” as The New York Times reports. The Washington Post leads with “White House, Democrats Near Short-Term Deal for Automakers.”

One could easily be led to believe that George Bush and the Democrats suddenly had a Kumbaya moment — that miraculously, after eight years of George Bush’s my-way-or-the-highway policies and what’s-in-it-for-me deals, that modus operandi did not apply to this “deal.” Well, that’s simply not the case.

Yes, Congress and the White House may be on the verge of a deal, but the White House and Wall Street are most likely the big winners rather than Detroit and Main Street.

It’s simple. As currently reported, Congress will give the Big Three $14 billion, but it must take it from the $25 billion energy-related “re-engineering” legislation previously passed. In exchange for the $14 billion, which is $20 billion less than the automakers say the need, Congress must agree to give Hank Paulson, the Treasury Secretary, the $350 billion remaining from the original $700 billion bailout bill.

Seeking to end a weeks-long stalemate between the Bush administration and House Speaker Nancy Pelosi, senior Congressional aides said that the money would most likely come from $25 billion in federally subsidized loans intended for developing fuel-efficient cars.

By breaking that impasse, the lawmakers could also clear the way for the Treasury secretary, Henry M. Paulson Jr., to request the remaining $350 billion of the financial industry bailout fund knowing he will not get bogged down in a fight over aiding Detroit.

Voila! Hank Paulson is allowed to continue flooding Wall Street with hundreds of billions of dollars that are virtually untraceable; certainly with no accountability if history is any indicator. Yet, Democrats must reduce the approved energy-related legislation by 56 percent and attempt to reappropriate the lost funding in the 111th Congress.

Where’s the “deal” that The Washington Post so gloriously touts between the White House and Congress? There is no deal. Democrats give up $14 billion and George Bush gives up absolutely nothing. Instead, he gets everything he has demanded since he submitted his three-page piece of emergency legislation to bailout Wall Street back in September.

Who would be foolish enough not do a “deal” where they received $350 billion in that deal and consequently forced their opponents to, in essence, reduce a previously agreed to “deal” by $14 billion in order to save the largest sector of manufacturing in the country?

Whether you agree or disagree with the automakers getting a bailout, it’s hard to argue that Democrats didn’t cave in again to the bullying by the most unpopular president in history and to a Republican Party that has been virtually decimated. It’s disgraceful.

*****

I believe the automakers should receive assistance, but only because of the substantial consequences of not bailing out Detroit. Management of the Big Three has been atrocious for at least three decades, in my opinion, but if the Big Three collapse – even just one of them — the implications are dire.

This is what the Center for Automotive Research (CAR) reported in a recent study (PDF – see page four) on the potential contraction of the Big Three automakers.

We assume that domestic production by international automakers in the United States would be seriously affected by a major contraction of the Detroit Three automakers for at least a period of one year due to the high likelihood of many U.S. supplier company insolvencies. In fact, we assume in our 100 percent contraction scenario that not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the U.S.) by the international producers also falls to zero. That is because we expect a major wave in supplier bankruptcies or a “supplier shock.” The collapse of a domestic market for suppliers coupled with the reality that few auto suppliers serve export markets would result in manufacturing utilization rates below 50 percent, forcing suppliers to restructure or liquidate. The scale of the contraction of the Detroit Three would overwhelm any attempt by the international producers to keep their existing suppliers in business or to find alternative suppliers, here or elsewhere. U.S. consumers would be forced to rely on only imported vehicles as a source of new vehicle purchases in the first year. [Emphasis added]

Of course that is the extreme case — failure of all three. But as CAR points out, something similar would happen if just two of the domestic automakers had a serious contraction, which is precisely the scenario presented here.

We assume essentially the same first year supplier crisis for all automakers in the United States. Production would fall about 50 percent in the first and second years for the international producers….

In all contraction scenarios, imported automotive supplies and parts prices are increased by 15 percent because of the probable disruption in the domestic supplier sector.

Late Update: I stated the amount of the bailout for the Big Three was $14 billion. Some media outlets are reporting $15 billion while others are reporting $14 billion. Who knows what the right amount is? We’ll find out soon enough, but I just wanted to note why there was a discrepancy in what I stated in my post and what is in certain press reports.

Senate Banking Committee Hearing

The Senate Banking Committee is holding hearings today on providing government financial assistance to the auto industry. There will be multiple panels appearing before the Committee, the first of which is the GAO led by the U.S. Comptroller General Gene Dodaro. The second panel will consist of executives from the Big Three – Ford, Chrysler, and General Motors.

The Committee requested representatives from the Treasury Department and the Federal Reserve to attend, but according to Committee Chairman Sen. Chris Dodd (D-CT) they refused to participate.

Albeit rough, these are some of the highlights from the hearing thus far.

Comptroller General Dodaro testified that Treasury does in fact have sufficient authority under current legislation (TARP) to provide funds to the automakers. He also testified that the Federal Reserve has the authority to provide funds to the Big Three, although they must meet certain specifications, such as lender of last resort, before the Federal Reserve can provide any funding. Treasury is under no such constraints, other than the terms originally provided in the bailout legislation passed in October. In other words, a timely disbursement of funds could be made to avoid the inherent catastrophes that would be inevitable if one or more of the automakers were to fail in the in immediate future.

Although the Big Three have submitted detailed proposals (GM plan, Ford plan and appendix, Chrysler plan) to Congress on how they would use any funding provided by the government, this is what I gleaned as the main points of their proposals in the hearing.

General Motors

• More fuel efficient vehicles
• Full compliance with 2007 Energy Independence and Security Act
• $4 billion now and up to $18 billion
• 9 plant closures by 2012
• Up to 30,000 job cuts

Ford

• More hybrid and electric cars
• 14 percent increase in fuel efficiency for entire fleet by 2009
• $9 billion line of credit to be used depending on sales
• $1 per year CEO salary

Chrysler

• New fleet offering 24 types of hybrid vehicles by 2012
• $7 billon by end of December to be used depending on sales
• $1 per year CEO salary

Again, this is just my rough interpretation of what has been presented in the hearing thus far, but it is clear that the job cuts and plant closures offered by General Motors are in stark contrast to the perceived intent of Congress and President-elect Obama – saving jobs of thousands if not millions. Chrysler and Ford appear to have more forward-looking plans to revise the industry to be more competitive and save, if not create jobs.

Late Update: I should note that I have not read the detailed plans submitted by the automakers to the Committee, therefore, there may be some contradiction in the terms proposed and what I have gleaned, in summary, during the hearings thus far.

As I noted earlier, Capital One is planning to buy Chevy Chase. So, how is Capital One able to purchase Chevy when they just received billions of taxpayers’ dollars in bailout funds from the Treasury Department?

According to the GAO report released yesterday on the $700 billion bailout program (TARP), Capital One recently received $3.555 billion presumably to keep them afloat and promote lending, not acquisitions.

Capital One TARP Bailout

Hank Paulson is doing a heckuva job.

The General Accountability Office (GAO) released its first report on how well Treasury is managing the $700 billion bailout (TARP or Emergency Economic Act of 2008). The overall findings are troubling to say the least.

The GAO report mentions several high-level problems with the program, but there is one item that I found particularly troubling, which the GAO does not appear to explain. Or at least I haven’t found an explanation for it yet, but I also haven’t read the entire report either.

According to the report, all of the banks participating in the CPP (capital purchase program), with the exception of one, received a bailout that amounted to no more than 3.45 percent of the banks total assets. The exception, BB&T Corp. in Winston-Salem, NC received a bailout that was equal to 2,288 percent of the bank’s total assets.

Per the GAO’s report, BB&T listed $137 million in total assets as of September 2008, but received a $3.134 billion bail out from Treasury. (See page 18 of the report.)

BB&T Recapitalization by the U.S. Treasury

Just to put this in perspective, Comerica Inc of Dallas, TX had total assets of $65.153 billion and received a bailout of $2.250 billion, or 3.45 percent of its total assets. State Street Corp of Boston had total assets of $286 billion and received a bailout of $2 billion or 0.70 percent of its total assets. JP Morgan Chase had the most assets — $2.251 trillion – and received a $25 billion bailout, or 1.11 percent of its total assets.

Was that a typo in the report or is there a serious inequity problem here?