What should we do about the troubled auto makers in the US?
There is a lot of talk about GM and Ford these days. With their stock prices plummeting and new car sales acting as the driving force behind their demise I’ve heard a few different ideas as to what we should do. Here is my idea.
Let me start off by saying that if you are one of the people who says ‘let them go bankrupt’ then you honestly don’t understand the ripple effect that would have on this country and the entire world. So to me this is not an option.
The incoming Obama Administration is determined to help the U.S. auto industry survive the deepening recession. And with General Motors, Ford, and Chrysler hanging on by threads, there is little pressure so far to have auto executives give something in return, except perhaps a promise to preserve jobs. The only questions that remain, say those close to and on the President-elect's transition team, is how the help materializes—and when.
I added this article excerpt to show that the new administration is taking this problem very seriously. Here is a little more from this article.
Obama's remarks came a day after a highly publicized meeting between executives including GM CEO G. Richard Wagoner Jr., Chrysler CEO Bob Nardelli, and Mulally, and House Speaker Pelosi and Senate Majority Leader Reid. There, the Detroit execs specifically requested a bridge loan of $25 billion to help get their companies, as well as some of their suppliers, through the recession. The requested loans would have few strings attached, unlike $25 billion in loans coming from the Energy Dept., which are targeted specifically toward retooling plants and offsetting companies' investments in more fuel-efficient vehicles.
This is where the debate can start. I think giving them a loan as the primary rescue measure is like putting bubble gum over a hole in a damn. This of course is how most of TARP’s money has been being spent (that’s an issue for another time).
Here is my idea. First, I know the automakers need money. I would prefer that the US Sovereign Fund (known somewhat as TARP) buy preferred shares in these companies. If we are going to bail out companies whose stocks are at 65 year lows then we should be able to get a bargain on the acquisition.
If the US Government was to invest $25B dollars into a program with the automakers it should take $2B to buy preferred shares in both GM and Ford. It should then guarantee a low interest loan to Ford so that they can buy Chrysler. The loan amount will need to be based on current market prices and not on what Cerberus paid for it. This would stabilize stock prices and give us a bottom or base to build from.
Here is where my idea differs from most. I will say that I was an avid support of the Republican Party in the 2008 election and that I do not support Government Sponsored Health Care as our incumbent proposes it. With that being said I believe the government should step in and put a $10B package together whereby they take over responsibility for the automakers pensions. With the focus being primarily offering to subsidize the capital payments to retirees while completely taking over the cost of healthcare. The legacy cost (or the cost per vehicle to fund pensions) is about $2500-$4000 for US Auto Makers. This is a burden that has slowed the US Big Three down for almost two decades.
Next, the US Government should take $5B and sponsor the development of more fuel efficient cars. Companies will be able to submit research assistance requests so that they can free up their current capital supplies while continuing to work on developing better vehicles. This is a long term program that will help to secure the future of these companies.
Finally, the last $8B should be used to grant low interest operational loans to each of the auto makers. This would shore up mounting losses and allow the companies to continue operations. I believe this money would give the auto makers about a years worth of breathing room. This should be long enough depending on other economic conditions for each company to restructure their organizations. To the best of my knowledge both Ford and GM were already working on moving into smaller vehicles and refurbishing or restructuring many of their plants.
In my mind this is a plan to address all aspects of their problems and not just a plan to throw money at them with the hopes they can survive. Yes, they need money but more so they need a new direction. They need to be lean and nimble to compete in a modern economy. Now is the time to act.
Disclaimer- Roger Bryan does own GM Options and/or Stock