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Breaking Down The Bailout
Posted On Sunday, December 7, 2008 at at 12:42 PM by Finance Fanatic
I thought since Wall Street is so tagged on these bailouts, I would give a quick update on the status of the Auto Bailout. Well, it is looking that the auto bailout is inevitable and should probably be reaching an agreement this week. Horrific unemployment numbers announced Friday seemed to help disagreeing lawmakers come together to find a way to put money in the auto maker's pockets. After looking at the numbers, the consequence of not passing the bill would force bankruptcy, which then could lead to the loss of up to 500,000 jobs just for November (3 million jobs in the long run). This would cause utter disaster in the market.
The terms of the bailout will most likely be a $15-$17 million bridge loan until March to help get their business back on track. This bridge loan sounds like exactly what it's called. A bridge to survival until Obama is in office and a much more lofty bailout can be drawn up, most likely costing over $100 billion.
GM said they need $4 billion by the end of the year to avoid bankruptcy. Chrysler needs 7$ billion. Ford, being in better financial condition, needs only $9 billion as a line of credit for their "emergency fund." So congress has officially opened the bailout door to industries who are struggling. I see the absolute necessity to bail out the banks, having access to capital lending which I believe is the most critical part of our economy. However, by opening the door to an outside sector, gives all sectors reason to come knocking for our taxpaying dollars. Who's next? Airlines? Farmers? Miners? It's not that I don't feel remorse for some of the failures of our sectors, I just feel we can't keep bailing out anyone who is feeling financial pressures, because during this recession, there will be several. Plus, bankruptcy can be a good thing for some of these businesses. It allows them to restructure their liabilities, free them from debt, and start over. It has been very successful for Delta and other companies.
At any case, they are predicting the bailout to be approved this week. One of the big factors that helped settle the loan problem, was to decide where it would come from. It was agreed to take the money out of the energy fund, as an incentive to make more fuel efficient cars. So I would expect a pretty strong rally the day it passes, even though this has been expected for quite some time. Anytime bailouts have been approved, it has boosted the market for a day or two. However, I still don't feel this is the answer for them. Unless we keep paying their bills for the next 2-5 years, their liabilities will far surpass their revenues.
So congratulations, you all have officially invested into the auto industry. I was hoping maybe we could all be sent a new Taurus or F350 for our generous donation. In any case, this week should be an interesting one. Have a good evening and we will see you tomorrow.
I completely agree with you there. Not bailing out the auto industry would be disastrous for already-weakened US economy. On the other hand, bailing it out has many negative implications of its own including:
a) Opening the door for other industries to ask for money
b) Putting taxpayer money at risk (if you think about it, banks don't want to lend these companies money... that should indicate something)
That said, at the rate these companies are bleeding money, how far will 15 billion get them? It seems like this bailout will succeed in delaying the inevitable, nothing more. Even if they were to succeed, this seems like it goes against the force that drives capitalism: that weak companies will die out and we'll only be left with the strong ones. For GM, Ford, or Chrysler to emerge as a strong company, I expect that it would cost much more than 15 billion dollars as they will need to completely restructure. It's a matter of lowering the number of dealers, cutting employee wages, R&D on more fuel efficient cars, building those cars, and persuading the public they have changed. Not an easy task by any standard. How long will this take? I have no clue, but you can bet they'll be bleeding money the entire way...
I would like to comment about double digit inflation. I am very disturbed by the lack of progress on cutting the budget deficit. It will require large tax increases and budget cuts to bring the deficit under control. When nobody will buy the debt obligations of the united states than the buyer of last resort will emerge and who might be that buyer of last resort’ the government itself. in other words the massive money printing will have begun welcome weimar republic two thousand ?
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