While we were all arguing about -- and distracted by -- the government's $700 billion-plus bailout bill, another industry was getting its own handout. General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler's $25 billion low-interest loan from the Department of Energy was funded in Congress with little fanfare.
Everyone's talking about Citigroup's fight with Wells Fargo over Wachovia and whether Fannie Mae and Freddie Mac are responsible for the housing crisis, but here's a good rule of thumb: Avoid like the plague any company or industry that has to seek government salvation to stay afloat.
Too big to fail?
Chrysler's Bob Nardelli (yes, that Bob Nardelli, who left Home Depot (NYSE: HD) in a particularly lucrative form of "shame") was quoted earlier this year as saying, "Failure is not an option." Well, yeah. I guess failure isn't an option when you can count on the government to decide that your business represents so many jobs and potentially angry constituents that it requires taxpayer money to save it -- no matter how many missteps you took.
And there were many. The Big Three showed a remarkable lack of a clue by completely missing the boat on innovations in small, fuel-efficient cars. Continuing to push giant, gas-guzzling SUVs when the oil-price writing was on the consumer-budget wall is just a mind-boggling blunder -- and GM's resultant $27-per-share loss in its most recent quarter is merely a sign of the scope of the mistakes.
I've heard some people suggest that to help these failures, the government should ban foreign automakers, which would presumably include Toyota (NYSE: TM), Honda (NYSE: HMC), Daimler (NYSE: DAI), BMW, and Volkswagen, from doing business in the United States. Seriously? They haven't been able to get their acts together with competition -- imagine what the situation would be like without it.
Automakers and financials may be "too big to fail," but they seem to be trying hard regardless.
History doomed to repeat itself
This isn't the first time U.S. automakers have required government intervention to stay afloat. In 1980, David Henderson of the Cato Institute asked, "Should the government force taxpayers to subsidize a company whose products do not meet the market test?" He argued no; the government voted yes. And here we are again.
Talk about a "moral hazard." How many times will automakers get to visit this particular trough?
At least Chrysler head Lee Iacocca had the grace to appear ashamed about it 28 years ago. Although he said it was to more efficiently negotiate with unions (using "sacrifice" as leverage), he also voluntarily cut his salary to $1 after the government stepped up. Can you imagine Lehman Brothers' Dick Fuld doing the same thing?
State-supported lottery tickets
Companies so short-sighted and badly run that they require government intervention just to stay in business are the corporate equivalent of a lottery ticket: They circumvent all economic and competitive reality in the vague hope that money will fall from the sky. No thank you -- I'm staying away from automakers and financials (and everyone else who needs a bailout), and I'd advise you to do the same.
Fortunately, there are still companies out there that can -- and do -- compete on their own merits. Take Motley Fool Stock Advisor pick Apple (Nasdaq: AAPL), for example. With its massive amount of cash, no debt, and innovative products consumers love, it's one of the last companies you could ever imagine that would start asking for handouts.
David and Tom Gardner and the Stock Advisor team look for companies that can survive and thrive for the long term; they weigh criteria like competitive advantages, clean balance sheets, and solid and innovative management teams. One of their favorite questions to ask when assessing potential picks is whether the business can last for the next 100 years -- without government handouts!
If you're looking for quality stock ideas, not sad government welfare cases, take a 30-day free trial of Stock Advisor today -- there's no obligation to subscribe.
And remember, "good enough for the government" is no good for your portfolio.
Alyce Lomax
does not own shares of any of the companies mentioned. Apple is a Motley Fool Stock Advisor recommendation. Home Depot is an Inside Value pick. The Fool has a disclosure policy.
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