The Banks Beat You to It, Detroit

In the end, it may have been about not wanting to throw good money after bad. But it looks more like the defeat of the $14 billion bailout for automakers came about simply because it was a bad time to be asking for a handout. Wall Street already used up the available goodwill.

While the House passed the measure, the Senate expressed a lot of concern that General Motors (NYSE: GM  ) and Chrysler created a lot of their own problems. They made bad choices in the cars they wanted to build, agreed to ever-higher wages and benefits for their workers, and were too slow to change with the times. A factoid trotted out is that Toyota (NYSE: TM  ) and GM sold the same number of cars last year, but Toyota made a $16 billion profit and GM lost $38 billion.

There was probably no bigger issue than senators seeking concessions from the auto workers. The unions agreed to wage parity with foreign automakers in 2011 when their contracts expire, but the Senate was looking for something more immediate, like next year.

Although the Senate's apprehension about giving away money without concrete concessions might be justified, when you compare it to the bailout of the financial services industry, are the situations really any different?

It can hardly be argued that anyone but Citigroup (NYSE: C  ) or American International Group (NYSE: AIG  ) got themselves into their predicament. Yet where they got bailed out two and three times, the automakers must now prepare for bankruptcy.

It may be necessary for union workers to take pared salaries, but you can't even compare the salaries of auto workers with those on Wall Street. A year after spectacular flameouts, bailouts, and blunders, John Mack of Morgan Stanley (NYSE: MS  ) and John Thain of Merrill Lynch (NYSE: MS  ) want to be seen as magnanimous for forgoing millions in bonuses.

Detroit didn't get its loans because it was paying for Wall Street's ills. Now the real possibility of bankruptcy looms before the Big Three.

That's not as bad as it sounds, and it's how things should have proceeded to begin with. The Big Three aren't going to disappear. They might become the Little Three -- and Chrysler may merge with someone else -- but bankruptcy protection would give them the opportunity to make the steep and deep changes that are needed, all without taxpayer assistance. Chrysler had previously hired bankruptcy specialists, and General Motors moved to do so yesterday. Ford (NYSE: F  ) wasn't seeking immediate loans for itself, but supported the effort because the fates of the three are so entwined.

Nor is all hope for a bailout lost. The White House will consider using the TARP funds to assist the automakers, something it had been reluctant to do previously. Fortunately, there is just enough money left over from the original allocation that Treasury was given to provide the loans the car makers want.

Assuming the world doesn't end with the defeat of the bill, and I'm betting it won't, the three automakers can emerge from this episode a lot leaner and stronger. Whether the taxpayers can escape another raid on their pocketbooks is the big question.

Related Foolishness:

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 12, 2008, at 2:50 PM, weiwentg wrote:

    I believe that bankruptcy has a significant chance of leading to liquidation. Consumer confidence in an automaker in Chapter 11 may plummet to severely that declining revenues add to Chapter 7. Since the supply chain is so interconnected, a Chapter 7 at GM would probably lead to bankruptcy among multiple suppliers, which would hit the remaining automakers. I know that a lot of jobs are going to be lost either way, but the best bet is not to let anyone enter bankruptcy - the consequences of that could be disastrous.

  • Report this Comment On December 12, 2008, at 3:24 PM, mac8115 wrote:

    What are the consequences that we face when we enable uncompetitive businesses to continue to operate?

    Throwing tax dollars at this problem is hardly a panacea. Detroit has been making its own grave for decades - enabling Detroit's workforce to continue traveling down this perilous course only certifies that future generations of auto workers will live with the same 400lb gorilla on their backs.

    Bankruptcy and dramatic changes are its only hope. If people are still buying American made cars now, then I seriously doubt that much will prevent them from buying them ever - even Chapter 11.

  • Report this Comment On December 12, 2008, at 10:37 PM, BlueLakeVentures wrote:

    Bailing out auto manufacturers is not a good idea.

    http://bluelakeventures.blogspot.com/2008_11_01_archive.html

  • Report this Comment On December 13, 2008, at 5:51 AM, dividendnut wrote:

    they must produce a quality product that american consumers are seeking, as well as cleaning up the mess that was created in past negotiations with the uaw/iue, i.e. buyouts, supplemental unemployment benefits, and the jobs bank. i don't think that they have adequately explored bankruptcy, which would force concessions on the unions.

  • Report this Comment On December 13, 2008, at 5:31 PM, dquihote wrote:

    Government "bailout" of private businesses is a model for Socialism - not a free market. Sure, it may take repeated business failures for it to move from theory to reality, but if it continues the way the "financial industry" has started that will be the end result.

    The bailout for the "financial industry" simply enabled poor business models and poor managers to continue what they were doing. The auto industry is (as the author above says) in the exact same situation - the difference this time is that they are being held accountable...if only that would have happened earlier.

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