The Auto Bailouts Were Worth It

Ford (NYSE: F  ) is making money hand over fist and going from strength to strength in markets around the world. Solidly-profitable General Motors (NYSE: GM  ) is the China sales king and is investing heavily in a new lineup of products. And on Monday morning came word that Chrysler has made its own return to profitability with help from partner Fiat, having refreshed its dated product line more quickly -- and more effectively -- than most observers thought possible.

As key competitors like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) continue to reel from the effects of the Japan disaster, as well as a host of problems of their own making, each of the once-Big Three are thriving -- despite a U.S. auto sales rate that remains well below pre-2008 levels.

So how do you feel about those auto bailouts now?

Yes, the bailouts probably saved Ford too.
Let's get this out of the way up front: It's true that Ford didn't need, want, or get the kind of bailout that GM and Chrysler got from the U.S. Treasury, and the Blue Oval has benefited greatly from the goodwill generated by the company's willingness to "go it alone" without taxpayer aid. But make no mistake: As bitter a pill as it must have been for Ford executives to swallow, Ford wanted -- needed -- the bailouts of its rivals to happen. Without Chrysler and (especially) GM, many of Ford's key suppliers might well have collapsed in those dark days of early 2009. Even a few failures could have crippled Ford's North American production lines for months -- at a moment when Ford's turnaround plan needed every sale it could get to succeed.

Put another way, had the government not bailed out its biggest rival, Ford's daring turnaround effort might well have ended in collapse. Those bailouts didn't just save annoying old General Motors and moribund Chrysler; they helped make possible one of the great turnarounds in business history.

Oh, and they also kept hundreds of thousands of Americans employed at a moment when a historically bad recession could have become something much worse, and made it possible for the Detroit automakers to continue to represent American industry in (and bring home bacon from) markets around the world.  All this for a relatively "small" expenditure? I'd say that's a pretty good deal.

Of course, the actual size of that expenditure is still an open question.

But will we ever be paid back?
Yes -- and maybe. As I write this, Chrysler still owes the U.S. Treasury $5.8 billion, but not for much longer: The company announced on Monday that it would be refinancing that debt, along with another $1.7 billion owed by the company to the Canadian government.

Chrysler has two good reasons to pay off the loan now, and patriotism isn't one of them. First, the company paid $1.4 billion in interest last year (while losing $652 million). Refinancing should bring that number down significantly going forward. Second, Chrysler has been hoping to take advantage of a low-cost loan program from the Department of Energy intended to help companies build more fuel-efficient cars, but the DOE has been reluctant to do business with Chrysler because of the outstanding bailout loans. Chrysler should now be able to move forward with the DOE's program, which has already benefited bailout-free Ford, Tesla Motors (Nasdaq: TSLA  ) , and others.

And what about GM? Technically speaking, the $50 billion lent by the government to bail out GM has already been repaid -- in cash, last year, and in equity, which is being liquidated over time. But the truth is, the government needs an average selling price over $50 a share to break even on its "investment." With GM's stock price stuck in the low $30s for the time being, and with the Treasury Department and GM's leadership both anxious to see the government exit the auto business, odds are that the total proceeds from the stock sales will end up falling short of the amount of the original loan.

That's not likely to help the General's efforts to rebuild public goodwill in the wake of the still-unpopular bailout. But I will not be surprised if GM CEO Dan Akerson eventually announces a plan to make up the difference. To do otherwise would be to prolong a difficult chapter in a book GM -- and the rest of America -- is eager to see closed.

Fool contributor John Rosevear owns shares of Ford and General Motors. General Motors is a Motley Fool Inside Value selection. Ford is a Motley Fool Stock Advisor pick. The Fool owns shares of Ford. You can try any (or all!) of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy has been bailout-free since before you were born.


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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 May 02, 2011, at 9:45 PM, rono44o wrote:

    Like many others, you claim Ford needed the GM and Chrysler bailouts to prevent a collapse of the automotive supply chain. However, that position assumes that GM and Chrysler would have simply disappeared in bankruptcy. Even had they disappeared, which is unlikely, the demand for their products would have remained. Other manufacturers would have produced the cars GM and Chrysler could no longer produce. The supply chair would have supplied those manufacturers.

    Certainly all this would not happen over night. For a time there would have been turmoil in the industry, but I don't buy the notion that the world ends when a company goes bankrupt.

    An Obamanized bankruptcy served nobody well, except the few who received favors.

  • Report this Comment On May 02, 2011, at 9:46 PM, jimmy4040 wrote:

    American money given away to Fiat for free. Fleet sales still 33% of total sales. Leaders are big SUV's same as before. No sign of a small car turnaround. Fiat brought absolutely nothing!

    Everything is being dressed up for sale, just like the typical P/E story.

  • Report this Comment On May 02, 2011, at 11:17 PM, jswap1 wrote:

    So if GM and Chrysler had gone belly-up, Ford's sales would have probably doubled. And you say Ford needed the bailouts to happen because they didn't want a doubling in sales? I have a feeling they would have been just fine in the long run.

  • Report this Comment On May 03, 2011, at 2:06 AM, ramon123 wrote:

    GM is profitable because they went Chapter 11

    and basically stole several dozen billion dollars from their creditors and shareholders. If not for that, GM would be in miserable shape.

  • Report this Comment On May 03, 2011, at 12:44 PM, TMFMarlowe wrote:

    @rono44o: You know that "many others" include Ford execs, right? In order to get to the point of owning the U.S. market, Ford had to *survive* -- something that was very much an open question in early 2009.

    Thanks for reading.

    John Rosevear

  • Report this Comment On May 03, 2011, at 12:54 PM, BMFPitt wrote:

    I couldn't possibly disagree more with this tripe. The moral hazard factor alone far exceeds any of the supposed posiitives listed here.

  • Report this Comment On May 03, 2011, at 1:09 PM, TMFMarlowe wrote:

    @BMFPitt: Hmm, hypothetical "moral hazard" versus a high risk of collapsing an entire industrial sector at the most precarious economic moment in decades? I think the whole moral hazard argument holds even less water now than it did at the time. Nobody thinks GM (much less Chrysler) is going to get a *third* chance.

    I'm way more likely to buy that line of argument when it's applied to Wall Street, FWIW.

    John Rosevear

  • Report this Comment On May 03, 2011, at 1:17 PM, zymok wrote:

    > Nobody thinks GM (much less Chrysler) is going to get a *third* chance. <

    Sure they will. This was Chrysler's second bail out after all.

  • Report this Comment On May 03, 2011, at 1:33 PM, BMFPitt wrote:

    "Nobody thinks GM (much less Chrysler) is going to get a *fourth* chance."

    -John Rosevear, 2024

    Maybe by then Fannie & Freddie will be on their 400th chance.

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