Detroit Gets Its Cash

The tale of woe from the automotive industry seems like a microcosm of the hand-wringing going on all over the financial sector: A series of bad choices led General Motors (NYSE: GM  ) and Chrysler to a precipice, and now they want the taxpayers to bail them out.

Sounds a lot like the crying going on about how we need to cough up a few hundred billion to save the banks because they didn't know how to say no.

The $25 billion handout to the Big Three was signed into law on Tuesday, and it's separate from the bailout package that failed in the House but passed in the Senate this week.

So now, facing an 11-month skid in sales -- the worst slump in 17 years -- the American carmakers want you and me to foot their bill for a whole host of incredibly short-sighted decisions. We're not only supposed to pay for them to retool their plants, but also to pony up for more loans to sell cars -- loans they're unwilling or unable to make themselves.

Ignore for a moment Detroit's decision to continue churning out gas-guzzling SUVs and pickup trucks as fuel prices spiraled ever upwards. Faced with tighter credit not only for themselves but also for consumers, the automakers simultaneously ratcheted up their lending requirements and either did away with or limited the availability of leasing programs. It's not hard to imagine that when it became harder to get a loan or lease a car, the carmakers saw demand for their vehicles plummet.

September sales for Ford (NYSE: F  ) fell 35%, and General Motors is expected to report a 25% decline. And they're not alone. Honda Motors (NYSE: HMC  ) is off 24% from a year ago, Hyundai is down 25%, and Toyota (NYSE: TM  ) is expected to fall by 20%. Nissan (Nasdaq: NSANY  ) sales dropped 33%.

This $25 billion handout may herald a new way for politicians to pass a bailout package: Do it in piecemeal fashion, one industry at a time. In comparison with the $700 billion whopper of a price tag on the Paulson plan, showering $25 billion on automakers is like flipping a quarter into a beggar's tin can. You can give out such largesse daily almost without thinking.

The only strings that came with the money is for Detroit to use it for its intended purposes of building more fuel-efficient cars. You'd think Ford and GM could have come to that conclusion a long time ago -- say, after the gas crises of the '70s and '80s -- but why do today what you can have Uncle Sam pay for tomorrow?

Nissan is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 02, 2008, at 3:08 PM, frigger wrote:

    I wish someone who knows more than I would conduct a study to compare changes in petroleum prices using a

    measurement other than USD. Perhaps Swiss currency? It needs to be something of exchange value which does not fluctuate very much.

    Only by determining units of petroleum which could be bartered against a fixed value medium of exchange over, say, a fifty year period can we decide how much petroleum prices really change in reflection of supply and demand.

    It is my suspicion that if such study were conducted we would discover that,

    for the most part, it is the dollar which goes up and down in barter value, not so much petroleum supply/demand/pricing.

    Maybe that is why auto makers never took seriously the issue of fuel efficiency. Oil prices fluctuated but always returned to normal -- or was it the dollar?

  • Report this Comment On October 02, 2008, at 4:10 PM, JJBAJR wrote:

    So, Detroit is the only one making trucks and SUV's? It wasn't that long ago Toyota was cutting back its own production of trucks at their new plant in Texas. Do the Japanese automakers get any type of assistance from their government? You know GM, Ford and Chrysler asked for $25 billion in low interest loans not a bailout like the finance sector. I have not seen any terms where it says the finance sector will repay the $700 billion in 25 years. I guess maybe one day if things don’t change we may have to see an America with no manufacturing and finance structure and then we can just hope we can get money and products from overseas as most of us will be out of work. Then who will people blame?

  • Report this Comment On October 03, 2008, at 4:22 PM, AndyBudd wrote:

    Dear Sir,

    Your recent article about taxpayers bailing out auto companies just shows how little you know about the business and the economy. I am constantly amazed by the lack of business knowledge and experience of journalists assigned to cover - business in general and the auto business in particular. Sarcasm and personal opinion have no place in serious journalism.

    The auto manufacturers aren’t getting any money from the BAILOUT.

    First of all, the 25 billion is a loan or loan guarantee – NOT A BAILOUT. Secondly, the low interest loans to automakers are to help offset the costs of developing vehicles that can live up to future GOVERNMENT MANDATED fuel efficiency standards. - We can make cars that get 100 miles per gallon – but they can’t pass GOVERNMENT MANDATED SAFETY STANDARDS because of power to weight issues that NO ONE has the technology to solve. In addition – how are you going to get to Grandma’s this Christmas with a wife and three kids, a dog, and a load of presents in your Smart Car. How about blaming the oil companies for not allowing CNG and / or electric recharging infrastructure to be installed at gas stations – OR perhaps blame the Government for not MANDATING IT.

    Automakers and dealers (foreign & domestic) are suffering because of frozen credit markets. I am a Chevrolet dealer who is doing quite well, but we are having a much harder time arranging financing for our customers. We have customers who want to buy, but if they don’t have a credit score above 800 and 20% cash down payment – good luck.

    Why is this a problem? – because more than 10 million people in this country depend on a healthy automotive sector for employment. You Wall Street types are the ones to blame for this economic mess. People trusted you with their savings and you idiots loaned it out to deadbeats.

    Here’s hoping that someone writes an inaccurate, untruthful article about you and your company. Hey, maybe I can start the rumor about “The Motley Fool’s” impending bankruptcy.

    If you’d like to get a clearer view on what’s going on in the business feel free to call me.

    Andrew Budd

    President

    Country Chevrolet, Inc.

    Warrenton, VA

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