With all the excitement in financial markets, I almost missed this story on the bailout for automakers.
The US Senate Saturday approved 25 billion dollars in loan guarantees for the financially strapped US auto industry, intended to spark a wave of automotive innovation. The loan guarantees were included in a continuing resolution that included funding for the US government and the wars in Iraq and Afghanistan.
President George W. Bush has indicated that he intends to sign the bill….The bill, which was approved by the House of Representatives on Wednesday, are the first loan guarantees for U.S. carmakers since Congress approved a similar 675 million dollar measure for Chrysler Corp. in 1980. Chrysler Chairman Robert Nardelli, however, said this week the loan guarantees should not be considered a rescue package for struggling carmakers. “This is not a bailout,” he said.
Well, if the loans are repaid, you might argue that it’s not a bailout because no federal outlays were involved. And you might argue the same for the $1.7 trillion in Fannie and Freddie’s debt that the U.S. Treasury now seems to be guaranteeing, and for the $3.1 trillion in guarantees on agency MBS, and for the $600 billion or so in loans that the Federal Reserve seems to have extended. Not to mention the $700 billion Treasury plan still under debate.
Now, there may be a wee bit of a correlation among those sundry and staggeringly large exposures– the state of the world in which the auto loans don’t get repaid is likely the same state of the world in which significant chunks of the other items also turn in to a bill due for Uncle Sam.
On the other hand, what’s another measly $25 billion among friends?
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The U.S. auto industry needs this more than ever now. With the way things are going, people are going to really curb spending now.
On the other hand, what’s another measly $25 billion among friends?
Just so long as the automakers aren’t putting up their Detroit real estate as collateral…. If I were them, I’d be getting set to show the government what absconding really looks like.
Am looking forward to the demise of the big three dinosaurs. They are of no use to the consumer at this point and should be sent off to Chapter 11 soon enough. Hopefully the new owners and management will have a clue.
We should have done this 20 years ago, in exchange for much higher CAFE standards, instead of indirectly subsidizing carmakers with low CAFE standards.
We’d all be infinitely better off – if the average CAFE were 50% higher, oil prices would be $35/barrel right now, our trade deficit would be 50% lower, and all of this financial mess would be much, much easier to deal with.
Instead, we propped up carmakers by preserving the truck CAFE loophole, at an extraordinary cost to consumers and the economy, and left the carmakers unable to compete when oil prices rose…
And this is fair to Honda and Toyota and Kia and BMW and Mercedes how? They have a huge presence in the US.
JH, nice to point this out. It is also important to note the the house snuck through a vote to end the non-proliferation treaty and supply India with nuclear fuel and technology.
I’m more than a little disturbed that you just noticed this old story. No, Ironman, no collateral at all is more like it, with results likely to be that of the billions (of our grandkids grandkids future tax dollars) already poured by the government into large US automakers for improved fuel efficiency – nothing for consumers.
I finally stopped waiting for upper midwest management to get a clue. I purchased this year (cash – I didn’t use my stimulus check) my 100% electric drive lithium-ion power pack registered street legal vehicle, my daily driver for my 26 mile commute, 100% wind powered thanks to a subscription plan from my local power utility (at costs less than coal power in some states). The manufacturer has had no government backing ever and I made my purchase without any government credits (it doesn’t qualify for any of the existing or proposed federal or state credits). Yes, the batteries are ready. NOW. My new vehicle cost less up front, has lower maintenance and operating costs (much, much better mpge), better resale value and much better performance than the closest gas equivalent. (I bought it in early Q3, so I did my part to prop up the economy – too bad it doesn’t get counted in vehicle sales measures currently used).
My vehicle was manufactured in the USA. Not in Detroit, sadly, who could really use a white hot product like this, but just outside Santa Cruz, CA. Who would have thought it would be the fruitcake hippies who would be creating the next economic growth base, high performance vehicles that are super fuel efficient (strange correlation there – spurious?)?
Also sadly, the large US car maker bailout and gamed, restrictive hybrid tax credits feels like pure votes for dollars, nothing to do with manufacturing jobs or efficient cars and nothing for what consumers are screaming purple for and ready to spend money on, subject to competent marketing.
I could not agree more with Mercutio Mont.
I drive a full size Chevy pickup truck. It is a great vehicle, better than the Toyota and Honda competition of its vintage. THe US trucks are still better today I think. However, outside the truck market, I see no sector where US design and manufacture has advantages.
Let these businesses fail or survive on their own merits. If there is a technology worth subsidizing, that is what private capital is for. Silverlake or Blackstone would buy these dinosaur companies and turn them around… for the right price.
James_Hamilton: I don’t know of a free, quick source to link, but when I checked my stock trading account, I saw that GM bonds [1]maturing in just *three years* have yields-to-maturity of ~28%. Doesn’t this reveal a pretty substantial chance the loans won’t be paid back?
[1] Feel free to visit my site and click on the GM category.
Professor,
I saw this but, hey, it is only $24 billion. With the way congress is throwing our money around this bailout is chicken feed.
Imagine, a month ago this would have been a scandal. Today? It doesnt even rate honorable mention.
We are all frogs and the water is beginning to boil.
Silas Barta wrote: I saw that GM bonds [1]maturing in just *three years* have yields-to-maturity of ~28%. Doesn’t this reveal a pretty substantial chance the loans won’t be paid back?
That is is a standard, safe interpretation. General Motors Accepance Corp. or GMAC bonds maturing in less than 2 years are paying annualized yields over 30%. The financing arm GMAC is 49% owned by GM and 51% owned by private equity firm Cerebus.
I tend to think that the overall market is panicking. Perhaps with good reason given the faulty political leadership.
Up until recently I would have attached a very low subjective probability on the likelihood of GM and/or GMAC going bankrupt. GM is more likely to be merged or acquired. Or so I thought. Right now I’m open to all kinds of possibilities.
Bin Laden and his band of merry low-budget terrorists may have actually managed to succeed in their original objective of economically destroying the USA.
GNP: GM bonds had those yields *before* the September crisis. I had posted about them before on my blog. So I think they were “fouled” long before any recent (last month) event.
Son of Chrysler: The Stealth Bail-Out
When’s the best time to beg for a bail-out? When everyone’s talking about another, bigger bail-out, of course! Via James…
GNP – Bin Ladin did not destroy the USA, we did it all by ourselves. 9/11 was just a handy excuse to panic the suckers and do some more looting… As Dick Cheney said to Paul O’Neil a month before he fired him: “You know, Paul, Reagan proved deficits don’t matter,”…
Voters, Congress and the White House have been happy as clams, running current account and/or federal budget deficits to enable our Humvee/Minivan/SUV culture for over 30 years… Allowing the total US debt burden to rise to 350% of GDP higher than at the start of the great depression. See http://www.economist.com/finance/displaystory.cfm?story_id=12306060
As Pogo said about 40 years ago – “I’ve seen the enemy, and it is us!”… see http://www.pogopossum.com/gofizzicklepogo/go15.htm
: I’ve been following and buying GMAC bonds since they were paying 6% annualized yields. They were paying ~20% yields not so long ago but the 30%+ yields didn’t show up until just recently.
Have avoided buying at 30%+ annualized yields recently as arbitrage and other attractive equity bets are promising much higher yields. Though to be entirely forthcoming, I’m essentially sitting tight and looking to nibble at more puts on USO oil funds.
MarkS: Agreed. The Sept. 11 attacks acted as a catalyst for some incredibly silly US policy responses. On the national security front alone, the US domestic track record has been exemplary even if one includes the Sept. 11 devastation.
Low-budget terrorism can rarely accomplish more than go after symbols. Starting a process that ultimately devastes the once mighty US auto sector suggests that on a strictly symbolic level, bin Laden et al. did surprisingly well and probably accomplished more than many of his followers initially dreamed in their wildest dreams.
I don’t move in the rarefied circles of writers and commenters on many financial and economic blogs, however I have my own humble take on this.
Late to the table perhaps, but my view on this issue can be seen here: http://www.dogshit.eu/archives/1093
I wish there was some rational way that the outrage that this represents could be adequately expressed.
Silas Barta: My Canadian discount broker is showing 39% annualized yields on GMAC bonds maturing in early 2010.
Amazing.
‘”This is not a bail-out”, he said.’ I am not sure what else to call it. We have a struggling company, a struggling economy and a government loan. It is indeed a bail-out (after all, GM was consider merger talks with Chrysler so they were certainly looking for some form of a “bail-out”).
I am hesitant as to the effect of this bail-out, however. The auto-industry is tanking because credit is lacking and consumption is (as a result) declining greatly. Unless the credit market rebounds and consumption goes on the incline the auto-industry will continue to struggle with or without a bail-out. I can understand this being an R&D investment (but it is still technically a bail-out) so once the markets rebound, the auto-industry will have better and more fuel efficient car models (which will be more attractive to household and the nation-on the premise of less fuel intake from these car model). I am still disconcerted that the government is the one putting up the funds to achieve such a outcome though. There should have been government sanctions on fuel efficiency vehicles long ago. Now we are in a position where this is not just important but it is a necessity.
Update: Those annualized yields on GMAC bonds recently topped out at 60%. Looks like Cerebus Capital Management may end up owning a new Chrysler-GM entity. That merged automaker would be too big to fail according to some pundits.
Pass the popcorn.