10 top reasons why a auto bailout is not a good idea

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10 top reasons why a auto bailout is not a good idea

Postby Mike Brooks » Fri Nov 21, 2008 12:49 pm

Following are 10 top reasons why a bailout is not a good idea:

1. A bailout would provide money only for short-term survival. It wouldn't alter carmakers' flawed business models. GM is running through cash at the rate of $2 billion a month. So $10 billion from the government would give it only five months’ breathing room. Can they turn over their business practices in that period? Please. The temptation would be simply to come back to taxpayers for more.

2. A government handout would allow the Big Three to avoid necessary cost cutting. Because of a strong union, the average GM employee received $70 an hour in combined pay and benefits last year. And it’s not just line workers who are making too much. GM chief executive Richard Wagoner garnered about $24 million a year in 2006 and 2007, while leading his company toward oblivion.

3. Bankruptcy isn’t all bad. It doesn’t mean liquidation. It means taking the painful steps the companies have been unwilling to contemplate to date. The real losers in such a deal are carmakers, equity shareholders and creditors. Bankruptcy would give the automakers the chance to throw out existing employee contracts with their onerous health and pension systems. The unions would be forced to temper their demands if they want the car companies to survive. In the case of GM, it could also dump some of its uncompetitive product lines such as Pontiac and Saturn. Discontinuing five of GM’s eight domestic brands would save the company $5 billion annually.

4. Taxpayer money won’t change the fact that many foreign cars are made better than their U.S. counterparts. Kelley Blue Book announced its top 10 brands for resale value this week, and not one of the Big Three was on the list. Chryslers, for example, keep only 24.2 percent of their sticker price on average after five years. By contrast, Hondas retain 44.5 percent of their value.

5. Bailout funds would help automakers continue their outsourcing of auto jobs to foreign countries, where costs are lower. All of the Big Three have increased the percentage of manufacturing and assembly done overseas in the past year, especially in China and Mexico. In May, Ford agreed to build $3 billion auto plant in suburban Mexico City and upgrade two other Mexican plants, the largest foreign investment in Mexican history.

6. Big Three bankruptcies wouldn’t mean the end of auto industry in the United States. Foreign companies, which already have plants here, could pick up the slack and open new factories. Some 78,000 Americans already work for foreign carmakers, a number likely to rise in the wake of any U.S. automaker demise. The depressed South could benefit particularly from increased production of foreign auto companies.

7. Other industries have survived bankruptcy just fine. Most of the major airlines have spent time in bankruptcy, including United, Continental, Delta, Northwest, and US Airways. Their predicament looked particularly dire after 9/11. But the major carriers made it through. And to the extent that they suffered, low-fare competitors such as Southwest and JetBlue picked up the slack, often offering superior service in addition to cheaper prices.

8. Bailing out the auto industry would only encourage other sectors to beg for government handouts. Remember that the $750 Billion Troubled Assets Relief Program was designed only to assist banks, but now insurance companies and even credit card giant American Express are trying to get in on the action. Homebuilders, who arguably are as strapped as the automakers, could lobby for some of the action.

9. Stockholders deserve no mercy. Some argue that they should be compensated for the fact that GM and Ford’s share prices have hit their lowest levels in decades. But in a free market, stock prices go down as well as up. The automakers’ problems have been clear for years, so investors had plenty of time to get out. As for Chrysler, it’s owned by private equity firm Cerberus, no innocent victim itself.

10. Bailouts have been tried in the auto industry, and they don’t work. In the 1970s, Britain’s Leyland hit the skids, hurt by slipping quality in its vehicles and imports from Germany and Japan. Sound familiar? Leyland, which made MGs, Jaguars and mass-market cars, accounted for 36 percent of the UK market. So the government sunk in $16.5 billion to keep it afloat. The result? Unless you’re a car buff, you’ve probably never heard of Leyland, because it no longer exists.
Trust in the Lord with all your heart, and lean not into your own understanding, Proverbs 3:5
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Mike Brooks
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Postby Rob Jones » Wed Dec 03, 2008 6:56 am

thanks for the info mike..

I agree I think the government should not give them money for this.

I believe in the bankruptcy system it has worked for many other companies and think it would work great for the big three..

I am from grand rapids michigan and our unemployment is about the highest in the country at 7.5% and other cities around grand rapids are up to 9% and higher. Almost all of the jobs lost in the past year have been people working for the big three.

The housing market has gone way down because of all of the housing foreclosures and such..

the reason being a person that was working at gm or ford was making upwards of 25 dollars an hour plus benefits, when they got a job after being layed off or fired or a plant closing, they may have found a job at another manufacturer that pays 13-18 dollars an hour. good money in some peoples standing.

When you where making 52000 a year (plus benefits) and now your making 31000 a year (benefits not included) it is hard to make a 2000 a monthe payment on your house even when your spouse is working and making good money

all in all I think bankruptcy would be the best for the big three they could get out of some of the contracts with the unions they have lower there outgoing costs and survive.

I have heard that 50% of gms personnel pay goes directly to people that have not worked for the company in over ten years otherwise people who have retired with near full pay with a economy adjustment every year or so plus mostly paid benefits. how can you pay for all of that and be a succesful business??
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