Bad Cars as Capital Offense? Forget Detroit, Save Yourselves

Even The Detroit Outsider was surprised by the perfect shitstorm that befell the Detroit 3 after they requested federal assistance. You can expect as much from Congress, which will take any opportunity to grandstand and posture and play the tough guy for their constituents. It's the American people whose disdain seems disproportionate. Apparently building and selling a shitty car is right up there with murder and child molestation. Even 15 years later, people don't want their family anywhere near you. Given the opportunity, apparently they'll sentence you to death for it.

The Detroit 3 financial aid battle has come to a head, and it looks like the Bush administration might step in and grant enough money to get the companies into the new year and new administration, a move The Detroit Outsider supports for the reasons outlined in Called to Serve. There's still significant resistance in Congress and among American taxpayers, and the topic will be far from dismissed even if Detroit gets a stay of execution. So I'll dissect what's behind this phenomenon and see if I can't convince taxpayers to save themselves.

The Detroit Outsider gives the American auto companies no quarter for their missteps. All of their current problems are linked to their shrinking market share, and that comes from years of predominantly lame products and boorish customer service. But seriously, how do U.S. citizens--regardless of the type of car they drive or have owned in the past--so readily throw American jobs under the bus? I guess if it's not your job or that of someone you know, it's someone else's problem. "That Chevy Chevette I owned is an offense so great that I'll throw myself into a darker economic climate out of spite. That'll show those car companies. What's that? My retirement fund went from small to puny? My favorite restaurant is closing because unemployed people don't eat out? My real estate taxes went up because the local car dealer is gone? I can't repair my Camry because the parts manufacturer is bankrupt? A new Volkswagen costs how much now that the American companies aren't here to undersell the foreign brands?"

There's nothing like self-interest to get people's attention. If any one (or perhaps two) of the U.S. automakers collapses catastrophically or files for bankruptcy, they don't just take their prospects for future sales with them. They complicate (at minimum) the repair of roughly half the cars in the U.S., including ones you and your loved ones may depend on. On top of that, every one of those vehicles instantly plummets in value. If you keep your domestic car indefinitely, you might be unaffected, but if you want to resell it or you wreck it, the buyer or insurance company is going to hand you a check you can use to buy this week's groceries. I hope you like walking.

Your American car is just another asset, like your house and other investments, that will have arbitrarily become worth less (if not worthless), making it that much harder to offset the money you won't have if you lose your job.

If you think bailouts are fatiguing, try joblessness
Right, right. Now it's all about bailout fatigue. After the Treasury threw $700 billion at Wall Street firms, to no apparent effect, Americans are concerned about throwing good money after bad. They don't believe the Detroit 3 represent a crisis, because they don't believe the banking sector was really a crisis. They feel duped; they got scared once again into giving up something valuable. Here's the problem: There was a mammoth crisis in the financial sector, and there still is. It's just moving slowly, helping to bring down companies the size of, say, General Motors. The D3 have been blaming their predicament on the frozen credit market as well as on decreased demand, higher raw materials prices and other factors. A perfect storm, they say. They're actually correct. They just left out one of the major components: having entered the storm weaker than their competition, which is entirely their fault. However, as the problem deepens and foreign governments from Canada to Sweden prop up their native auto manufacturing, the distinction becomes increasingly irrelevant.

Frozen credit seems to hit the auto market harder than some, because it goes beyond the issue of consumer financing. Demand is down to begin with, and anyone who does want to buy a car finds few lease offers and stricter loan requirements, but consumers aren't the only ones who buy cars. Dealers do. Lost on many consumers is the fact that dealerships have to finance the new cars on their lots until people buy them. Unsold cars are expensive, times two: Apart from not bringing money in, they gobble it up just by sitting around. To top that off, the most favorable financing historically has come from the automakers, and we know what shape they're in. This is why it's a recession. No one's in any position to help a brother out. It's like the scenarios above, where you, the consumer, are getting hammered from every direction. Your home is no longer a source of equity, interest income is a pittance and anyone who might otherwise have helped you out is in the same situation. The Detroit Outsider wouldn't have supported windfall-profit taxes on domestic automakers when they were netting $15,000 a pop on full-sized SUVs, and for the same reason I'd let the market, and bankruptcy if necessary, seal the Detroit 3's fate if it were 2006. But it's almost 2009, and the circumstances are extraordinary. The situation is delicate and desperate.

It's not the money that was bad
The $700 billion wasn't "bad money." The bad part was giving it to an administration that has consistently fucked up everything it has touched. Are we really surprised? If it weren't so damaging, this kind of dedication and consistency would be impressive. The errors made previously are behind the gridlock we see now. Much has been said about the Detroit 3's CEOs and their terrible performance on the Hill in November. Interesting how the guys who ask for a (then) $25 billion loan, not a $700 billion handout, are getting the scrutiny, the third degree, the public humiliation. The problem isn't that these guys don't deserve it; it's that the other guys deserved more. For simplicity's sake, let's pretend the $25 billion request was for a grant, not a loan. Even so, by my calculation Wall Street deserved 28 times as much scrutiny. That would be 112 days of Congressional hearings. The duration works out well, actually, because these companies don't build cars (or anything) and the CEOs would have to walk or bicycle to Washington. I don't want to see them on the Acela Express if their firms are in such bad financial shape. (Have you seen them trains? They're pretty nice.)

If we the taxpayers let the Detroit 3 twist in the wind, we exhibit the same myopia that put the automakers where they are now. Most frustrating to The Detroit Outsider is that people sneer at the prospect of companies sending jobs overseas yet are all too happy to serve the D3 a death sentence and hand the global automotive business over to foreign companies. Yes, the foreign brands build the cars here, and that represents jobs. But where do you think the profits go? In October alone, automotive products represented $7.8 billion in trade deficit. Ironically, it's positive revenue from overseas that has buoyed Ford and GM as they've stumbled their way through restructuring and cost-cutting. If the domestics fall, we send more of our automotive dollars overseas, and we get fewer back.

There isn't enough outrage about the inequity between the Wall Street bailout and Detroit bailouts. Yes, Wall Street had the benefit of coming first, but if they hadn't gotten $700 billion, the automakers' $25 billion would have seemed an outrageous sum. The D3 are getting some good with the bad. Ultimately the problem is that people think they know about the car market because they own cars, and they aren't happy about the bad ones they've owned. Conversely, you have no idea what banks do. The Detroit Outsider has no idea what banks do. What he knows is that what an American-based bank does can pretty easily be done by another American-based bank. The country has outsourced itself to near oblivion. When money and the transfer thereof are revealed for what they are--ethereal, intangible, ultimately meaningless--"stuff" starts to look pretty valuable. Whether you're talking about euros, yen or yuan, whether the dollar is up or down, a toaster is still a toaster. It's good to have, especially if you want to make toast. Ergo, it's handy to have the capacity to make the toaster itself. Or a car.

The national debt is more than $10.6 trillion. We're in hock to foreign countries that history suggests could become our fiercest rivals. It's not a good situation. But now you want to cut off the flow? Now we can't afford to throw a little more funny money at the rapidly vanishing American manufacturing base? The Detroit Outsider wishes he were sophisticated enough to express this more eloquently, but…what the fuck?

You don't need a study to know that the costs of failure would be greater than a bridge loan. Fortunately there is a study: The Anderson Economic Group and BBK business advisors reported that a failure of two American automakers would cost taxpayers $66 billion. The job losses, other economists estimate, would be in the millions when you factor in suppliers and other related businesses, including other automakers, dealers, etc.

It's the usual scenario that's so hard to accept: Pay now or pay later. If the Detroit Outsider harps on the Bush administration, it's only because it's the most recent and relatable example. There are a lot of single-issue voters out there, those who support one party over the other because, say, they don't want their taxes raised. So these voters pull the lever for George W., probably twice, and sure enough their taxes aren't raised. Instead trillions of tax dollars go into a voluntary war and we get the worst economy since the Great Depression, our job prospects evaporate and our 401ks are so fucked we can't bear to look at the statements. But at least taxes weren't raised.

Don't cut off your future to spite Ford's past. Contact your elected officials. They really do listen to their constituents, if only so they get reelected. The Web makes it easy:

http://www.usa.gov/Contact/Elected.shtml

You can pay now or pay later. Rest assured, you'll pay.

ALERT: Did Bush Blink? A New Chance for U.S. Automakers

The Detroit Outsider postpones the promised post to fire off an update on the fascinating chess game that continues to play out among Detroit, Congress and the White House. The D.O. is actually heartened to see the various players, little by little, making pragmatic decisions. Now, even the infamously obstinate Bush administration is considering blinking and using funds from the Troubled Asset Relief Program (the original $700 billion given to Wall Street) to assist the Detroit 3 into next year when the Obama administration can deal with it.

What happened? It didn't hurt that the world markets took a collective dump overnight since word spread that efforts to get this plan done stalled—again—last night in the Senate. In the meantime, foreign governments continue to prop up their own domestic automakers, or at least are contemplating such. Maybe, just maybe, America is starting to accept the Detroit Outsider's assertions spelled out in Predicates A and B in Called to Serve: This really could bring down the global economy and cost far more than a bridge loan.

Quick review: One of the biggest fights has been about where the money for a bridge loan would come from. Most Democrats wanted the money to come from TARP, which would satisfy people who retroactively think the grant was a mistake—possibly because it doesn't seem to have done a thing to help, unless you count massages and facials for AIG employees. It also would bring a little social equity, assisting the working class and not just the banker/investor class that it has helped, so far, only in ways that have given the taxpayers what's called "bailout fatigue." The D.O. must point out at this point that there's a big difference between $700 billion in cash and a $25 billion loan, but that's another story. TARP money is administered by our pal Hank Paulson at Treasury, who could have made this go away weeks ago in a matter of moments if President Bush blessed it. Naw, the prez wanted Congress to figure it out, and maybe accelerate the $25 billion promised earlier in the year to help the D3 retool to produce more efficient cars.

House Speaker Nancy Pelosi resisted this on the grounds that it robbed the environmental initiative (again), but finally Senate leader Harry Reid and his majority must have gotten it through to her that $25 billion next year isn't very useful if the companies collapse before then. (Like saving the new-deck-chair fund when the Titanic is taking on water.) The other plus of this plan was that it didn't sound like more billions of taxpayer money—just an application of the existing allocation.

Finally, Senate Republicans, some of whom represent states with significant foreign-car transplant factories (just sayin'), yanked the wheels off the wagon yesterday demanding more safeguards against eventual bankruptcy. That brings us to where we are now.

In the past 24 hours, there's been some ballsy brinksmanship (or perhaps desperate last options) on the part of GM and the Democratic Congressional leadership. GM publicly secured bankruptcy counsel after resisting all along. Reid came out last night and said it's over, can't do it in this session. Have to wait until 2009, by which point GM and Chrysler claim they will run out of money.

And then the seemingly impossible happened. Bush reconsidered. It's possible TARP funds will come about. Could W recognize that this would be the straw that broke the economy's spine? That he could add to his extensive list of failures the distinction of having triggered the Great Depression II: Even Greater? Anything's possible.

Called to Serve

The Detroit Outsider didn’t want to do this. But the question of a bailout for the U.S. automakers is well into its second month, and a bill passed by the U.S. House of Representatives today faces opposition in the Senate. Even if short-term aid is granted, the debate will continue into 2009 and possibly beyond. A poll released today reflects that Americans are split roughly 50/50 on whether the federal government should act. It’s understandable; there are strong, legitimate arguments on both sides, but they truly are two divergent sides. At one extreme is the America typified by California and the Northeast that has no use for American cars and sees few enough daily to actually believe Detroit only makes cars “no one wants.” Unfortunately these are regions of dominant influence: the mainstream media, Washington D.C. and Hollywood. Back in reality, the Detroit 3 account for about half of the cars sold in the country—the whole country, which means someone’s making up for the folks who wouldn’t set foot in a Chevy dealership and think people buy American only because they have to. (To be fair, some of them do.) At the other extreme are the people of Detroit and its surrounding region that work for or rely on the industry, directly or indirectly, and who stand to lose too much to be objective, or at least to be viewed as credible on these issues. And who’s sorting through all this? Our elected representatives, who play the role of ropes in tugs-of-war among their constituents, their contributors and their inestimable egos.

What’s missing is a voice in the middle—someone who’s not in Detroit but knows both it and its people. One who’s in the industry—yet isn’t. The Detroit Outsider will be that voice. The D.O. knows how complex this situation is and over the years has come to recognize that people, organizations and companies in conflict are seldom as unreasonable as they may seem. Once you dig in, you find the misunderstandings behind the tension. Now, don’t think this is some post-partisan, up-with-people kumbaya movement. Quite the contrary. Rule No. 1 of The D.O. is that you’re all going to get your asses kicked. Haircut? I keep hearing that all the players will need to “take a haircut.” What you need is your asses handed to you—Chrysler, GM, Ford, auto workers, consumers and legislators. We don’t end up in situations like this because of one bad guy, or two or even three. We’re all responsible for this crap. That said, you’d better believe some players are more responsible than others. That’s how the real world works.

The Detroit Outsider will do whatever he can to shed light on this historic conundrum as if our lives all depend on it. They do. He will also tire of referring to himself in the third person, but right now it’s remarkably satisfying. First, some basics so you don’t think this is one of those phony astroturf campaigns to spread pro-Detroit propaganda. To follow my arguments, you’ll need to understand, or at least entertain, the following predicates.

A. There are no good options.

If you keep thinking of this as a question of saving a company or two, or even of saving some jobs, you’re missing the whole point. On their merits, GM and Chrysler might not be worth saving, and Ford is only a step or two behind. They need taxpayer money because they can’t get private capital. Frozen credit plays a part, but the main problem is they’re just a bad investment in their current state and the state of our economy. As for the jobs argument, people will lose jobs, bankruptcy or not. The difference is how many, how quickly, under what circumstances and what the consequences will be. To understand our predicament, you must accept that, economically, we’re fucked. But that doesn’t mean we should throw our hands up and look the other way. We can still influence how fucked we are, and how we are fucked. Take politics for example. If you believe politicians are all crooks, The Detroit Outsider might not argue, but some are still better than others.

B. GM and Chrysler failure is imminent and would devastate the economy

The nightmare scenarios aren’t hyperbole. The supplier base will fall, affecting all auto manufacturing in the States, including foreign transplants. Scores of people will be out of work, possibly sans severance. Money will stop flowing. We lost more than a half million jobs in November, and already people and companies are hoarding cash, concerned that they’ll be next or, as someone recently told me, because it would feel wrong spending money when so many others can’t. You see how this can get out of control? We’ve proven that we can spend our way into trouble, but we can also cause problems through not spending. The D.O. isn’t an economist, but he knows GM’s presence across the country—locally, regionally and nationally—as well as globally. More than anything, I was convinced of the direness of circumstances when people from foreign transplant car companies intimated that they don’t want to see the domestics fail and bring down the supplier base. All it takes is one major part or subsystem to disappear and the lines grind to a halt. Where the transplants have been in this plea is a good question. They officially have no opinion on the matter, and for competitive reasons that makes some sense. Their shareholders probably don't want them standing up for the competition, for example. But it speaks volumes that the companies best positioned to benefit from their competitors’ fall don’t want to see it happen.

What’s next?
The Detroit Outsider will be delving into these issues and more, right quick, starting with the most important, convincing Americans that they should act. Coming soon:

"Bad Cars as Capital Offense: Don’t Save the D3, Save Yourselves"