Will Henry Paulson Sink Detroit?

Henry Paulson's main claim to fame is getting just about everything wrong in his tenure as Treasury secretary. However, he now stands to gain lasting notoriety as the person who destroyed the domestic U.S. auto industry, and the economies of the Michigan, Ohio, and Indiana along with them.

The story is that the big three automakers are struggling with record sales declines. This collapse in car sales in turn is the fallout from the collapse of the Greenspan-Bernanke housing bubble. While the domestic automakers have been hit hardest, all manufacturers have seen sharp drops in sales. Toyota's sales were down 23.0 percent compared with its year ago levels. Honda's sales were down 25.2 percent, and Nissan's sales fell 33.0 percent.

These huge plunges in year over year sales by the world's top car manufacturers can't be blamed on the industry. Responsibility for this plunge lies with Mr. Paulson and other economic policy makers, and their Wall Street friends.

The basic arithmetic is simple. General Motors saw its sales fall by 45 percent compared to its year ago levels. That means its revenue has been cut nearly in half. While it has made some reductions in employment and can ease back its production, there is no way it can reduce its expenses by the same amount. Many of its expenses, like interest costs, property taxes, and health insurance for retirees are largely fixed independent of short-term fluctuations in output.

As a result General Motors is now losing close to $2 billion a month. At this rate, it will burn through its capital in around 2 months and be forced into bankruptcy. Chrysler and Ford are in somewhat better shape, but the basic story is the same. Furthermore, the fallout from a GM bankruptcy could sink Chrysler and Ford as well, as common suppliers shut down and credit for the industry vanishes and customers flee to manufacturers with longer life expectancies.

There have been analysts, presumably including Henry Paulson, who think that bankruptcy is a reasonable solution for the auto industry. This is yet another of Mr. Paulson's famous mistakes. (Remember, this guy missed the housing bubble completely, thought its impact would be small when it burst, didn't see a problem with letting Lehman Brothers fail, and thought the TARP [RIP] was a good idea.)

Bankruptcy would allow GM, Ford and Chrysler to more quickly cut back their bloated dealer networks and adjust their car lines with current market demand, as its proponents claim. Bankruptcy would also void union contracts, which will thrill the millionaire bankers by forcing workers earning $57,000 a year to take pay cuts. And, all those lazy retirees will see the health care benefits that they worked for taken away.

That's the good part. Realistically, bankruptcy is likely to kill all three manufacturers, taking down much of the region's economy with them.

First, some folks may recall the credit crunch. Lenders are extremely reluctant to take risks. In the absence of government guarantees, it is unlikely that any banks will step forward to provide GM and the others the money they need to keep operating in bankruptcy. In other words, bankruptcy is very likely to mean a complete shutdown of the Big Three.

Let's say that the anti-bailout crowd suddenly gets a soft spot and decides to guarantee loans to the firms operating under bankruptcy protection. There is still the problem of selling cars. Customers will be very reluctant to buy cars produced by a manufacturer in bankruptcy, since they won't know if a dealer and supplier network will exist in 3 or 4 years so that they can get their car serviced and buy replacement parts.

While people don't mind flying an airline in bankruptcy, buying a car is to some extent an investment in the company. Many fewer customers will be willing to invest in a bankrupt car company.

But let's assume that the investment financing is arranged and that customers are still willing to come through the doors. The bankruptcy itself is still likely to be devastating to the economies of Michigan, Ohio, and Indiana, the three states where Big Three employment is concentrated.

Bankruptcy protects the firm from its creditors. The creditors of these firms are thousands of suppliers who are heavily concentrated in the same states. In most cases, the Big Three manufacturers were their major customers. These suppliers have already been squeezed by falling demand and lower product prices. If they cannot collect the money owed them by the Big Three, there will be a whole chain of secondary bankruptcies.

The impact in these states is potentially huge. According to the Center for Automotive Research, auto related employment accounts for almost 7 percent of total employment in Michigan, 6 percent in Indiana, and 5 percent in Ohio. Losing 7 percent of total employment in Michigan would be equivalent to losing more than 9 million jobs nationwide.

That is Mr. Paulson's latest plan for the auto industry and these three states. This will be quite a legacy.

There is one last point that should really gall just about everyone. Mr. Paulson has argued that he does not have the legal authority to use the money appropriated for TARP for bailing out the auto industry.

This claim is outrageous for two reasons. As many of us who opposed the TARP argued, it gave Paulson a virtual blank check, and that is pretty much how he has interpreted it, using the money to bail out a wide range of non-bank institutions.

The other reason why this is so galling is that this is an administration that has taken pride in claiming virtually unlimited powers in a wide range of areas, including the conduct of war and holding of prisoners without charges or trial. It would be incredible if they allow Detroit to sink because they claim that they don't have the legal authority to save it.

Comments

[Norge]

The consumtion system in place, financed by debt and ending in a revenue system for special interests such as the military and information agences including nasa is basicly reached its' final demise which with hindsight was inevidable.

People are not mindless food and object suckers to be pacified while the bloated government and all its' attachments live securely with the funding by the slave class through its' taxation and torpedos to inforce their legalized theft of others hard earned daily work.

Now the people have and are loosing their homes
and livelyhood while the powers that be save themselves vei more fiat money.
Pumping more credit into the system is about as dumb as going down for air instead of up while swimming under 10 feet of ocean water in a shark infested harbor.

The real solution or one of them would be to immediately slash all taxes to minimun 75% for all Americans on all income. That would give the economy a strong injection of the peoples' own money plus help with reinstilling confidence.

Though of course that would crew up the revenue system the parasites feed from...

In the harbor of scoundrels..

[Norge]

No.
Detroit sunk itself some years ago with not modernizing its' industries with fuel efficent systems and retaining their rediculous gas guzzlers insects. It became the dead albatross around their necks and took detroit to the grave with it.

We are now viewing the after effects and the consequences of being out of sink with the times.
The party is over.

[RobinSeattle]

You are absolutely right.

Aside from the fact that we see no plans on the part of the Big Three to cut executive pay, trim its upper management personnel, forego pensions even though many of them are millionaires many times over or give up their free company provided houses and cars , the current fix the industry is in is due to a complete lack of proactive (sorry to use that overused buzzword, but it is appropo here) planning. It is the arrogance of power and wealth that is insulated from real life.

So the risk of bailing them out is to offer future firms rewards or a corporate safety net for failure. The billionaire Ford family isn't going to bail out thousands of families who work for parts suppliers even though they can afford to because, well, by gum, that would be socialism!

No, us taxpayers are supposed to provide a stuffed mattress on demand for our corporate aristocracy.

Listen, if regular folks are going to suffer, and they will, then I want the executives and all those responsible for this crisis to be forced to chip in bigtime. If they won't, then they can piss off.

[sposton]

We have one main task ahead of us - to save our real economy which is different than saving our financial institutions! The financial entities which find themselves in trouble aren't salvageable in their current form, but since letting them go bankrupt would cost us more than not letting them go bankrupt there is one option left to do - nationalization! Nationalize banks and other financial entities in trouble, dispose of whatever assets are disposable in an orderly fashion and then work on a completely new financial framework that will exist for one reason only - to support the real economy. In the meantime create government entities to provide badly needed credit to the real companies that produce real products in real economy.

With all their faults the auto companies are our real economy and ought to be treated fundamentally differently from failed financial institutions that create no real product and that created mountains of useless financial instruments - derivatives of derivatives.

[therealredstateblues]

amen

[propax]

Second the motion.

[patrice503]

Why do you keep arguing with this AM radio rethug troll. Ignore and please keep discussing the real issue , some good stuff here on that.

[therealredstateblues]

Good point

trying to discuss issues facing the automotive industry with a person with so little knowledge and understanding of the industry is futile

As well as discussing issues affecting hardworking people trying to keep roofs over their heads and feed their families, or small business people that service and support the industry trying to stay in business with someone so vindictive towards folks that are suffering from the sins of bad managment decisions, big oil and wall street is also pointless

[feo]

The US has subsidized big oil, big mining and big agriculture for many, many years. Ethanol was just a sop to corn-producing states, for example, and will never compete economically with oil. Read about the sweetheart deal big mining has had since 1872. It's about time the people of the states of MI, OH, IN and IL got a few of their tax dollars back. If that is in the form of a loan to the car industry, so be it. And while we're at it, knock off this ludicrous nonsense about UAW workers getting $73/hour. Pure bullcrap invented by TV chatterheads who are paid $2-3 million a year to spout off stupidity.

[RobinSeattle]

We give Archer-Daniels-Midland a billion dollars a year in subsidies. Anyone want to explain to me why? And welfare and food stamps are socialism? Can't anyone see how screwy that is?

[ReasonIsMyReligion]

The father of No Banker Left Behind sees himself also as No Studebaker Left Behind.

Better that Bankers can maintain their second homes than auto workers remain in their only homes.

Paulson must go.

A deal for the Big 3 must be worked out.

P.S. Did Pelosi press the banks for as much of a plan as she is now pressing Detroit?
(Cue the crickets)

[Henry]

Michale,
Could you please explain to us what the benefit of CH 11 amounts to? Is this some period where they meet Jesus and are born again? What majic is there about CH 11? I worked for a company that was forced into CH 11 reorg. And then there was new management that came in with learning curve and the problems were actually exacerbated. Help us out here. Where is the majic in bankrupting away their contractural and fiduciary responsibilities. (I know you are just a punk who'd like to see union retiree's hurt... but that should be your problem)

[therealredstateblues]

When AMC went into bankrupcy they stopped paying us suppliers

when they stopped paying us, we stopped making parts for them

without parts they couldn't build cars, and customers could not get service parts.

It turned into a vicious circle that ultimately led to liquidation

this is why people won't buy cars from a bankrupt maker

[Michale32086]

Thank you for your concession that you have no logical or rational counter to my argument and must, therefore, resort to immature personal attacks.

Your concession of my superiority is appreciated, albeit irrelevant..

Michale.....

[Henry]

Mikey,
Can't answer the question eh? Proof positive of who you are.

[worldtraveller]

Bankruptcy is best thing that can happen.

[Henry]

worldtraveller,
Could you explain the constructive benefit of BK 11? You're not just waxing negative as small vengeful unpatriotic person are you?

[worldtraveller]

Not vengeful...
I simply believe that these companies are terribly run and made bad cars which worst of all they sold to anyone willing to assume a loan regardless of ability to pay. An all around bad job.
I think that the system over expanded on leverage and allowing it to contract back to a normal level that can be sustained by true purchasing power and not MORE debt must be permitted. It is inevitable. People are simply taped out. The banks also need to come clean with their balance sheets and whatever and whomever made the bad bets and failed to manage their credit risk and counterparty risk must suffer the cascading consequences. There is no need to throw GOOD TAXPAYER money (there is no such thing as gov't money) down a black hole.

Henry... which part is vengeful and unpatriotic.

[Michale32086]

@Viper

I was referring to the credibility of flying to DC to beg for money in separate private jets..

Plus there is this little tidbit...

A New York Times article says that GM chief Richard Wagoner was paid $24 million in 2006 and 2007, in salary, stock options and other perks. And his 2008 salary base is $2.2 million.

Does that really sound like a company on the verge of failing???

This is the man you want to give 50 billion dollars to???

Michale.....

[therealredstateblues]

Bill Ford vowed to not take a salary until the company is profitable again

they were in the black for the first quarter of this year, as has been the european division, whcih I might add operates in a higher tax higher wage envirnment than the US

SO what

Most big 3 execs don't make the top paid CEO lists I have seen

[Michale32086]

And yet the fly to DC in separate private jets..

And yet, GM CEO Wagoner was paid 24 million in 2006 and 07 and has a base salary of over 2 million a year...

And this guy is begging the US Taxpayers to help bail him out???

What crap....

Michale.....

[Michale32086]

Here is a differing opinion that's hard to argue with...

http://www.huffingtonpost.com/pam-atherton/automaker-bailout----head_b_145073.html

Michale.....

[therealredstateblues]

Actually - it is yet another opinion piece by yet another "expert" who has no connection to or experience with the auto industry that is very easy to argue with

[Michale32086]

And what is your connection to the auto industry??

Michale.....

[Henry]

Michale,
Know much about fair trade? Foreign countries like Japan and China manipulate their currency as part of their national employment strategies. This makes their imports cheaper than a fair free market determined price. (this may be way way too complicated for you) So the communist China et al sucker us financially at our own game playing us as stooges like you for the rubes that you are. There is a serious national security component to this. You'd love to see Boeing fail right? Remember the socialist Europeans awarded the tanker project from a less than patriotic Bushwa Defense Dept that benefits the confederate states?
It there were fair trade in conformance with WTO there would be tarriffs on imports from Germany and Japan due to social health care component differences and there would also be punishments due to fx manipulation Japan. Bush has failed the country in these elements on his dismal failure to understand. I understand that units of the Repuclican Army in Iraq go for $300 per month, maybe we should replace our US Army with them?

[Michale32086]

So, the gist of what I am gathering here is that a few seem to think that the Auto Makers got into hot water thru NO FAULT OF THEIR OWN... That it was rising fuel costs and the banking meltdown that caused all their problems.. That their business is viable and sound and just needs some help..

Is that the gist of the argument??

Michale.....

[therealredstateblues]

The financial meltdown and rapid rise in fuel costs are primary factors

no one is denying that detroit management has made some boneheaded moves

but to punish the workers, suppliers and the entire midwest for the sins of big oil, wall street and auto execs is pretty hard hearted, short sighted and mean spirited

[Michale32086]

No one is punishing the workers... It just so happens that they are involved..

Should we reward the boneheaded moves of the management just so the workers are OK??

If a regular company goes bankrupt, are the workers "punished"?? Of course not.. Their fortunes rise and fall with the success of the company. That's life..

Why shouldn't the auto workers' fortunes be affected the same way?

Why are they so special??

Michale......

[Viper]

We have lost or are losing every industry in the U.S.: Electronics, computer, textile, garment, appliance, high end MFG, engeering, research and etc.

The rest of the world is not play the free trade game.. they play to win for their country.

Regards

[Michale32086]

So, then the apparent solution is to match their trade policies in kind..

Sounds like a Tom Clancy novel I once read...

Michale.....

[sunshinerain]

That's right - Americans don't MAKE anything anymore, we just CONSUME. Like THAT'S sustainable.

In Michigan and DISGUSTED.

[jfor]

Let ExxonMobil bail them out with their record profits.

[Michale32086]

Another excellent idea!!! :D

Michale.....

[sunshinerain]

I agree. There's plenty of money floating around...let's raise taxes on the superrich!!!!

[PhilipTaylor]

CRISIS OF FINANCIAL FEES
(including salaries, bonuses, and parachutes)

FEES by Banks and INVESTMENT BANKS:

1. $10's to $100's Million in salaries, bonuses, and other incomes (e.g., Paulson $400+ million)
2. Incrementally High "TRICKY" adjustable mortgage Fees for subsidiaries of Investment Banks
3. High Second Mortgage Fees above property values
4. "Fake" Appraisal Fees
5. Selling loans that exceed value of the property with MORE Fees added
6. Slice and Dice mortgages into packages (Derivatives) by Banks for "MASSIVE" Added Fees
7. Rating Agency Assigns "AAA" rating to High Risk Derivatives and takes Large Fees
8. Sell Derivatives to Customers including HIGH Fees
9. Front end and Back End Insurance Fees
10. Financial Product Maintenance and Customer Service Fees
11. Credit card Excessive Interest Rates and Fees

Note: The Reason Banks will not MARK TO MARKET and want that removed:

With decline in home values some products now would take a 80% to 90% write-off of the Fees paid by Derivatives Clients, showing the "degree of greed" in this FEE driven system.

At least this LEVEL of CORRUPTION has not hit the Auto Industry! So lets save millions of Blue, Green, and white collar jobs!

Regulate FEES and INCOMES to stop this Greed!

[TJC]

Detroit will have to change or fail. It is difficult for them to compete against quality foreign vehicles built in non-union states. They must go through bankruptcy to re-orgaanize and retool. Their assembly lines must be flexible, efficient and produce higher quality cars. I know that they have improved quality recently but they can do more. Engineer more fuel efficient vehicles. In the late 1980's early 1990's the Malibu was a piece of crap. It is now a considerably better vehicle but it is still called a Malibu and the stigma associated from the earlier models hurts the sales. Even if it's only 10% it is still poor marketing.
The lamb duck administration wants Obama's start to be as tough as possible so Obama should have someone talking tothe CEO's and begin restructuring the industry.

The corporate jet thing was foolish. This shows that they are oblivious to their abuse of entitlement. It is very telling of their inability to think outside the luxury box.

[Michale32086]

}}}
The corporate jet thing was foolish.
{{{

It is THAT exact mindset that indicates to me that the Automakers need to fail..

They simply have lost ANY credibility or consideration...

Michale....

[Viper]

Yes thats why they still have more than a 50% market share and over 150 million cars on our highways and why they turn profit out side of the U.S. market


Would you think a Toyota Celica was a such a great buy if you paid twice as much for it as they do in Japan?

Regards

[therealredstateblues]

it was a bad PR move - they should have jumped in their most fuel efficient vehicles and drove to washington

No matter

The bnew malibu is a great car - stylish and gets 32 mpg was car of the year last year

Chevrolet has the most fuel eficient produyct mix currently

Toyota relies heavily on trucks and SUVs in their product mix

[Connolly1916]

Gotta agree with ya on the private jet thing. Typical.

[Viper]

Their Union wages at the end of this contract will be in line with the wages in the south basically. Do the competitors who only ASSEMBLE ( lowest valued added part of car MFG) not build cars here with younger workers now, and have 20 year tax exemption for those factories... then move to 3rd world countries.. to compete when their work force is older and their Tax incentives expire?

The race to the bottom... Just like where enginnering, software development and etc have gone?

Did the UAW kill the appliance , computer or electronics MFG, or the textivle and garment industries or even the Prepared food MFG? Or was it the outdated idea of free trade that no one else is dumb enough to practice.


Regards

[Truthosaurus]

I think you bring up some good questions. What is "free" trade if for example, one company can dump toxic chemicals used in the manufacturing process, while another has to assume the expense of reprocessing? Is that really free and open competition? On the other hand, is it a race to the bottom, or in some cases a race to the top? I am thinking of some off-shore tech industries which can raise levels of income, albeit in some cases at the expense of domestic income and jobs. I think we need a well balanced policy of trade with certain safeguards to manage things. Hopefully the new administration can make progress in this regard.