The Big 3 - facts and issues

Discussion in 'Economy' started by tigerbob, Nov 16, 2008.

  1. tigerbob
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    tigerbob Increasingly jaded.

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    I’ve seen a load of threads / posts on this subject, but a lot of them seem to be making assumptions about several things or ignoring (willfully or not) key information. So I’ve tried to source several key pieces of info to try and get the numerous sides of the discussion into the open. I don’t pretend this is an exhaustive list - merely an attempt to provide some degree of balance.

    1. How many people does the auto industry ‘employ’ / or how many total jobs does the industry support?

    Estimates seem to vary between 2 and 3 million, including those who are indirectly employed. I’ve also seen it stated as about 10% of the US workforce. Here are a few links that support these figures. So, if the big three go to the wall, we are talking about potentially up to 3 million people unemployed.

    Automotive industry - Wikipedia, the free encyclopedia

    Economic contributions of the automobile industry to the U.S. economy. | North America > United States from AllBusiness.com

    http://www.ita.doc.gov/static/auto_reports_jobloss.pdf

    2. If the Big 3 are not bailed out, is Chapter 11 an option?

    Chapter 11 seems like the best option. Gets the makers out of their ridiculous UAW contracts, allows them to focus on the business of retooling and making a better car / truck. But is Chapter 11 an option? From the reports I’ve read, you have to have a viable business model with Chapter 11 - if your business is not a ‘going concern’, that’s chapter 7 (liquidation), not chapter 11.

    Chapter 11, Title 11, United States Code - Wikipedia, the free encyclopedia

    Going concern - Wikipedia, the free encyclopedia

    3. Could an automaker who has filed for Chapter 11 be deemed a going concern? One of the key criteria appears to be that the automakers revenue streams need to be tenable.

    Deal Journal - WSJ.com : Why GM Says Bankruptcy Is an Impossibility

    Why The Automakers Deserve To Be Rescued, New Republic: The Cost Of Letting Them Fail Could Be Greater Than The Cost Of Saving Them - CBS News

    Auto bankruptcy would drive away buyers: survey | U.S. | Reuters

    4. If Chapter 11 is not an option, what’s left.....

    Seems clear to me - bailout or liquidation.

    Liquidation under Chapter 7 - this is where the UAW (surprise) says no bailout will lead to - means several hundred thousand jobs disappear immediately, with several million more possibly following. Federal, state and local government would lose $156bn in tax and spending on welfare programs over 3 years (if you believe the numbers - see earlier Wiki link). Shares become worthless - which is less of a worry as I see it as far as individual investors are concerned (shares can go up and down and they took the risk) and more of a worry for pension funds that are heavily invested - rightly or wrongly - in auto stock. Plus of course the vast number of auto retirees lose their pensions (this could happen under Chapter 11 as well). The stocks of other industries (particularly certain commodities) will be impacted as well.

    On the other hand, bailing them out means inflated UAW contracts may remain in place, incompetent or at best short-sighted management may remain in place, it will still take years to turn the ship around (we all know what happens to ships that take a long time to turn), and there is a likelihood (some would say certainty, with some justification) that more handouts will be needed by the autos. Plus of course, an alarming precedent is being set. Where does it all stop?

    One thing is certain - whatever happens it will be a mess and the pros and cons of each potential direction will be so convoluted as to allow plenty of room for dems and reps to blame each other for years to come.
     
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  2. dilloduck
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    dilloduck Diamond Member

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    Nice research---it looks like the option we get every election year--choose the lesser of two evils or hope someone can think WAY outside the box to resolve this one.
     
  3. PeterS
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    PeterS Active Member

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    It seems letting them go into bankruptcy is the best option as it would allow for new labor contracts and overall restructuring. If, after this, they aren't deemed viable then a bailout would be in order. One point that should be made on all this is that bailouts aren't gifts but loans that are repaid. We have bailed out GM before and made money on the deal so we shouldn't view this as the negative that it seems to have become...
     
  4. RoadVirus
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    RoadVirus <insert pithy title here>

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    I agree with you 100%, but i doubt the greedy UAW would allow new labor contracts that cut down on all the frills.
     
  5. NOBama
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    NOBama Senior Member

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    This would have made a great poll. Anyway, I vote for option 2.

    If they can't meet Chapter 11, "going concern" criteria, tuff. Let them liquidate. I suspect some billionaire or private equity group right here in the good ole USA would snap them up.

    The investor(s) who bought the bones could probably (HA!) still get X$ from Uncle Sam to retool and make a go of it. Additionally, I think a lot of special confederation, including national security, would go into any such sale of assets.

    I also think this would only happen to 1 company, most likely GM, and to be honest, I rather support the temporary unemployment compensation effort resulting from it than literally waist billions of dollars on GM. The other 2, Ford and Chrysler, would suddenly become much healthier companies with little to no assistance from US.

    The next time the UAW contracts expire, Ford and Chrysler would have to put their foot down and say enough is enough, in order to become competitive. If their workers are stupid enough to go on strike, oh well, let the UAW union support them.

    Poor management and the UAW have screwed their own membership, through greed. Yes, a lot of retirees will get hurt and that really sucks but, what's the alternative? The way I see it, we have a choice here: We can either deal with this now or let our grandkids, their kids, and their grandkids deal with it.

    One of these companies has to go down in flames; otherwise nothing's really going to change.

    All IMHO.
     
  6. Diuretic
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    Diuretic Permanently confused

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    Why will retirees get hurt?
     
  7. tigerbob
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    tigerbob Increasingly jaded.

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  8. NOBama
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    NOBama Senior Member

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    Excellent question but, in all honesty, I don't know the answer. I was thinking along the lines of Enron when I wrote that.
     
  9. Diuretic
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    Diuretic Permanently confused

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    I see. The reason I asked is that I don't understand how superannuation works in the US. I assumed, obviously wrongly, that unions and companies controlled it.

    Wait a minute, now I remember, I saw that doco on Enron. Do companies and unions control superannuation?
     
  10. Annie
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    Annie Diamond Member

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    Depends on how their benefits are set up. If in private plan, no problem. If based on company stock, etc. Big problem.
     

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