Are We Failing to Allow Failure? Is that a bad thing?
Is it the government's job to bail out any and every company that fails? Are businesses no longer accountable for their actions? Where do we draw the line?
General Motors is the latest company begging for a blank check from the government. The problem? It has already received loans (they didn't want to call them a bailout!) from the government and is still failing anyway... Now they're looking for an actual bailout!
What makes anyone think that throwing more good money after bad will help?
Back in September, apparently there was a bit of a fracas about automaker financial woes. GM was party to the $25,000,000,000 in loans given out by the government along with Ford and Chrysler.
Sep 12, 2008 (Detroit Free Press - McClatchy-Tribune News Service via COMTEX) -- Federal loans of $25 billion for the U.S. auto industry would be a "tremendous help," but would not equal a bailout of Detroit's struggling automakers, General Motors Corp. Chairman Rick Wagoner told Congress ... The pitch from Wagoner came as the U.S. Senate prepares what appear to be the first votes on the industry's loan hunt early next week, as part of several energy bills.
Wagoner's remarks were the most public attempt so far from Detroit's automakers to get the loans, which were approved but not paid for in last year's energy bill. Automakers have seized on the program as their best hope for relief from a cash crunch that's expected to last through 2010, although for now they have dropped a bid for $50 billion in aid.
Wagoner said since the $25 billion loan program was passed last December, the U.S. economy and shaky capital markets had severely hurt the industry's ability to pay for new technology out of its regular cash flow.
the question of $25 billion worth of federal loan guarantees for automakers has gone quickly from policy-wonk material to full-fledged national debate. Carmakers are not sitting by quietly.
General Motors Corp. Chairman and Chief Executive Rick Wagoner addressed a Senate committee ... arguing that such loans were vital for the industry. But he said a requirement that the money be used to improve fuel efficiency of vehicles by at least 25% was too stringent.
Instead, he told the Energy and Natural Resources Committee, the loans should be applicable to projects that increase fuel efficiency by as little as 10%. That translates, on a vehicle like the Chevy Silverado, to less than a 2 mpg improvement. And for the entire GM lineup, which in 2007 had an average fuel economy of 25.16 mpg, fewer than 3 mpgs.
Considering that the law creating the loan guarantees also called for an increase in industrywide corporate average fuel economy to 35 mpg by 2020, Wagoner's proposed 10% bar seems awfully low. Besides, it's not like GM doesn't know how to build fuel-efficient cars: In 1994 it had at least three models that got over 35 mpg, but GM's most efficient car in 2008 gets 29 mpg.
DETROIT — Executives from General Motors and the Ford Motor Company pressed their case ... for $25 billion in federal loans in a series of high-level meetings with lawmakers in Washington.
The appearances by G.M.’s chairman, Rick Wagoner, and Ford’s executive chairman, William C. Ford Jr., underscored how vital the industry considers the loans as it tries to meet tougher fuel-efficiency regulations.
When (and if) finally approved, much of the loan will be used to convert production to smaller, more fuel efficient vehicles, which are increasingly popular in Europe as a result of the escalating energy crisis. The money will also be added to existing U.S. Advanced Battery Consortium grants to help fund the development and manufacture of next-generation battery technology, such as those used in the forthcoming Chevrolet Volt.
Speaking after the meeting, Alan Mulally of Ford and Chrysler’s Robert Nardelli said they were “encouraged” and “pleased” after pitching for the massive loan, likely to come in the form of low-interest financing. The reaction is unsurprising given the continuing poor financial performance of the sector, amid heavy operating losses and double-digit interest rates in a tightening credit market. The looming crisis in the car industry has led some commentators to speculate that, without the loan, U.S. automakers might struggle to survive long enough to produce plug-ins and other fuel-efficient models that can compete with existing Japanese offerings like the Toyota Prius.
GM Accepts Loan Package; Building New Plant in Flint
FLINT, Mich., Sept. 25 -- General Motors CEO G. Richard Wagoner Jr. said Thursday that the automaker should be able to put to good use its portion of a $25 billion government loan package for new technology.
Speaking to reporters at a ceremony announcing a new engine plant in Flint, Wagoner said many of the loan program's specifics still must be written by the U.S. Department of Energy, but that GM can live with the version the House approved Wednesday.
So, it seems GM already has its hand in the public's pocket. One would think that getting its share of a 25 billion dollar payout from the government would help rectify its books. Not so; it appears to still be hemorrhaging money.
NEW YORK (CNNMoney.com) -- General Motors shook an already embattled auto industry ... as it reported a huge quarterly loss that was much worse than expected and warned it is in danger of running out of cash in the coming months.
So, where exactly did the huge loan from the government go?
Now GM and others seem to want the government to bail them out.
S&P cut GM's credit rating deeper into junk bond status to a rating of CCC+ ... not far above the D rating that indicates default by a company.
Shelly Lombard, senior high yield analyst at Gimme Credit, an independent research firm, estimates that GM will need to get between $10 billion and $15 billion in federal assistance in order to avoid bankruptcy by 2010 and that the chance of bankruptcy without help is probably 80% to 90%.
"They didn't want to speak the B word. It doesn't sound like they have a lot of options if the government doesn't step forward," she said, adding that aid for the auto industry that has already been approved by Congress amounted to "bringing a Band-Aid to a train wreck."
Both Schulz and Lombard also said that not even a federal bailout may be able to save either GM or Ford in the long-term considering the problems facing the industry.
"To the extent that they do receive some assistance, it's more buying time rather than a fundamental solution," said Schulz.
Which 'B word,' precisely, did nobody want to speak? 'Bankruptcy' or 'bailout?' It seems like both have been strongly implied in various articles. Though the latter seems to have more support for the former. Will bankruptcy go the way of the dodo?
DETROIT, Nov. 13, 2008 (Reuters) — Goldman Sachs suspended its rating on General Motors Corp ... and said the automaker needs at least $22 billion in federal aid to survive a deepening industry downturn.
JPMorgan, which also slashed its target price for GM stock to $1.84 from $3.08, said a government bailout could easily reach $30 billion unless GM reforms its vast liability structure.
However, not everyone is keen on bailing out GM.
ANDREWS AIR FORCE BASE, Md, Nov. 13, 2008 (Reuters) — The White House said ... it was not Congress' intent to use the $700 billion financial rescue package to help ailing U.S. automakers.
"That was not Congress' intent," Gordon Johndroe, a White House spokesman, told reporters traveling with President George W. Bush to New York. Bush was scheduled to speak about the financial markets and economy later in the day in New York City.
Back in September, White House spokesperson Tony Fratto had made a relatively sane remark about government's role in industry:
"Obviously, we want to be very, very careful about the government's role with private enterprise out there," White House spokesman Tony Fratto told reporters. "There are lots of industries that are dealing with challenging economic conditions, and it's always important to be very cautious about the federal government's role."
So, that seems to be the quandary we find ourselves in at present. What is government's role in business? What responsibility lies with government to rescue markets that are underperforming? What responsibilities lie with industries themselves in order to avoid underperforming or going under entirely?
While I don't think that it's a great option to let companies go under or to allow workers to lose their jobs due to corporate [insert adjective: greed, complacency, apathy], perhaps we should let a few companies go under on account of the fact they've screwed up and made poor business decisions.
Is it the government's or the taxpayer's burden to bear when corporations make poor decisions that end up causing them to go under? Why should we subsidize or bail out companies who have failed to live up to their end of the bargain? Especially when we have already given them handouts or loans to "rescue" them in very recent memory (a couple months ago).
Is pumping more taxpayer money into such an entity really a good investment? If they still fail, one could ask "where did the money go?" Does it simply evaporate into the aether?
Lombard and Schulz (quoted above) have already intimated that even a bailout may be wholly insufficient to salvage the company, and would merely be 'buying time' before imminent collapse.
If the government hands out money to GM or other automakers who have fallen on hard times, what's to stop them from handing out money to other companies, industries and sectors who have a bad year and come near bankruptcy? Where does it end? Is there to be no more accountability in the system? If I start a business and it fails, can I ask for a handout? What would make one company or industry more deserving of government funds than another?
There are no easy answers here. In fact even the questions are uncomfortable. But, they need to be asked and definitively answered.