Auto Industry Bailout

by John M. Curtis
(310) 204-8700

Copyright November 18, 2008
All Rights Reserved.                    

        Testifying before the Senate Banking Committee, auto industry executives pleaded with Congress to show mercy, providing a $25 billion bailout, a type of bridge loan while they move aggressively ahead with needed reforms.  While senators hazed the industry in prepared remarks, the overwhelming consensus involved keeping Detroit out of bankruptcy.  “I believe the solution must be a solution that leads to long-term viability, sustainability, viability,” said Treasury Secretary Hank Paulson, opposed to turning over a penny of his $700 billion bailout money intended for financial institutions.  He urged Congress to use the existing $25 billion loan program designed to retool plants to build more fuel-efficient cars.  While Paulson has no problem turning over $165 billion to AIG Insurance, he begrudges Detroit a measly $25 billion to save thousands of U.S. jobs, perhaps the economy.

             Paulson lost credibility last week when he did a one-eighty, telling lawmakers he would no longer use the bailout for buying banks’ toxic assets.  When he and Fed Chairman Ben Bernanke went before Congress Sept. 24, they both argued persuasively that the government had to buy up banks bad paper or failed mortgage-backed securities.  On Nov. 12, Paulson reversed gears, saying that he no longer believes buying up toxic assets would unthaw frozen credit markets.  Paulson called his change “flexible,” insisting the Treasury Dept. and Fed had to adapt to unprecedented circumstances.  Yet faced with the collapse of the U.S. auto industry, he sees no linkage between Detroit and credit markets.  Auto executives disagreed, reminding Congress that the auto industry represented 10% of GDP.  Pulling the plug on Detroit would send the economy into a death spiral.

             Ford Motors CEO Alan Mulally took exception to Paulson’s priorities.  Since Detroit—and all its affiliated industries—represents such a big piece of U.S. manufacturing, ignoring the problem would exacerbate unemployment and damage the economy.  “The industry is so interdependent.  We’re nearly 10% of the U.S. GDP, and if one of the automobile manufacturers gets into serious trouble, it has just tremendous implications for the entire industry,” said Mulally, warning about turning away from helping Detroit.  “Our industry . . . needs a bridge to span the financial chasm that has opened before us,” GM CEO Rick Wagoner told the Senate Banking Committee, blaming his company’s problems on bad management and the global economic slowdown.  Most senators weren’t receptive to more excuses, reserving plenty of disdain for GM’s upper management.

            No one doubts the U.S. auto industry needs to get its act together.  But the current economic mess goes beyond whether or not the industry failed to respond to the public’s changing appetite for cars.  Big Oil’s high prices and record profits killed the demand for SUV’s and trucks, leaving Detroit holding the bag.  While they’ve tried to get with the times, converting over to stylish fuel-efficient cars has taken time.  GM and Ford have started bringing over successful European models to the U.S.  As time goes on, the industry will get more competitive.  No matter what the anger at GM and Ford, now is not the time to throw out the baby with the bath water.  Ignoring Detroit would only worsen and prolong the country’s recession.  Rescuing AIG proved the Paulson doesn’t think only financial institutions are worthy of bailout.  Instead of ignoring Detroit, it’s time face reality and do what’s necessary.

            All the arguments about how Detroit failed can’t ignore the fact that credit markets have seized up, leaving consumers unable to buy cars.  Whether or not Detroit produces the perfect cars yet doesn’t stop the global credit squeeze, leaving many consumers and businesses without needed cash.  “We don’t thin taxpayers should be asked to throw money at a company that can’t prove that it has a long-term path for success,” said White House press secretary Dana Perino, echoing Paulson’s myopic view.  Paulson can’t cherry pick only those businesses he believes worthy of bailouts.  Perino has less contempt for the financial industry that watched CEOs loot companies at the expense of shareholders for golden parachutes and executive pay.  Fingering Detroit can’t excuse waste, fraud and abuse on Wall Street.  All U.S. businesses are joined at the hip with the banking sector.

            U.S. taxpayers have every right to expect strings attached to any Detroit bailout.  White House officials should stop pointing fingers and realize that banking and manufacturing are two sides of the same coin.  No one denies that Detroit must build more stylish fuel-efficient cars to remain competitive with American consumers   If GM and Ford compete well in Europe, they can do the same in the states.  Oil industry executives shouldn’t get a pass for price-gouging that drove consumers away from gas guzzlers.  Whether or not pump prices continue to drop, Detroit must follow Europe and Japan building more stylish fuel-efficient cars.  Putting U.S. automakers into bankruptcy would decimate domestic car sales, handing Japan and Europe an unnecessary windfall.  Detroit must plod along to retool and build better cars while the banking industry fixes the credit problems.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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