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09 December 2008

Automakers to Get $15 Billion

It appears that Congress will give the automakers $15 billion. While we are still waiting for the vote, most analysts expect that the automakers will get a bridge loan designed to get them through until the Obama administration can do something more fundamental.

The government will get a 20% stake in the company calculated by how much each car maker gets in loans. So, if GM takes $10 billion the government would get $2 billion in stock. Now with GM being worth $3 billion, this means that the taxpayers will own 2/3 of the company.

In addition, executive salaries will be capped, stop paying dividends; answer to a car czar and there will be no corporate jets.

Now, it has been said that GM could need up to $50 billion over time in order to survive. If a company is worth $3 billion but needs $50 billion to avoid bankruptcy, I'm thinking they are already bankrupt. And maybe it would be better for the company to go into Chapter 11.

I know what the implications of that are. People won't buy cars from a bankrupt company; lenders won't lend to people buying from a bankrupt company; suppliers to the company could go out of business; more jobs would be lost; and on and on.

On the other side of the coin, somebody will come in and buy the company, reorganize, make it more efficient, start building the cars that are in demand and emerge with a better, more profitable company.

The current management failed to have the foresight to produce products that would survive this environment and lost billions of dollars, falling behind their competitors who did have the foresight to build the right products. I'm not convinced current management will use the bailout money effectively, losing more billions and maybe going bankrupt anyway.

And here's the real kicker, Chrysler won't open its books to Congress because they are a private company. Congress doesn't even know for sure if Chrysler needs the money, they are just taking their word for it. Chrysler won't even tell Congress who is on the board of directors.

Now, I could be missing something here, but I believe Congress has been admonishing banks, investment bankers, Freddie Mac and Fannie Mae executives and others involved in this financial crisis that one of the reasons for being in this mess is because people who were applying for housing loans were not required to prove their income, in some cases they didn't even have to disclose their income.

Now Congress is about to make the same mistake. Give GM and Ford money, but withhold Chrysler loans unless they disclose financial information to Congress. The rest of us have to fill out an application and disclose financial information, Chrysler shouldn't be exempt from that.

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