The only thing less efficient than government is…labor unions!
Investors Business Daily (IBD) asked this probing question regarding investing in the "New" General Motors (GM): "Why invest in a company if your money and rights as an investor can be arbitrarily stripped from you, as they were in GM's case?"
IBD was pointing out that President Obama dismantled two centuries of contract law in his "pre-packaged bankruptcy" of GM. Legal and binding contracts were wiped out with the GM assets disproportionately distributed to the government and unions, leaving investors and dealers holding the short straw. The United Auto Workers (UAW) will receive about 17.5% of the stock for $10 billion of unsecured debts, the bondholders will receive about 10% of the stock for $27 billion in secured debt, and stockholders will get zero. Where else would unsecured debt be favored over secured debt?
It would be cynical to point out that the unions donated millions to the Democrats in political campaigns in this "pay to play" world. Obama and the Congressional Democrats are obligated to save the UAW at the expense of non-union jobs and businesses. During a Bloomberg business panel, it was asked what will be the importance of the unions in the next decade. Jack Welsh, former GE CEO, asked, "Give me a highly successful unionized industry." After the panel dodged the question Welsh said, "It's an inherent killer of competition." Company profits is not an objective of a union.
Before you celebrate that the bondholders and stockholders got the shaft, ask, who are they. Many were retirement funds, and individuals who lost everything they had invested in GM. In reality, this wasn't a bankruptcy, it was the nationalization of private industry.
But it's not Obama's fault. He has said, ". . . the United States government has no interest in running GM." But Obama is running GM. Obama orchestrated the firing of the GM CEO, dictated the terms of the bankruptcy, decided where GM headquarters will be, decided which dealers would survive, forbade the import of profitable GM cars from China and Germany, and handpicked a 31-year-old Yale law student, Brian Deese, to dismantle GM. Deese has no recognizable experience in economics, business, or the automotive industry. So why would Obama select him to be in charge of dismantling GM?
The federal government doesn't have a stellar record on managing businesses. The government even lost money when the IRS confiscated and attempted to run the Mustang Ranch bar and brothel. For government-run GM to survive, it will have to build and sell cars that people want. Congress has already dictated the kinds of cars that will be produced. Soon dealerships will display the reincarnation of such classics as Le Car, Travant, Lada, and Yugo. Tiny cars have been available for decades but they have never been popular. To sell the Pelosi GT, the Waxman Super Sport, or the Obamamobile, Congress will need to ban all other vehicles.
If people aren't interested in driving these automotive disasters, how will GM ever become profitable? This is the dilemma that investors have. Why should an investor put their good hard earned money into a company that has very little chance of making money? But for the sake of good humor, let's assume that people want to drive "clown cars." History shows the profit margin on these cars is small. Why would someone want to be a stockholder in the "New" GM knowing that the business model is flawed. Throwing good money after bad comes to mind. The goal of an investor is to invest in a profitable company. But the basic goals of the "New" GM are in conflict — the least important goal is to make a profit.
Obama and the Congressional Democrats are obligated to save the UAW at the expense of non-union jobs and businesses. Devotees of Socialism can rejoice knowing that the workers (UAW) will now control a significant portion of the means of auto production, but will investors think this Government-Union consortium is a good investment?
I doubt it.
Correct on all points.
The administration did give higher standing to unsecured creditors such as the UAW over secured creditors, i.e. bondholders. The overwhelming majority of these bondholders were funds directing the pension payouts of other 'less' politically connected retirees. It is important to analyze the missteps now; as they may be shoved into the 'memory hole' at a later date.
The first question one must ask regards the dealerships. If I understand this relationship correctly; dealerships are franchise operations. The owner pays the auto company an up front premium to acquire privilege to stock, sell, and service those specific models. Under these conditions; a dealership costs the auto maker nothing. Closing a dealership is tantamount to sacrificing market share.
Anyone used to living in a metropolitan area knows where 'Dealer Boulevard' exists. There is that one stretch of highway where all the auto dealers seem to congregate. Whenever you desire to shop for a car, van, or truck, you go there and literally work your way from one end of the street to the other looking at all models, configurations, colors, prices, and warranties. You also have the convenience of each dealership assessing the value of your trade-in.
To surrender such advantage to your competitors just when you most need the ability to have your revamped product line to be as widely viewed as possible is corporate suicide. Only someone with scant knowledge of the business would insist on closing dealerships.
Next, we must deduce exactly why it is so important to keep a union's claims whole, that other workers and pensioners MUST be thrown under the bus to accomplish it? What makes union membership more equal than your average non-union blue collar employee?
There can be no question as to why. If you invest $35 million in campaign contributions, you expect that investment to yield something in return. Who knew that the political parties should have their own symbols on the NYSE? Apparently; they are businesses in all senses except actual incorporation. They do raise capital, they do produce and 'sell' a product, and occasionally they pay dividends. Just ask the UAW.
The second lesson is; maybe if YOU PERSONALLY had belonged to a union, you wouldn't be getting stiffed right now. Something to ponder as we debate card check isn't it? My brother-in-law is a retiree and a life-long UAW member. His two statements are; "Looks as if my years of paying union dues is paying off in this economy." And "To bad you never unionized your business, sucker!"
It does cause one to wonder how such arrangements will lead to economic recovery. If banks are wholly owned subsidiaries of government, and are told who to lend and who not to lend to. If auto makers are told who to fire, who to retain, and what to produce. If the courts are told who to pay and who to screw, what person in his right mind would place his hard earned money into any company?
Good article and good comments milbrat.
Let's look at investment in light of both GM and Chrysler.
Common stock: Hmmm value of zero, however common is last in the pecking order (in the old america before Obamacontract law became the law of the land). That means that all valid obligations of the company would be honored before the common shareholders received anything in a liquidation or in almost any bankruptcy. Shaky company, unproven management (although the new Chrysler may actually have a leader with some idea of how to do a turn around in the auto industry…of course he is from Italy), unproven product line, need I go on. A very risky investment choice unless there is some other sweetener. Your mattress is definitely a better place for your money.
First mortgage bond holder: You have preference on assets over virtually all other debts of the corporation; oops that was before Obamacontract law became the new business law book. Well, if you demand enough premium such as up front points, and a very high interest rate coupled with special provisions to call the notes maybe you could get this investment up to a C level bond equivalent in the old contract law environment. Your mattress may be a safer investment.
Preferred stock: Most of the common stock comments are common to this area, however you do get the benefit of a fixed return when there are earnings and it may end up requiring a repay clause where any missed payments must be made up before any common dividends can be paid. May possibly be better than the mattress but not much.
This author has the motivations and political manipulations well pegged, but his prognostications can be questioned. Given the current political situation, Obama has many options available to create a successful New GM. The question really is can Obama use his power to create a company that will re-emerge as a thriving, non-government owned business? With multiple agendas beyond a simple profit motive, can the New GM return to financial health and attract private investors? And will the politicians desire that result.
In business terms, two things must happen which favor the New GM. First, the volume of new car sales, nationally and as GM's share of the market must increase to provide the revenue needed to drive cash flow and ultimately profit. If New GM can't generate sufficient cash flow, the taxpayers will eventually become fed-up and political pressure will build for some future President and Congress to pull the Treasury's life support credit line.
The second thing that must happen is for prices on GM cars to increase to a unit profit level that allows GM to thrive. Constant and deep purchase rebates may drive sales but the resulting net prices don't cover all fixed and variable costs, plus a modest profit. And nobody in their right mind would pay full sticker price for most GM models in the recent past – recall there were constant and multiple rebates offered just to get folks into the GM showrooms. Toyota, Honda and the other foreign manufacturers didn't extend comparable rebate offers, they didn't need to.
Obama has many weapons in his aresenal to address both these problems. Increasing sales volume – "Cash for Clunkers" is ready to go in Congress and Congress is trying to decide which models the "cash" will be offered on. Obama's auto flunkies have to be heavily lobbying Congress in favor of attractive offers for trading in your clunker for GM models.
CAFE standards are another weapon, force folks to buy new cars using a carrot and stick approach. Increased gas mileage will be attractive when gas prices increase. And if gas prices don't increase fast enough, there's always a stiff federal excise tax on gasoline to encourage the troops. Another approach is "Tax on Clunkers". How would a stiff annual federal "gas hog" tax drive Americans into the showrooms? Very easily if the tax is perceived as both "necessary" and "fair" – and the media gets to decide what "fair" is.
Another weapon is a customer purchase rebate when you buy a new energy efficient car. For example, the Chevy Volt, the great white hope of GM, will receive a $7,500 rebate courtesy of the taxpayers. But if rebates to buyers from taxpayers, not GM, are extended beyond electric cars, it becomes even easier. For example, GM markets a $35,000 gas engine vehicle, the purchaser gets a $5,000 rebate from the U. S. Treasury (a Treas check is much prefereable to a tax credit since so many Americans pay no fed income taxes). GM collects the full $35,000 generating say a $3,000 profit on each sale, the taxpayers indirectly subsidize GM's bottom line. Everyone is happy except the holdouts.
If you combine a "gas guzzler" federal tax on your present vehicle with an attractive purchase rebate underwritten by the taxpayers, it isn't hard to get folks into the showrooms. And while it's true that Obama can't blatantly favor GM and Chrysler over all other manufacturers, he has many other options to indirctly favor the two auto companies he now owns. How about R&D subsidies to "help" New GM develop fuel efficient cars – Toyota, don't bother to ask. Or the Treasury supporting low, or no, interest car loans through a GM financial subsidiary.
All these inducements and penalties are possible and no amount of indignation concerning the rule of law and due process will give investors qualms about buying New GM stock if the investors sense that Obama is throwing the full weight of the govt. behind GM.
Pat,
I must first draw your attention to the fact that GMis closing 1,100 of its 2,600 dealerships. As I alluded to in my previous posting dealerships are market share. You cannot cut 42% of your contact points with the consumers and expect to compete.
Even if CAFE standards significantly increase, and energy prices skyrocket, both almost certainties given the track record of this administration so far. You would require protectionist tarriffs in order to induce (read force) the public to buy GM cars.
I've heard of this 'clunker rebate'. Do you propose that it be offered only on GM cars? hat's about the only way I can see this administration influencing the American Public to purchase its product.
I have a small ranch. I need a truck. If I have to pay a 'guzzler' tax in order to haul my hay and trailer my tractor into town for service, so be it. I have to be able to tow and stop 8,000 lbs!
If I had a collision with a Chevy Volt; I'd be picking pieces of you and that Chevy out of my tire treads for a week! I didn't stop driving my truck when gas was $4.00 and won't stop just because you raise the price to $6.00! You couldn't raise prices or usage taxes enough to get me to drive a small, useless car that can't move anything significant, and can't be utilized to actually accomplish any work.
mibrat, not sure where your information is sourced from but GM had over 5,500 dealerships prior to the announced closing, more in total than Toyota, Honda and Nissan combined, while their market share is about equal to Toyota's. A dealer is not market share, it's a sales outlet and it's doubtful GM is cutting the high volume dealers while leaving the low volume rural ones untouched.
Given the current Obama approach to business in this country, I wouldn't be surprised that some types of disguised tariffs aren't on his To-Do list but there are other ways to market New GM models. Obama also has to tread lightly around those states that have Toyota or Honda plants when it comes to blatant favoritism.
Gas guzzler or "Tax for Clunkers" can be structured in many ways. The sledgehammer approach is an annual flat tax on certain cars and light trucks paid to the Feds with perhaps some kickbacks to the states that support him politically (hint: Michigan and Ohio). But the more likely approach is a graduated tax based on annual mileage and certain exemptions for those who use light trucks to make a living (and pay federal income taxes). I live in California in a metro area and the number of Yukons, Escalades and luxury Silverados you see in this neck of the woods aren't for hauling hay – and I greatly suspect they outnumber the hay haulers both here and in the country as a whole.
Obama is the CEO and chief investor in the New GM and he can and probably will work to make his company successful. Nor would I trust Wall St. to stand on principle and refuse to finance a New GM if the signs are right in the future, greed outweighs morality every time in the markets.
If your Ford F150, Ram or Silverado took on a Volt, no doubt it would win the encounter but the same is true for your truck vs. many small cars currently on the market. The guzzler tax wouldn't take away the need for light trucks with the necessary horsepower, rather the purpose is to make folks consider a new car with a lower power to weight ratio. Buying a used car won't help either since the New GM doesn't make "used cars", so the Obama initiatives have to favor new cars with improved gas mileage.
With the weapons in his arsenal, Obama has a chance to win one with the New GM, but it's not a sure thing. My point was Wall St., as always, is waiting to see which way the winds blows before committing, but they're not adverse to making a killing on stock in the New GM.
Pat, your comments suggest that GM and Chrysler require the government to develop a captive customer base through use of targeted tax and other incentives (read that as more money taken from those that actually pay taxes). Unfortunately for this approach it will also offer these taxpayer funded boondogles to purchasers of other auto companies. If GM and Chrysler were unable to build automobiles that the public would purchase under the old business law model what would make you think that a government/union run business will be able to compete.
Sorry but your analysis doesn't hold up unless we create the captive buyer and that would create the greatest trade war this planet has ever seen.
Pat,
Previous internet searches on GM dealerships yielded less than stellar results. However; that being said, the number of closings is not in dispute. These are still 'market contact points'. Reducing this number by 20% as opposed to my original estimate still places the new GM at significant disadvantage. I think we must still address the fact these independently owned dealerships have quite an amount of capital tied up in inventory, service parts, buildings, property, etc. Apparently these people are in the same boat as the secured bondholders; expected to 'take one for the team'; so that more favored groups may continue to be made whole.
The UAW now owns a 39% stake in GM http://www.businessweek.com/autos/autobeat/archives/2009/05/chrysler_gm_and.html but the bondholders (secured creditors) received $2.7 billion in equity from the 'new' GM in return for their $27.2 billion in secured debt. Granted that 39% of GM today is worth next to nothing, but a GM that approaches even what it was worth in 2004 that would amount to $55 per share. We've still not explored the reasoning behind the administration forcing a change to established bankruptcy law to place the UAW ahead of these bondholders. I'm certain that I need not cover over 100 years of 'Stare Decisis', which validates the point I made in the last paragraph of my original post which asks;
"It does cause one to wonder how such arrangements will lead to economic recovery. If banks are wholly owned subsidiaries of government, and are told who to lend and who not to lend to. If auto makers are told who to fire, who to retain, and what to produce. If the courts are told who to pay and who to screw, what person in his right mind would place his hard earned money into any company?"
This would seem to invalidate the assumptions you make in paragraphs four and six of your latest post. Despite what you may believe; the NYSE is not a stock market but it is a market of stocks. While there are large institutionalized investors, there are numerous smaller investors also. Holders of company common stock under the previous rules were third in line; only able to receive value after all secured and unsecured creditors had been made whole. http://jalopnik.com/5286402/gm-reminds-investors-its-stocks-completely-worthless Under those circumstances; why would you expect any investor, institutionalized or personal, to want to risk his own or his clients' money on a company the government has taken over once already? Especially when they see the likelihood of any payback based upon historical performance.
I feel I gave a condescending response to your original posting regarding the Hybrid Volt. I must admit to a bit of frustration that one would believe the future of an automobile manufacturing company would rest on such a product. I realize that the hybrid vehicle is a necessary step in the evolution of personal transportation; it is not be 'be-all-and-end-all' of the process. I would personally expect most personal transportation to be hydrogen powered within two generations. But I do not believe the hybrids will fill that forty year gap.
While I realize that the administration's appointed Automobile Task Force may actually push GM in this direction, it's not a surprising result seen as how none of the members of this body has any automotive industry experience and only three of them have ever owned a car.
The conventional wisdom is that GM's major issue was building cars nobody wanted; and hybrids are another example of that mistake. Your point regarding the number of trucks you count in your metro area is well taken. I'm certain that there is a significant amount of what we call 'Air Haulers'. But your own observation serves to validate mine.
My ranch is small, 25 acres, and for me it is a 'second job'. I commute 85 miles each way to work every day. Unlike California, here you have to go where the money is. My home is 5 miles from the nearest traveled road, 20 miles from the next small town. 40 miles from the Interstate, and 65 miles from the closest major metropolitan area. That commute equals a 180 mile round trip each day. How will the Chevy Volt assist me? It doesn't have that kind of range. Added to that is the reality that a rechargeable electric car doesn't alleviate pollution, it just changes the point of emission. The stuff that no longer exits the tailpipe, exits the stack of the power plant providing the current for recharge.
Your original post reveals that government force would most probably have to be utilized to assist GM's climb to re-profitability. "Cash for Clunkers", CAFÉ standards, Treasury rebates, artificially inflated gas prices, and "gas hog" penalties are all examples of government force. It doesn't matter if the fist is wearing velvet or chain mail, force is force.
This is just another example of favoring one group of people over another. I've personally been amazed at how each and every program this administration has instituted in order to help 'working families' has managed to miss my family entirely. Tuition assistance; sorry kids are already grown and gone. Housing assistance; mine's paid for. Health care; already have it. Tax breaks; well they've not gone up yet but have not lessened either: And yes, I write the government a check each year, and have for the last twenty or so.
All this leads me to state the following; the federal government made a monumental error buying into GM. As a matter of principle, I think any company that was short sighted enough to be caught in the financial maelstrom should have been allowed to fail. Whenever government injects capital into institutions they are choosing to reward institutions that the market would punish. A lost job is a lost job. Saving UAW jobs and pensions at the expense of independent dealers' and bondholder jobs and pensions is nothing more than blatant favoritism.
Once again I refer to my above quoted paragraph in my original post and ask; How does this lead to economic recovery? And what person in his right mind would invest in any company knowing in advance that the government could step in at any time, and make your investment worthless?
Looking forward to your response
Mickey G: Your conclusion that a captive market is necessary is flawed for a number of reasons. For the UAW workers at Ford, how would a captive market directing, or forcing, buyers to GM and Chrysler help them? This author, Jack Ward, is quit correct that Obama's motivtations were entirely political and helping the UAW ranked near the top of his list. So how would he help the UAW by favoring GM workers over Ford workers?
If you'll pardon my presumption to know your mind, there currently exists a captive market of which you thoroughly aprpove and, after decades, hasn't set off a global trade war. The sellers have names like Northrup-Grumman, Sikorsky, Hughes, Boeing, Lockheed and so forth. The captive buyer is of course the U.S. Govt., specifically the Defense Dept. procuring next generation military aircraft. The sellers kept from servicing this buyer have names like Dassault, Saab,Airbus, Mitsubishi, Sukhoi, MIG, etc. We not only direct business to these favored companies, we also generate requests for weapon systems we don't currently need to provide these companies with a balanced revenue stream in order to keep them in business.
If you will recall, replacing the Air Force tanker fleet recently was hotly debated because the Defense folks were willing to consider a foreign aircraft supplier. But no global trade war was initiated and all the players, foreign and domestic, agree with this captive buyer arrangement – nor will it change anytime soon.
So, Obama must be careful not to attempt a captive buyer arrangement but he definitely must attempt the two improvements I specified. Increasing consumer spending on cars and light trucks isn't adequate, he must increase unit volume sales of new cars and light trucks. The current market for used cars is increasing as buyers perceive the economic value in used cars, but the UAW workers don't make "used cars".
He must also restore the pricing structure within the American automotive market. Assuming GM and Chrysler (as well as Ford) have regained a quality level comparable to the Japanese and Germans, then the destructive purchase rebates must go away. Yet, once retail consumers expect constant "sales" or "markdowns" before they will consider buying, the habit is a hard one to break. A purchase rebate paid from taxpayer funds gives GM and Chrysler a chance to recover from the "rebate" mindset.
If you're assuming that Obama can create a taxpayer funded rebate structure that favors only GM and Chrysler, I believe your conclusions are erroneous. But if Obama can restore GM's and Chrysler's pricing structure to the point where they make a unit profit on each sale, he is well on his way to creating viable companies that won't require perpetual govt. assistance. If Ford, Toyota and Volkswagen also benefit from these rebates, that also serves his purpose toward increased consumer spending on new cars and "stimulating" the economy (hint: Ford, Toyota and Volkswagen have plants within America employing only American workers).
Milbrat, if I can presume to paraphrase the thrust of your comments you believe that Obama went about this in a high-handed manner, trampling on the legal rights of stockholders and bondholders and orchestrating a deal that favored special interests for political reasons. And from my knothole that's an assessment shared by many Americans. Folks are angry with how this GM/Chrysler bailout was handled and many have vowed never to purchase a car from New GM or New Chrysler. My comments weren't in support of Obama's actions but rather pointed out that Obama can still win this one if he uses the weapons at his disposal in a wise and timely fashion.
Regarding the stock market, folks often misunderstand what the market actually does. Theoretically, it is intended to support raising capital through sale of equities. But, in reality, it is much more than that. Large public corporations issue stock each and every month but large sales of new shares are relatively rare. However, stock as compensation is quite common; both at the senior management and low level employee level (and usually the reason for issuing new shares out of the corporate treasury). Without a market to trade shares for cash or other stocks, stock compensation loses all power to motivate employees.
Additionally, the stock market is a form of legalized gambling, although we pretend otherwise. Short sales, puts, calls, all the other gimmicks aren't necessary to public corporations to raise capital through equity, but are very necessary to create the risk element and betting mechanisms necessary to support the gambling aspect of the market. We claim that such disguised gambling supports a healthy market function, but in reality that is patently absurd.
Speculators on Wall St. may not agree with the New GM on moral grounds but it won't stop them from making a future profit trading in New GM shares. You're correct that private lenders and investors should think twice before trusting New GM, that lesson has become blatantly obvious after recent events, but that doesn't mean that there isn't a future profit to be made trading in New GM shares. How could it be otherwise given the speculative and gambling aspects of the market?
Like many commenters on this site and others, there is a tendency to blame business for willfully violating moral principles. However, holding business accountable as if it was a seperate entity, independent and unaffected by govt., is a mistake. A contractor can cheat you on a home improvement project, an internet vendor can sell shoddy merchandise and so forth but there are legal remedies available, business can't ignore such remedies at will, nor can business ignore the legal and physical force behind those remedies. Our government, on the other hand, is accountable to no one – it's a force unto itself.
To illustrate, assume for a moment that GM had repudiated Obama, and earlier the Bush Administration, by refusing any government assistance and declaring they would take their chances in a normal bankruptcy process. Now ask yourself if that would have been the end of it? Legally, and with encouragement from the Justice Dept., stockholders could have raised a lawsuit requiring GM to accept a Govt. bailout. The UAW could have asked for intervention citing national interest, contract violations regarding their pension fund payments, etc. Do you believe the Govt. would have simply backed off and told the complaintants to solve it on their own?
America is a land of business but Americans are hopelessly naive about how business actually operates. Rather than rant on for pages, let me cite a few simple examples. International businesses must obey the laws in each country they do business in, moral principles, ethics and right conduct nonwithstanding. A firm operating in Saudi Arabia must treat its female employees under the strictures of Saudi law, even when those actions would get them sued and fined in the States. Many countries have laws that are in oppostion to American law.
Business shouldn't knowingly hire illegal workers but what does a grove owner do when it's time to bring in the crop? The govt. won't protect our borders and depending on which way the political winds are currently blowing will round-up illegals one day and ignore them entirely the next day. So the grove or orchard owner goes out of business to support the law while the govt. ignores the laws it has responsibility to enforce.
A late term abortion provider can become wealthy but a business buying from countries that employ child labor is subject to legal penalties. So, legal to kill a child able to live outside the womb, illegal to buy merchandise from a country engaging in certain forms of child labor and which is under stricture by the State Dept. Which entity, business or government, has the moral myopia?
A media organization sends its reporters into a war zone or hostile area, the employees are killed, kidnapped or otherwise harmed and nothing is done about violating the law on the part of the employer. A refinery is heavily fined, sued and could face criminal prosecution if it doesn't enforce certain safety regulations affecting employees. What's the basic difference between the two industries in respect to safeguarding employee safety?
Business exists and operates entirely at the whim of the govt. and under the changing winds of current politics. Blaming New GM is an exercise in futility.
Pat is quite clearly a statist and does not have a clue about constitutional limits on government.
If I won't make choice Pat approves of, he will have the government force me to. That is not just unconstitutional, it is anti-constitutional.
I have 3 American vehicles at home. 2 Jeeps with over 170,000 miles on each. The Cherokee still gets 20 MPG highway. Clown cars don't fit families and thus require families to use two cars to take the family anywhere. Would Pat then demand that families not go anywhere expect by government control public transportation?
CAFE is responsible for the death of hundreds of thousands of Americans since peanut head first forced it on us.
Making cars even smaller and lighter will only do one thing. Reduce health care costs because crash fatalities cost less to treat than crash survivors.
Taxing Americans until they have no choice but to buy tiny death traps is not the American way. It is what socialist Europe does. When Europeans move to the States, they buy big SUV's at the same or higher rate than Americans do.
Pat, your words prove that "pro-choice" only means pro-choice when the rest of us make choices you approve of.
As it is now, there is not a car on the market that gets over 30MPG that will fit my family. There is no room in the back seat for a 6 foot tall 13 year old. As it is, he barely fits in the Cherokee. Will you then demand a tax on tall children for environmental impact? Or maybe forced chemical or surgical reduction in height?
I no from personal experience how unsafe small cars are. My Jeep Wrangler is not big. I hit a Honda civic broadside in the passenger door when the inexperienced driver panicked, over-corrected and went straight across my lane. I hit her around 60MPH. The Honda was totaled. Had there been a passenger in that seat he would have been dead because the side of the Honda caved in.
You may be willing sacrifice the children of other people but I seriously doubt you would ever by a small car if you ever survived a crash with one. By the way, the fatality rate for even single small cars, no other vehicle involved is 3 times that of what used to be called mid size car.
So maybe the plan for smaller cars really is part of BO's plan to reduce health care costs. Buy funeral home stock.
BTW, my third American vehicle is a Buell. Since I can't fit my family in a high mileage vehicle I might as well have fun with it.
Let's summarize where this discussion was going before it started a new life and diverted course. Would you buy stock in the new GM. Pat seems to think it will be a wonderful investment, I differ as do others.
If you were to build an econometric model just for the auto industry (they already exist and are used by all the major auto companies) you would discover that once market share is lost it is extremely difficult to gain back. This is because, like it or not, there is a measure of brand loyalty that shows up in the population. That loyalty translates fiercely when someone has changed brands that they previously showed a strong preference for into a strong preference for the new brand. Couple this preference with a perception of higher quality and better products and you have the beginning of a perfect storm.
Chrysler recovered from an almost identical situation, under Lee Iacocca, by developing a innovative new product the mini-van (not really new but if buyers believe it is a new product it is a new product).
So what is different today in the new Government Motors and Fiat/Chrysler? Ownership is government and union, and lenders have been brutalized to the extent the entire economy may be affected since first mortgage notes are not worth the paper they are written on.
Who will innovate? Government? Union? To use the texting example LMAO!
The other companies will innovate and, unless captive customers are created, Government Motors and Fiat/Chrysler will die with the exception of two brands: Chevrolet and Jeep. Why only those two? Government in its zeal to move the population to roller skates will destroy the Cadillac segment of the market leaving only specialty and brand. Chevrolet for the brand and Jeep for brand and specialty.
Doubt this? Look at history and try not to repeat it.
Pat,
I agree. I'm not blaming the new GM. I believe that the new GM: With government intervention, a government steering committee, and Congressional interference regarding new product development is an entirely different animal that the GM that would have emerged from a straight bankruptcy.
We'll never know what form that company would have taken. It very well could have been a liquidation and ceased to exist. The difficulty I have is with the distortion such government interference creates.
My concern is the mis-allocation of capital present in the government structured bankruptcies of both GM and Chrysler. Austrian economics teaches that the market allocates capital to the 'most' effective use. Think of it as a jungle. The rule is adapt or die. In a company where the business model is capable of this, the company thrives. Stock prices go up, the balance sheet is in order, and the P&L is positive. GM, by all accounts, has been sick for quite some time; hemorrhaging both cash and market share.
If you believe that the administration's motives are altruistic; then the bailouts and other subsequent government meddling is intended to 'save' GM. A cynic may decide that an administration, not wanting to waste a crisis, saw an opportunity to dictate policy in so many areas (spread the wealth, shared sacrifice, social justice, and complete control of a major manufacturing concern) that this added up to an opportunity to good to pass up.
Whatever their intention; the effect was to continue to mis-allocate capital that should have been directed to a more healthy concern. I may own a Chevrolet, but I'm not married to the company.
Government intervention has made a bad situation worse. The original Chrysler Corporation Loan Guarantee act of 1979 was a failure. According to a 1983 Heritage Foundation article; "Chrysler renegotiated its debts and restructured its organization in a way that greatly resembled a company going through Chapter 11 bankruptcy. Its creditors, like those of bankrupt firms, were forced to swallow sizeable losses." The entire article may be found here; http://www.heritage.org/research/regulation/bg276.cfm
All the original government intervention allowed was for a dying company (Chrysler) to limp along for another three decades. If Chrysler had been allowed to fail in 1980; there can be no doubt that the UAW and the industry as a whole would have learned some valuable lessons 30 years ago that may have avoided all that has happened recently. Mis-allocation distorts the market.
Now we face exactly the same conditions. Government has lent money to two automobile manufacturers. However; this time they've taken majority ownership, dictated which entities would receive what compensation regardless of established law, and put a bureaucratic committee in place to oversee their future development. After experiencing the government's success in managing passenger rail (read Amtrak); what would lead one to believe that a government sojourn into the auto industry would be any more profitable?
The original question posed by Jack Ward's essay was "Would you invest in the new GM?" My response is; "I don't have a choice, the government has purchased shares for me! But that doesn't mean I have to like it!" This is WRONG on so many levels.
Thanks for the discussion Pat. See you out there!
Mickey
I concur with you on Jeep. As stated I own two Jeeps. Both with over $170K miles. One for the family and one for off road fun that I have spent a few times what I paid for it in upgrades and repairs. There are few if any cars that owners will spend such a high percentage of initial purchase price on modifying.
So long as Jeep is around, there will be a Jeep in my garage.
I have also been told by a guy that is 6'5" tall and has a son who is 6'1" that his family fits in a Jeep Patriot and it gets about 30MPG. There is not a single Japanese car that can claim that fit.
And no I would not buy stock in GM. Obama and the zealots in his cabinet will not let GM make vehicles that Americans want to buy. And the Union already won its battle to get rid of the most innovative division of GM, Saturn.
Therefore it will go the way of the dodo bird.
Fishgutz, funny you mention the Patriot. I bought one about 6 months ago to be my light duty toy 4X4 and I am in the process of lifting and making other mods. For heavy duty stuff I use the landrover. We also have a couple of convertibles one a Chrysler, the other a VW. Funny, I was a died in the wool GM customer until I bought a dodge station wagon. After making that change I shopped for whatever offered the best value. Now that I went off theme for the thread I am done with this one…and won't buy bonds, common stock, or preferred stock in Government Motors. I will just wait for the Omessiah to give all of us taxpayers our shares in the company…may be a long wait.
Lifting a Patriot? I did think anyone made a kit for that.
The way BO is going, we will end up with three classes of people. The wealthy power elite, the wealthy criminal elite and the poor. After all that is what socialism always creates.
I would not buy stock directly in any company that is at the mercy of an unreasonable union.