Auto Bailout

by Larry Levin

The CEOs of the Big 3 automakers were on the Hill again today. Yesterday they were grilled by the Senate; today was the House's turn. The shock and disappointment expressed by members of Congress is another charade folks. No matter how they gnash their teeth - this latest massive handout is a done deal. And once the cash is gone, they will be back for more.

Although there were arguably worse reasons for today's big sell-off other than the latest taxpayer stickup by another failed industry, the shares of GM and Ford hurt the indices indeed. GM paced the Dow's decliners with a drop of -9.7%, while Ford dropped -25% today. Sure, their share prices are already terribly low, but I believe the psychological impact was big today.

Should there be a bailout of the Big Three? Both GM and Ford stocks are headed to $1 per share - maybe lower. GM closed at $2.79 and Ford closed at $1.26 today. The market capitalization of GM is now $1.7 billion versus a market cap of $46 billion 10-years ago, at the end of 1998. Ford's market capitalization at the end of 1998 was $71 billion and today is now $2.92 billion. Ford has about 1.7 billion more shares outstanding than GMs. Back of the envelope math tells us that the combined market cap of both GM and Ford is now $4.62 billion. Throw in, at most, $1 billion for Chrysler and we can buy the whole lot of them for a pittance.

Questions: If their combined market caps are worth just $5.62 billion, why is Congress even considering a $25 billion handout? Congress could buy all of the stock in each company for less than $6 billion and keep the change. Wouldn't that be far cheaper?

If that was the end of the story, then buying them outright might make sense. However, the story does not end there at all. What about their debt you ask? Ah yes, therein lies the problem! According to GMs 10-Q for the period ended September 30th 2008, GM has a NEGATIVE net worth of $60 BILLION. If Congress gave GM the entire $25 billion and nothing to the others, GMs net worth would still be -$35 BILLION

Ford's situation is nearly three times worse. I have read from several sources that it is weighed down by $160 BILLION in debt. If Chrysler carries say $40 billion in debt, what is $25 billion from the taxpayer - BORROWED from China - going to do against more than $1/4-TRILLION in debt? Nothing - absolutely NOTHING!

Within months, all three will come back to the fools in CONgress, hat in hand asking for more money. To you, however, it will feel more like a gun at your back as you are forcibly made a victim again.

Of course there is a lot of wailing and gnashing of teeth that we must do something. And what is that? We must borrow the money to give to these failed executives...to save the Union - UAW. Oops, that's not how it is presented. Pundits simply say that we must borrow this money to give to the failed policies of the executives and the UAW to save jobs in general. (Of course, they're never truthful at all - never saying that this money must be borrowed first!)

Really? Is that a guarantee? Just a few weeks ago Treasury Secretary Paulson gave Citigroup $25 billion. Odd thing is that just two-days ago Citigroup announced it will slash 53,000 jobs. Exactly what taxpayer benefit did we get for that $25 billion? It certainly didn't save any jobs at Citigroup.

Isn't it about time CONgress stops borrowing money from the Chinese to then waste it on a failed industry? (Remember, I was also against the Wall Street handout.) Let GM, Chrysler, and Ford go bankrupt. Filing for bankruptcy protection will be a good thing in the long run. These companies will not disappear. The world will not end and few jobs will be lost that are not going to be lost anyway. The more money CONgress wastes attempting to bail out organizations that deserve to fail, the less money there will be for legitimate uses down the road. It's high time that Congress understand that simple economic fact.

The airlines have been in and out of bankruptcy before and there is still an airline industry. And to those who squawk that this is different; buying a $300 airline ticket isn't nearly like buying a $30,000 car. People just won't do it. I say - stop with the scare tactics! Do you really think that people put a price tag of their own life, and their children's lives, at less than $30,000?

Those who argue this claptrap on CNBC are suggesting that nobody will buy a car from an automaker going through bankruptcy protection because the cost of the car is too much to bear if something were to go wrong. The same dingbat argues, however, that we will freely RISK OUR LIVES flying in the plane of an airline that is in bankruptcy protection - completely impervious to the thought of something going wrong. Yet, something going wrong at 25,000 feet is far more devastating than a car with an electrical problem. Wouldn't you agree? It doesn't make sense to me either.

There were a few great moments today during the hearings on the Hill. Representative Bachus said - If we continue down the path of taking money from more efficient and competitive companies and giving them to companies which are less efficient and in trouble because of bad management and bad decisions, our overall productivity as a country will continue to suffer. He couldn't be more correct. But when did that matter to the circus clowns running the government?

Representative Ackerman said there was - A delicious irony is seeing private jets flying into Washington D.C. and people coming off them with tin cups in their hands. Couldn't you all have downgraded to first class? I don't know how I go back to my constituents and say the auto industry has changed.

A short while later Representative Sherman asked - (loosely quoted) May I see a show of hands from all of you who flew-in today on a commercial jet? Let the record show that no one raised their hand. May I see a show of hands from all of you who will sell your corporate jets today and fly commercial in the future (because you're getting $25 billion soon)? Let the record show that nobody raised their hand. By the way, these questions were also directed at the President of the UAW, who apparently doesn't plan on giving up his corporate jet either.

If you agree that the automakers need to go through an admittedly tough restructuring in bankruptcy court, rather than have tens of billions of dollars thrown at the problem, then please tell your CONgressman. I know it won't matter, even though they were flat out LIED to by the White House and Treasury Dept, they will fall for the scare tactics again.

However, it will make you feel like you tried. I did!



Previous Day's Trading Room Results:

Trade Date: 11/19/08

E-Mini S&P Trades*
(before fees and commissions):


1) VA buy @ 10:00am at 839.25 = b/e (1 lot)

2) A few trades weren't filled today, however, due to the chop there weren't many to start with.

3) Algorithm positions (31)...combined daily total...+24.00

ZB (30 Year Bond) Trades*
(before fees and commissions):


1) No trades today.



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