Welcome to the New GM: Government Motors

by Larry Levin

The latest government handout came with Friday's stickup of the US taxpayer: GM and privately owned Chrysler will receive $17.4 billion. Some are saying they have been awarded for failure. The government, however, says it's necessary. And with the government's exemplary track record in spending money, picking winners, being fair, etc - how can one question its decision?

The money is meant only to give the companies some breathing room, during which they are supposed to extensively restructure and prove their viability. But they only have three months to do so. If they can't, the government says it will call its loans regardless, leaving the companies to their fates.

Un-huh, if you believe that I have some magic pixie dust that makes reindeer fly. In my opinion, the Bush administration just punted the football to the Obama administration. Once B.O. has the ball, do you really believe he will allow these companies to go under? Do you really believe he will make the firms pay back these loans in 90-days? Or is it more likely that the UAW will call in its massive campaign contributions and demand that little if anything is changed, at least how it affects the UAW?

Do you doubt it? Within hours of the bailout announcement, the UAW called on Barack Obama to change/remove any union concessions in the current language when he is sworn in to office.

In short, I believe that this is the first of many massive handouts to the car industry that will not contain the teeth of Chapter 11 bankruptcy reorganization. The economist who spoke at the Congressional auto-heist-hearings, Mark Zandi, said the Big 3 will need at about $125 billion to save them. I agree; it will probably cost at least that much.

But this stickup isn't necessary. The constitution contains bankruptcy clauses, not bailout clauses, for this exact situation. To claim that millions would become (permanently) unemployed is yet another scare tactic. To be sure, it would be painful but so is an unpopular taxpayer mugging. Using these scare tactics is par for the course lately, and wrongly assumes that Chapter 11 equates to closing forever. That is wrong. Once the auto companies scrapped off of its backs; 70% of its debt, management replaced, UAW rules massively changed or simply removed, suspend dividend payments, replace board of directors, and many lines of unpopular models put to pasture --- then, we may have strong and competitive auto companies reemerge.

This can happen with a Chapter 11 bankruptcy - not with a government handout. With the latter, we will have another socialistic behemoth: GM, Government Motors.



Previous Day's Trading Room Results:

Trade Date: 12/19/08

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


1) No trades today.

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


1) No trades today.



Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!