The Simple Explanation - "The Bailout"

This is gross over simplification, but so what. People keep asking me, so...


Some people want to let the automakers either sink or swim on their own. No loans, or "Bailouts". Why should a business get saved when it has managed itself into the pooper?

The argument for saving the companies has purely to do with jobs. It has nothing at all to do with saving the reputation of the great American companies or the country's ability to lead the way in manufacturing. No one argues that this battle has been lost. Essentially, there are a lot of folks working for these companies and in the distribution system that goes along with it (dealers etc). It's the jobs, not the companies.

If you are of the mind ~ If the "Bailout" is a loan, and the government will get paid back, why is there a need to micro-manage the detail, plant a car-czar and oust CEOs? When the financial institutions needed loans, they didn't have to go through all this hoopla.

The angst over the loans is based on the fact that no lender would make the loans. The US government is the "lender of last resort". The car makers are stiff. They have lousy credit. Based on their current situation, it doesn't look like they'll make it. The odds are quite good that they'll eat the money and still go down in flames.

The drastic slowing of retail sales has crippled GM. Even if there had been just a slight dip (not a crash), GM would still be in pain. They have been somewhat arrogant and ill prepared. They are the stiffest of the stiffs. I'll note here quickly that while Ford is in the group, they are in a better shape. They have been busy working on what they do for a number of years and are a much better company. They're still in rough shape, clumsy and fat, but not as much as they were ten years ago, and not as much as the others. Chrysler is not going to make it no matter what you do. They are doomed, loans or no loans. Yes, GM is doomed too. Even if things get a bit better in the marketplace, GM is sick. Ford can survive if the general economy gets better.

It probably makes more sense to deal individually with each company, but that's not how it went. We're here now.

The government knows Chrysler is doomed, they strongly suspect that GM is doomed, and they are worried about Ford in the weak economy. Collectively, this group looks like a terrible credit risk. The repayment chances are so slim that loaning money is an obviously lousy idea. You're not likely to get paid and what's worse, you'll be asked to throw more money their way when they burn through this chunk. Still, they have to make loans that are unlikely to get repaid. That's why the deal comes with all this parental intervention. The loans are off the risk map.

Again - this is an over-simplification.