Total Automaker Bailout Could Cost $75-$120+ Billion

Dec 04 2008 Published by under Featured News

A couple of very interesting points have come out during today’s Senate Banking Committee hearing on helping the auto industry. First, not all three companies are in the same condition, and secondly, the cost of keep them alive could be much higher than $34 billion.

Chrysler, General Motors, and Ford all came before the Banking Committee to answer questions about the restructuring plans that they submitted as a precondition for receiving federal loans, and there is a framework developing where the companies would receive aid, but be subject to oversight and benchmarks. There was some discussion during the hearing about whether a board or a trustee should be appointed to oversee this program. Due to the fact that two of the three companies are in such grave condition, it looks likely that the plan will involve a trustee, because a board would take too long to set up.

The most revealing bit of testimony has come from Mark Zandi who is the chief economist at Moody’s Economy.com. Dr. Zandi’s analysis found that the cost of rescuing the industry, across all aid programs would be at minimum $75 billion, and maybe go as high as $120 billion or more. He believes that the industry could emerge from this healthy and competitive if each company sticks to the plans that they have submitted to the committee. He argued that without strict oversight, the companies were unlikely to stick to the plan.

He stressed that a trustee should be appointed, and strong benchmarks be set. Most importantly, he proposed that not all the money be distributed to the companies now. Chrysler and GM need $17 billion now. Without aid, GM won’t survive through the end of the year, and Chrysler needs money by March. Zandi said that the two companies should only be given the money they need for now. This move would keep them accountable, and allow more time for to figure out the next step.

The situation is this. Ford doesn’t need any money. Chrysler will need money soon, and GM needs money now. The committee has expressed reservations about loaning Chrysler money because it almost universal knowledge that the company is only interested in staying alive for the purposes of merging with someone else. The reality is that the government is going to have to something. The economy can’t afford to lose another 2.5 million jobs. This issue is really about jobs. If the government helps the auto industry, they aren’t doing so because they like the companies. They are doing this to keep people employed.

The loss of jobs is the gun being held to the head of the taxpayers. Personally, I don’t believe that all three companies can survive. I do think that if we want the US auto industry to be globally competitive, we need better trade agreements, so that not thousands, but hundreds of thousands of cars can be exported aboard.

Currently, there is an imbalance where countries like Japan and South Korea can export vastly more of their own cars than they are required to import for the US. Until this becomes a more balanced agreement, there is no way, for the Big 3 to compete. Once the companies are restructured the next step will be the opening of markets for them.

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