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Old 11-18-2008, 04:16 PM   #43
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Exxon made 11 billion ... in the 1st quarter of this year alone.
Yes, and they paid $16 billion in various taxes last year. "Big oil" is not some person sitting behind a curtain like in the Wizard of Oz. It is made up of people, financial institutions, and mutual fund holders that own millions and millions of shares. The shareholders own oil companies just like they own any corporation.

If you have a growth mutual fund in your 401k, 457b, or simply in your personal portfolio, there is a BIG chance you own XOM, COP, BP, etc.

Big oil is you, me, and millions of other people! "Big Oil" and blaming it for something is bumper sticker politics.

Oil companies have billions invested in personnel, equipment, leases, contracts, etc., and cannot act like Bob's Lawn Mower Repair. Just because it is big (and it is huge w 107,000 employees worldwide) does not mean it is bad regardless of what politicians say. Last quarter the profit (TTM) was a little over 10%. Does that sound like robbery to you?
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Old 11-18-2008, 05:05 PM   #44
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A normal loan package to any company in trouble will have many performance requirements and that can be done by the lender, a least by a smart lender. This was not done by Henry Paulson in the loans to banks and that is the same dumb behavior that got us into this mess. So Congress has an obligation to create the terms of the loans, but whatever they do may be vetoed. So it will be up to the next administration.

I and others wrote this before, but it gets ignored. The feds are on the hook for pensions—we have a pension guaranty system that collects funds from companies to pay people their pensions if the company goes under. The pensions are less than they would have gotten. That pension system has not collected enough money, so it has to come out of general tax revenues to pay those reduced pensions. Unemployment insurance would probably have its funds (premiums) tapped out and require an injection of general tax revenues. And, of course, Medicare would be drawn on for more senior citizens. Various tax revenues (sales, property mainly) would drop. More government employees at the state and local level out of work. More mortgage defaults. It cascades. This is what happens in a depression—more people out of work, less products and services bought, more people let go, more bankruptcies.

Then we may go into deflation (we already have that in the housing market) and people earn less, can't pay their debts that they could have a year ago, more defaults, more unemployment. You can say the strongest survive, but plenty of innocent people go down with the weak. And should we encourage the "weak" to live on the streets, go without healthcare, go without food, their children suffering? Is a society that doesn't help the weak survive a morally just society?

The policies of not doing much were pursued in 1929-32 and the situation just got worse and worse. Find a copy of the movie version of "Grapes of Wrath"—it's a pretty good description of what happened to rural America. FDR did a lot, but was too cautious and it took WW II—as Thomas Krugman described it last week, the biggest public works project we ever had—to stimulate recovery. We need something of that scale to avoid a very long recession, panic or depression, whatever you want to call it.

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Old 11-18-2008, 05:17 PM   #45
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All of the competitors of the big 3 (largish 2.8?) are headquartered in countries where gas is much more heavily taxed, consequently their core product is an effective automobile.

Here we've attempted to do something different, leaving gas taxes low and regulating fuel economy via CAFE. Thus we found our domestic industry producing 6000 pound V8 Buicks, Chryslers and Fords in the 60's and 70's. The advent of safety standards included a loophole that brought us 6000 pound V8 trucks (and derivatives at an incredible markup) and essentially underdesigning most of our automobiles to be able to give them away (sell below cost) to keep the CAFE numbers up.

And we as Americans couldn't buy them fast enough. Even Toyota, Nissan, and Honda started to scoot that way. Even VW and BMW and Mercedes... against all logic, such was the power of the US market that these could be made in numbers enough to be profitable to be sold all over.

This worked Long term this is not a sustainable business model, especially when there is a risk of instability in energy prices - and as long as we're importing significant amounts of it, there is risk.

So what's going to happen? The careful observer will note I did not ask "what's the solution?" as there may not be much of one.

This is my prediction, and worth double what you're paying for it, or half, it's all the same.

1) the new administration will arrange bridge financing for 2 of the three corporations. The third won't accept - or won't be willing to accept the strings that come with this.
2) the impact of the government loans will be very similar to filing chap 11, but won't be called that due to the baggage that phrase contains. In a nutshell, shareholder equity will be diluted (essentially to zero in GM's case according to Deutsche Bank:
"While we believe that that GM's secured creditors may get a par recovery, unsecured creditors may get very low recovery. Equity shareholders are unlikely to get anything. We are lowering our target on GM equity to $0."
3) gas taxes will rise. This will be for many reasons.
i) to cover the risk and provide financing for the bridge loans for automakers
ii) to create demand for the product that F and GM are in the middle of shifting towards (Fiesta, Focus, Cruze, and Volt)
iii) to provide stabilty against future energy price instabilities
iv) to fund infrastructure improvements (jobs)
4) something significant will happen with/to the UAW. This will be one to watch. The problem isn't so much with unionized labor, I think, after all Germany and France have that and don't find themselves in this pickle. The difficulty (I hesitate to label it a problem) is more in a 1940's era "Us vs the corporations" mindset. The problem it isn't the UAW vs GM, it's both of them vs. Honda, Toyota, Mazda, Subaru, BMW, Mercedes, VW, and other manufacturers who also build cars & trucks in the United States.

5) One of the 3 goes away. If the market goes from 15-16million a year to 12 million, the economy of scale isn't going to be there for that many US manufacturers. It's like AMC all over again. The jobs won't entirely disappear, however, the incomplete list in #4 will pick up some of the slack (Honda's first car from it's new plant - officially opened last week - sold 30 hours after coming off the line).

6) National health care. Not arguing the merits or anything like that. My suspicion is that this will be part of a multi industry "stimulus." It will be marketed, I think, as a means of making American companies more competitive world wide. Offshore manufacturers have already mentioned WTO action if the US gov't gives too much to the Big 3. This would be a way around that, possibly mollifying the unions for the losses they're sure to take. The thing to watch, I think, is whether H. Clinton takes a cabinet post or stays in the senate. If she stays a senator, I'd look for this sooner rather than later.


I may be totally full of hooey, but this what I think is coming. Some of it I don't like. Of none of it do I have any inside knowledge (Disclosure: I did some work for GM back in 1995. I do not discuss business with those former colleagues).
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Old 11-18-2008, 05:24 PM   #46
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It's all good and nice to say it will effect everyone. It may be true, I believe it is,, But that doesn't justify Giving money to the big three... yes yes Loan,,, But if they don't have the money now what makes you think their gonna get it to pay it back.... The big three spent there money buying other foreign car companies instead of working on there own..

Before any money is loaned I think they should put out the facts on how they intend to change things and turn there companies around.... Then I might consider loaning them my tax money... I had to do this for my business loan... THEY SHOULD TO>.

And the national defense, build tank things, doesn't hold water... We can put plants together to do that if we need.... And why are we gonna need them,,, WE have tons of them...

And if they go under one of the Japanese companies will buy them and all the jobs won't be going away.....

DOOM SAIERS would like you to believe they would...
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Old 11-18-2008, 05:53 PM   #47
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Does that sound like robbery to you?

YEP.....$44bil/16bil pretty soon yer 'gonna be talk'n real money.
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Old 11-18-2008, 05:58 PM   #48
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...
This worked Long term this is not a sustainable business model, especially when there is a risk of instability in energy prices - and as long as we're importing significant amounts of it, there is risk. <--- [BBC news quote on Somali hijack of oil tanker]
...
Proofreading finds itself at odds against the editing timeout.

should read:
"This worked for a while. Long term..."

Linky to Deutsche Bank quote here.
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Old 11-18-2008, 07:01 PM   #49
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I guess my whole point is if we can blow away billions for lackluster education (mostly union workers in education, at least around here), billions on war, give billions away to 3rd world countries, forgive billions in debts, etc, etc, then why not at least try to loan the $$ with conditions....at least if we tried and it still failed, we could say that we tried. Not to try puts too many folks at risk, forget not being able to by an F-150 or Corvette. I'm not sure we as a country, let alone a world would simply work our way out of it because I really believe that 1.6 million folks out of a job would throw an already fragile world economy into a depression. DC is already borrowing Peter to pay Paul and we're going to saddle 3 to 5x or more than the 25 billion in the proposed loans for medicare, pension costs and unemployment and simply say it wasn't worth a shot?

As much grandstanding as is going on in Congress today, I know that if the big 2.5 or 2.8 go away, the politicans all know they are next and what the auto industry means to the country as a whole. Economies of scale, we did it for Chrysler back in the 80s and it turned out OK, I think the same can be done again, and if not, at least we tried.
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Old 11-18-2008, 07:44 PM   #50
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I have to agree with the previous poster (85MH325)…

This entire discussion has served to restore my faith in our ability as a society to have meaningful discussions on complicated topics and find "common ground."

I salute you all.
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Old 11-18-2008, 10:02 PM   #51
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Talking We're not in Kansas anymore Toto!

I sincerely apologize to Larry in MO and everyone else who has posted here for being so glib in my previous posts. But please check out the SEC EDGAR and look at page 78 of the 10-K and look at Exxon US EBT vs Exxon US Tax. It's 35% or less.

In the Great Depression days, in much of the country at least, people could fall back on agriculture and feed themselves. If cash was short, labor and barter weren't dirty words. But nowadays everything's credit and "monetization." Few Americans recognize a cotton seed from a soybean seed, much less have the knowledge or the tools to turn one into fabric, the other into food or feed. We've enslaved ourselves to monetized city life.

Nostalgia aside, the Detroit 3 as we've known them have finally hit the wall. But there's a decent prospect one, maybe two, could be rehabbed & successfully reorganized via Ch 11 without wrecking what's left of the rest of the economy. But I am seriously debating whether bankruptcy is better than a bailout for American consumers and taxpayers.

The main problem with American auto companies is that in previous decades, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees. In those days, the UAW was one of the most powerful unions in the US, and it bargained aggressively with the auto manufacturers, carrying out strikes when its demands were not met. When the American auto industry began to face tough competition from Japanese and German carmakers, they were saddled with excessive pay to their workers, and vastly excessive pensions and health benefits to their current and retired workers.

It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees. In recent years GM and the other American manufacturers have chipped away at their generous fringe benefits, but their health and retirement benefits still considerably exceed those received by American auto workers employed by foreign companies. As a result of lower costs, better management, and less hindrance from work rules imposed by the UAW, about 1/3 of all cars produced in the US now come from foreign owned plants.

Bankruptcy could have the effect of helping GM and Ford become more competitive by abrogating significant parts of their labor contracts with the UAW. One of the greatest needs would be sizable reductions in their health costs through sharp increases in the deductibility and co-payments, and a reduced coverage of medical procedures. Bankruptcy would also probably help bring the wage rates of GM and Ford in line with those of foreign producers in the US. Some of their pension liabilities may be shifted onto the Pension Benefit Guarantee Corp, but even that would be preferable to an overall bailout.

Perhaps a good analogy is what happened to United Airlines. By entering bankruptcy it was able to reduce its inflated cost structure by breaking contracts it had with the pilots union and other employee unions. It exited bankruptcy a slimmer and more efficient airline. Whether it is able to compete effectively in the long run is still not certain, but it is in much better shape to compete than before it entered bankruptcy.

Bankruptcy may also force out the current management of GM and Ford. I do not know for certain whether they have competent management -- GM surely did not have top management for much of its recent history. I do believe, however, that when a coach of a team loses a few games, he might legitimately explain that by injuries, bad luck, or even bad officiating. These excuses become lame when he consistently loses many games, and the correct and common practice is then to fire the coach. The same considerations apply to top management. When a company consistently does badly while some of its competitors (like Toyota) are doing well, its time to fire the management team, and see if another team can do better.

Is GM "too big" to fail? I do not believe the company is too big to go into a reorganization -- which is what bankruptcy would involve. Such reorganization would abrogate its untenable labor contracts, and give it a chance to survive in long run. A bailout, by contrast, may only simply postpone the needed reforms in these labor contracts, the business model of GM, and its management.

The only bailout I would be willing to even consider, and it is only because of these extraordinary times, is one where the shareholders and managers of the companies are NOT allowed to profit from it.

There are two types of corporate bankruptcy: liquidation and reorganization (Chapter 7 and Chapter 11 of the Bankruptcy Code, respectively). In a liquidation the bankrupt company closes down, lays off all its workers, and sells all its assets. That's not the solution to the problems of the Detroit automakers. They are still producing millions of motor vehicles per year, and if they suddenly ceased production entirely there would be a big shortage even though demand is way down. To put this another way, although at present the companies are probably losing money on virtually every vehicle they sell, at a lower level of production the price at which they sold their vehicles would exceed marginal cost.

The alternative to liquidation--reorganization--can work, a la United Air Lines. The reorganized business is able to borrow money because its post-bankruptcy borrowings ("debtor in possession" [DIP] loans, as they are called) are given priority over its pre-bankruptcy debts, which are usually written down in bankruptcy, reducing the reorganized firm's debt costs and thereby enabling it to recover solvency. The debts that get written down can include health and pension benefits, which in the case of the auto companies continue to be a big drag on profitability.

The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into. The first problem is that the companies might actually have to liquidate, because they might be unable to attract the substantial post-bankruptcy loans that they would need to enable them to remain in business. The near insolvency of much of the banking industry has made that industry unable or unwilling to make risky loans, and loans to the auto companies after they declared bankruptcy would be risky.

Second, not only the size of the automakers, but peculiarities of the industry, would cause bankruptcy to greatly exacerbate the nation's already dire economic condition. In the very short term, the automakers would probably stop paying their suppliers, which would precipitate a number of the latter--already in perilous straits because of the plunge in the number of motor vehicles being produced -- into bankruptcy. Many of the suppliers would probably liquidate, generating many layoffs. At the other end of the supply-distribution chain, consumers would be reluctant to buy cars or other motor vehicles manufactured by a bankrupt company because they would worry that the manufacturer's warranties would be unenforceable. So more dealerships would close, producing more bankruptcies, liquidations, and layoffs. With the demand for the vehicles made by the Detroit automakers further depressed and the supply-distribution chain in disarray, the liquidation of those companies would begin to loom as a real and imminent possibility. Liquidation of the automakers would produce an enormous number of layoffs up and down the chain of supply and distribution. Such prospects reinforce the unlikelihood that a reorganized industry could survive on DIP loans.

The likely psychological impact of a bankruptcy of the U.S.-owned auto industry should not be underestimated. I believe that the majority of us are pretty much fearful and mistrustful of our government by the constant misinformation concerning the gravity of the economic situation (including the head-in-the-sand reluctance to acknowledge that the nation was even in a “recession,” long after it was obvious that we were in something worse), and we are reducing our buying, precipitating big layoffs in the retail industry, which in turn reduces buying power, which in turn spurs more layoffs. This vicious cycle would be accelerated by the laying off of hundreds of thousands of workers in the automobile industry, including employees of suppliers and dealers as well as of the manufacturers.

The U.S.-owned auto industry may be doomed; it may simply be unable to compete with foreign manufacturers (including foreign manufacturers that have factories in the U.S.); or a reorganization in bankruptcy may be the industry's eventual salvation. But I suppose that the automakers should be kept out of the bankruptcy court until the depression bottoms out and the economy begins to grow again. (Recall that the government bailed out the airlines after 9/11, allowing United Air Lines to have an orderly bankruptcy reorganization beginning the following year and ending in 2006.) Any bailout, however, should come with strict conditions, to minimize the inevitable moral hazard effects of government bailouts of sick companies. The government should insist on being compensated by receipt of preferred stock in the companies, on the companies' ceasing to pay dividends, and on caps on executive compensation, including severance pay.

A possible alternative would be for the government to refuse to bail out the industry but agree to provide the necessary DIP loans to keep the auto companies from liquidating after they declare bankruptcy. But this would be a kind of bailout too....
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Old 11-19-2008, 01:47 AM   #52
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If you all are not too tired, then here is one more opinion. Getting old is hell but, isn't there something else that everyone has one of?

My history tells me that American companies quit taking strikes around 1975 due to foreign competition and therefore losing market share. We have gone approximately 30 years with the boardrooms giving the UAW whatever they were willing to fight for. (this is not just the auto companies, it is nearly every major co)

The end result of wage and benefit increases not linked to productivity has gotten the big three auto companies to approximately $70 per hour all in and the japanese are closer to $45. (includes HR function)

The old accounting relationships between materials, labor, & overhead are out of balance and consequentially, at the end of the year, there is no money in the "rice bowl".
A japanese company spends very little time keeping score but, if there is any profit at the end of the year, they know they have done good. American companies spend enormous amounts of time micro managing every aspect of the corporate equation. I used to take four months to put together our business plan for the next year.
We had an IBM printout of every cost item for the year. I took a highlighter and marked every item that need negotiation with the union to effect change in our cost structure. It amounted to approximately 90% of everything in our cost structure except for materials. (slight exaggeration)

The UAW is not going to give at all on wages or benefits. GM just put $5B into the medical plan of the hourly workers. That is part of where GM went through $39B in the last two years.
The companies will continue to eliminate R&D, reduce salaried labor, and whatever else they can pull out of their balance sheets to delay the inevitable.

The bailout which will happen will only push the end game further down the road.

If we get them through this crisis, then the Japanese will continue to take market share and gradually the supplier base will be changed over to the foreign companies and we can let them fail sometime in the future.

The part that really galls me is that the top management and the UAW workers will be able to ease into retirement with our money without either one every coming to the table to fix anything.

I would cut Chrysler loose now ( substandard engineering & not even a public traded company)

As for myself, I will never purchase another american auto or truck. I will not pay both ways for the sorry situation they find themselves in. I stopped yesterday to tell my dealer that in very blunt terms.

Just my $.02
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Old 11-19-2008, 06:16 AM   #53
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As for myself, I will never purchase another american auto or truck. I will not pay both ways for the sorry situation they find themselves in. I stopped yesterday to tell my dealer that in very blunt terms.
I am as guilty as the rest of you. I have an '08 Accord and an '07 Titan in my garage; both built in the U.S. by foreign companies. That said, this problem continues to be like the blind men describing the elephant. It's a huge problem, and it looks and feels different in different places.

One of the huge hits that the country will take is that dealerships, hundreds of them, will go under. The dealers have absolutely NO say in the production or wholesale pricing of of the vehicles they buy, yet they collectively employ far more Americans than the production facilities and all of those employees depend on those factories' production for their livelihoods as well. They have had no role in the financial situation that corporate management finds their companies in, yet they'll suffer the most as a result of those policies and decisions. Those folks are your friends and neighbors who live in your towns, shop at your stores, and give to your churches and charities just like you do.

It's easy to characterize the "auto industry" or "big oil" as some huge, faceless monsters that exist only on corporate paper. The truth is that whatever happens with these industries is also going to happen in each town across the nation. We have a small Ford dealer an a small Chevy dealer in our town. I'm reasonably sure that their futures are in jeopardy, and if their futures are in jeopardy, our local economy isn't far behind.

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Old 11-19-2008, 06:37 AM   #54
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Nothing new...

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> debt
> should be reduced, the arrogance of officialdom should be tempered and
> controlled, and the assistance to foreign lands should be curtailed lest
> Rome become bankrupt. People must again learn to work, instead of living
> on
> public assistance. -- Cicero , 55 BC
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Old 11-19-2008, 07:07 AM   #55
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I sincerely apologize to Larry in MO and everyone else who has posted here for being so glib in my previous posts.
Not necessary at all, sir. You make many valid points and your views are shared by many. Fortunately, this is not an autocratic society (or forum) so your opinion is valued.

Some years back (80's?) the government loaned Chrysler a bunch of money to keep a cash flow. As I recall, Chrysler paid it back early and everyone was happy.

I don't think it would end happily this time around, however. No, I don't blame the rank and file lug nut installers but I find fault w/ the unions. I'm sure they had a place once upon a time. Not so much today if at all.

In 1975, 1979, and 1980, union firefighters walked off their jobs in Kansas City, MO. Three different times they walked including sabotaging the equipment before they left and starting fires during the time they were out. Yes, I can provide documentation if you need it.

Who else would the city use to man the trucks? The union did not include fire officers above the rank of captain. Those commanders manned trucks to help the rag tag non union work force--the police department! Believe me when I tell you, I've spent more time putting this post together than training we had for the first one. As I was a sergeant, I became a pumper commander. I was a helicopter pilot at the time and not much of a fireman but we got through it. We saved a lot of basements and sidewalks. Every person that had a building that needed burning, burned it! Oddly, we suffered no serious casualties either police or civilian.

The unions left a half million people in the city, including my old mother, completely without a fire department for several hours until we could organize. The only "fire department" to aid us was the Gladstone, MO, Public Safety Dept. They were non-union and came to help. The other agencies, all union, would not cross the picket lines to help.

The moral of the story is that I wouldn't p**s in the rain (as my old mother used to say) to save a car load of union member w/ his/her dilemma. The real problem is that the union folks would not be the ones to suffer if GM goes under but they need to feel the pain.

NO bailout, per se. A loan would be acceptable w/ very strict terms of benefits, repayment, etc. A max of $250/ year for the boardroom personnel. That is dollars not hundreds of thousands. Fix it or go under!
Take cuts, work for short pay, and act like you care. Nope, you're right, they'd never do it.
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Old 11-19-2008, 07:41 AM   #56
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