I should say first that I'm absolutely delighted by Barack Obama's election to the highest office of the land and I'm especially pleased with the selection of Joe "I commute on Acela" Biden as his second.
HOWEVER I do believe that our new president has gained for himself the cushiest deck chair on a ship that is all but done. The Bush years have left us awash in toxic debt, running on empty in so many ways, and the vital rudder of the rule of the law has been jammed in a hard right turn no matter what hazards present themselves immediately in front of us.
The second biggest hazard is the impending bailout of Detroit, with the first being the ridiculous unsupervised debtor in possession financing for Wall Street that our Congress got stampeded into providing. We've been treating the insolvency problem our various institutions have as a liquidity problem and this is purposeful misdirection, picking the pockets of our children for the sake of today's unproductive wealthy class.
Like those five investment banks that simply evaporated over the last seven months Detroit's big three are now inevitably following in their footsteps. The sooner we see this for what it is the sooner we find a safe place to beach the smoldering, sinking wreck of our economy.
We should consider my personal history in the context of this story. I was the architect for a data warehouse system used by a major player in the auto parts supply sector a decade ago. I was a perennial favorite with auditors for my ability to quickly answer complex questions about our thirty nine state business operations and I learned to read the securities exchange commission filings we made, comparing them to what I knew of the company's finances.
Late one Friday two executives filed silently into my office and asked if I could stay late. We fed all of the company's check stock to shredders, unboxed new check stock with the letters DIP embossed on them, which I later learned stood for debtor in possession financing, and then I got to write a program that calculated how many weeks each of 4,000 employees slated for termination had worked for the company. Things went downhill from there. It took almost a year to finish, the selling off of what made sense and the liquidation of what didn't.
I've looked at the news regarding Chrysler, Ford, and General Motors. When executives of a public company indicate they don't have enough cash reserves to last through the end of the year and make public statements involving the word "bankruptcy" I don't need to go wade through their 10K filing for third quarter – they're toast.
A bankruptcy filing "would be a disaster far beyond General Motors and a sad chapter in American history,'' Wagoner, 55, said in a Bloomberg Television interview. GM said on Oct. 24 that bankruptcy "is not an option.''
If they were anything other than a significant slice of our national identity these operations would be assessed for value, just as my old employer was, and either reorganized under bankruptcy protection (chapter 11) or completely liquidated (chapter 7). Since they're "too big to fail" they get attached directly to the U.S. Treasury, swilling away until someone has the courage to make it stop.
There are a hundred and forty million people employed in the United States and roughly ten percent of them are somehow involved in the auto industry. I think this extends all the way from plant workers to gas station clerks. This assessment on job loss from the Center for Automotive Research seems in line with reality – an immediate 1.8% jump in unemployed directly from the event and then a cascade of other business failures doubling or tripling that number before it's all done.
Should GM take such a step(bankruptcy), the result would be 2.5 million jobs lost in the first year among automakers, suppliers and related businesses, according to a Nov. 4 report by the Center for Automotive Research, based in Ann Arbor, Michigan.
The underlying driver behind this situation is the total freeze up of credit markets, which have not restarted despite a seven hundred billion dollar U.S. Treasury giveaway. People can't use their houses like an ATM any more, real live businesses are dying every day because banks either can't or won't lend to them, and auto industry sales are off 25% even for the luckiest vendors. The credit market won't start moving again until everyone comes clean about the toxic junk they're holding from Wall Street's synthetic financial instrument casino of the Bush years and when they do trust and activity are going to come back at a lower level. Much lower.
So … even if we do prop them up for a bit under some pretense their food source – consumers willing to consume another brand new car – is going to be in precipitous decline. We can't envision their sales continuing as they were and I suspect even 50% of previous sales numbers are too much. We aren't saving them, despite the rhetoric, they're simply too big to obtain debtor in possession financing from anywhere but the U.S. Treasury.
That 50% of former sales needs to be inspected, too – it isn't going to be grossly overweight gas guzzling SUVs. Those who do buy cars are going to be purchasing sensible little sedans and four cylinder light trucks and minivans. The median price is going to come way down on what sales volume they do and that means profit margins on vehicles will be dramatically lower. There's a lot of room in a $40,000 SUV price tag that simply doesn't exist in the one affixed to a $12,000 econobox.
Obama seems to have the right idea but I wonder if our Congress will have the political courage to call things as they are.
A year ago, in Detroit, Obama assailed the US industry for failing to meet global demand for fuel-efficient cars. "The need to drastically change our energy policy is no longer a debatable proposition," he said. "It's not a question of whether, but how; not a question of if, but when. For the sake of our security, our economy, our jobs and our planet, the age of oil must end in our time."
And suddenly that nice, cushy deck chair is not nearly so comfortable.