In normal times, this might not be such a big deal.  Chrysler went into bankruptcy a few decades ago and emerged as a better, stronger company.  But, times have changed, and the underlying problem is the same no matter what industry we’re talking about – lenders are remiss to help companies before they get into trouble and even less likely to help those in bankruptcy.  Congress seems to be missing these facts as they continue to grill the Big Three, and while I’m not in support of a bailout, it is time to consider a loan or rescue package that will allow these companies to survive.

Interestingly enough, CNN recently polled 1100 people by telephone only to find that 61% of them oppose a bailout of the auto indusustry.  Their conjecture is that the American consumer is burnt from the Troubled Asset Relief Program and its enormous size, leaving them feeling as though $35 billion just isn’t enough to worry about.  Unfortunately, my belief is that much of the problem Detroit is experiencing today stems from the same set of problems that is troubling Wall Street – lenders aren’t lending.  They’re not lending to each other, they’re not lending to other businesses, and most importantly for Detroit they’ve made it difficult to get loans for consumers wanting to buy new cars.  Add to that the market turmoil, the media’s continued blaring horns claiming how bad the economy is, and increasing layoffs and you’ve got the “perfect storm” for taking out a Big Three player.

Apparently I’m not the only one considering the devastation that this would cause world-wide, and Keith Wendell of Johnson Controls recently pointed out the obvious:

“Should one of the Detroit 3 fail, a significant number of supplier failures would occur and become unmanageable,” he said. These companies also supply parts to foreign automakers that assemble cars in the United States.

From an economist:

Economist Zandi urged Congress to provide the $34 billion. “Without any government help, the Big Three will quickly end up in bankruptcy and be effectively liquidated, resulting in hundreds of thousands of layoffs at just the wrong time for the sliding economy,” he said.

With recent actions it would also seem that the Big Three are willing to do whatever it takes to open their books and even as far as government oversight to save their companies.  Even though they haven’t been the smartest about their efforts, their persistence and similarity of message seems telling to me.  Couple that with a roughly 30% drop in sales compared to a year ago, it’s looking very bleak for these companies.  The only one that seems to be somewhat safe, if you believe Alan Mulally, president and CEO of Ford, is Ford, and even he is going to Washington to secure loans in case of a more serious downturn.

Only time will tell where this ends up, but for the sake of our economy, the jobs of people surrounding the auto industry, and the future of manufacturing in America I hope that the people reviewing these decisions know what they’re doing.  If they don’t, the world will suffer.

Ranter

These plans are as optimistic as TARP, with the Federal Reserve Bank offering as much as $200 billion to purchase securities backed by consumer debt (credit cards, auto loans, student loans, etc.).  The Treasury will then insure up to $20 billion against losses (is this confusing yet?) and then the Federal Reserve will purchase up to another $500 billion in mortgage backed securities from Fannie Mae, Freddie Mac and Ginnie Mae (lets call them the three stooges).  As if that’s not enough, the Fed will also buy another $100 billion in direct debt issued by those firms.  And that’s it for Tuesday.

The best part – this time the Fed has a plan for where the money is coming from – the fed is going to make it from thin air increase their reserves.  Added to the other $700+ billion back in October, and now we’re talking about a lot of money, and from this seat nothing seems to have changed.  Obviously, as the country prints more money to increase their reserves they reduce the value of the American dollar world-wide, ultimately reducing the value of our exports and increasing the cost of our imports – not good for a country in recession.  How this plays out with the rest of the world experiencing similar problems and similar bailouts is yet to be seen, but considering this is really what can be called a credit starved recession it’s unlikely to see how the heavily indebted United States will come out of this without significant long-term issues.

The hope and potential upside here is that the Federal Reserve’s action will significantly improve the residential housing market, improving consumer confidence, improving asset values for banks, and hopefully promoting consumer spending through the purchase, construction, improvement and redecorating that comes with home ownership.  If it doesn’t, it will just be one more thing that the government tried, which like it or not is probably preventing a full-on global depression at a scale unlike anything we’ve ever seen before.

Obviously, I am hopeful for the best here and believe that at some point the banks, consumers, and small businesses that drive our economy are going to have to stabilize and eventually grow.  There will be a considerable amount of time between that growth and where we are today, but even a moderate stabilization would do wonders for consumer confidence, global confidence, and the American dream.

Ranter

The biggest problem here today is that Citigroup has both a liquidity and solvency issue.  Thy’re working to calm their investors, but the market is already so shell-shocked from the other failures to date that these reassurances are falling on deaf ears.  In retrospect, it’s easy to see how big a blow losing the bid for Wachovia was and following that with an announcement announcing the elimaination of 52,000 jobs worldwide compounded the problem from a public relations standpoint.

The good news is that Citi is trying to control costs.  They are reducing expenses.  They are making the changes necessary.  They have people willing to invest in them and idiots analysts willing to give them a buy rating even now.  The bad news is that, like so many others, there is a considerable unknown as to the extent of Citi’s losses and damages from their derivatives portfolio.  Add to that the job losses which will ultimately reduce consumer’s ability to pay their Citicard debts and you have what are likely too many unknowns for even a company of this size.

Finally, though, you’re going to hear what I think is wrong with Paulsen’s plan and the way that he has been using Tarp funds.  Forget about AIG.  Forget about the Big 3.  Think back to what the original funds were approved for – to prop up the financial sector.  Citigroup is a cornerstone of what most consumers see as the financial market – Paulsen should be making every effort to shore up their perceived value and their ability to prevail in these tough times.  Show America, without splashing it across the media, that Citigroup deserves to survive as much as AIG.

Can you imagine what it would do to consumer confidence if all of a sudden their Citibank card was declined in the market because the government was unwilling to pitch in and lend a hand when Citigroup and the country needed it most?  It’s unimagineable for me and I can’t see a scenario where this isn’t followed by the failure of bank after bank after bank.

Ranter