US Auto Industry Led To a Bankrupt Detroit

by | Nov 19, 2008 | Stock Market Comments

I don’t know which side of the argument you fall on…bailout the automakers, or let them fail.  But a very compelling, and well-written editorial was submitted to the New York Times by Mitt Romney.  The question has been asked the last few days, “if the airlines can slink in and out of bankruptcy…why not the automakers?”  In fact, the NYC subway system originally ran as independent lines, until the magic word forced them all together into one wonderful rat hole: money.

One point getting glossed over in all of these discussions is this: there are no showrooms for airlines.  That is, you don’t decide “you know…today I’m turning in this old clunker of a 747 and get me a new 767.  They are offering zero-percent financing!”

Cars are sold by, and bought by individuals.  Automobiles are personal statements, to some folks.

Rides on a subway, and flying on a plane (quickly becoming the same thing) are not the same.

There are compelling arguments on both sides.  However, I would like to offer my own solution:

Money…with strings.  No bailout.

But the US can guarantee the automakers loans.  But with the following conditions:

  1. A taste of their own medicine.  Zero-percent financing. But for only TWELVE months.  If the loan repayment schedule is not adhered to, a prohibitive “lets-put-you-out-of-business” rate applies (because it will be the end of the road).
  2. Senior Management works for one dollar.  But they can get five times their old salary in employee (incentive) stock options…free.
  3. Current management must sign resignation letters dated 12 months from the date of the guarantee.  This is it, boys.
  4. An understanding from all parties (management, unions and Congress): there will be no more money after today from Uncle Sam.
  5. As a condition of the loan guarantee, Uncle Sam takes a preferred stock ownership in each company, much like they are doing with the banks.  However, after twelve months, the shares are sold (or granted)…to the employees, through their retirement plan (and/or) employee stock purchase plan.  Everyone…right down to the janitors…has a stake in the success of the company.

Or not.

Honestly, how much debt can you pile on top of a broken system?  Is more crushing debt the answer?  A better solution than all of these strings would be to see the automakers issue and sell shares of stock at these rock-bottom prices.  Look, any time a company wants to raise money through a stock sale, they have to hit the road and “pitch” the merit of investing in them (management) — and their company.  Which means they need a business plan (which they may not have — or may not have completely pitched well enough for folks to understand).  They have to make a presentation that is credible and believable to get people with money to “buy” into the story.

Would management buy their own stock right now? We will be able to gauge precisely how well management believes in their future by asking them to open their own wallets as the industry is down on it’s knees.  Will anyone ask?

Opponents will argue “but a stock sale at these prices dilutes the ownership of current shareholders!”  Technically, that IS true.  But so what? You need a microscope to these stock prices right now.  They are trading right NOW at prices that indicate they will file bankruptcy any day.  Consider this: anyone owning the auto stocks at these levels is either:

  • blindly loyal to the company (they would definitely buy more),
  • living under a rock, or
  • speculating.

Long term investors would be much friendlier (and supportive) of management as well.  After all, it is THEIR MONEY at stake.

The US Auto Industry does NOT need a bailout.  Everyone runs into a cash crunch now and then.  The automakers need to sell (and tell) a better story.  They need to take responsibility.  And they need to get investors behind them.  This means putting together a credible game plan.  NOW.

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