AIG vs. Detroit Big Three

Rather than look to economics for the answer, it might be more fruitful to look at politics. Who gave what to whom, who can do what to whom? Expecting to Congress to act in an economically sensible way is probably asking a bit much of them. (Or we wouldn't be in this mess.)

Look up the term "pot committed". We're in too deep to walk away from AIG. And Congress is playing poker with borrowed money, so they can't afford to fold and lose now.

An explanation of why AIG was bailed out can be found here:

freakonomics.blogs.nytimes.com/2008/09/18/diamond-and-kashyap-on-the-recent-financial-upheavals/

Short version: A functioning financial system is in our national interest (*). AIG was sufficiently interconnected to other firms that its bankruptcy could've sparked a wave of other financial failures - sort of like the cascading bank failures of the Depression. Faced with this prospect, a bailout was the lesser of evils.

The Big Three, by contrast, are not systemically important actors. Their bankruptcy might cost some people some money, & some other people their jobs, but it wouldn't endanger the financial system. There may be other reasons to bail out GM et al, but the one underlying the AIG bailout ain't among them.

All that being said, I don't much care for how the AIG bailout has been handled thus far. Like Yves Smith (**), I wonder if this couldn't have been done in a manner less costly to the taxpayer.

(*) economistsview.typepad.com/economistsview/2008/10/credit-markets.html

(**) nakedcapitalism.com/2008/11/aig-looting-continues.html

10:38 was me. Hope this new commenting feature is cutting the spam down, 'cuz it's really starting to annoy me....

To add to the previous comment:

Imagine your house burned down, and when you called your insurance agent he informed you that because AIG failed your insurer was now insolvent. Imagine that happening when your kid needed a doctor.

Imagine your car breaks down and will be out of commission for a month or more as the mechanic waits for the part, shipped from Brazil or Mexico or China, which has to be paid for in advance because the world is on a cash basis with the US.

Is that the future you wish for your kids?

These are terrible times. There's really no metric in modern history for them, so we have to be careful and think out all the ramifications of what we're doing. As you note in a different thread, Paulson does not inspire confidence on this, but the Jonah Goldberg "let 'em' fail" approach would remake America as a third-world nation overnight. We'd have a strong military domestically deployed to keep order, and nothing else.

That kind of "crunchy" we don't need. If it's what people are seeking, they need only move to Mauritania.

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This is the third try to post this, the spam prevention thingy just doesn't work.

The wave of the future is riding electrons around from server farm to server farm. Who needs cars! The making of them is nasty and dirty. Electrons are clean, numbers are beautiful.____[Sarcasm off]____I do believe that AIG is held to be more important because our elites no longer value the physical reality behind the numbers on their spreadsheets. They have imbibed a gnostic fantasy that the deal and the corresponding numbers are reality. They no longer understand the reality behind the numbers.____I recall reading in a manufacturing trade magazine an account written by a plant manager of a visit by a congressman to his factory. The congressman expressed surprise at how clean and high tech it was. The congressman apparently was expecting a dickensian horror show of primitive soot covered machinery, exposed moving parts, and mutilated workers.____That mindset, I believe, captures the view of the elites toward manufacturing. Therefore they are glad to see it go. Never mind that ultimately the value of the dollar is tied to what foriegners can buy with it.

Lest we get all caught up in things and forget all reality...

GM: Many lines, a conglomeration of a whole lot of different companies who have continued to compete with themselves and are NOT efficient. General Motors has, over the years, acted with extreme imprudence. I used to make my living fixing deliberate acts of foolishness on the part of GM, done to "make a quick buck".

Perhaps today, they're attempting to undo those mistakes. It's hard to say.

Ford: Always a maverick company. Inconsistent in intentions and actions. Often at odds with itself. Has at least attempted to deal with an oncoming contraction.

Chrysler: Just a little over a year out of being under the thumb of Daimler - the worlds most INCOMPETENT manager of other companies. The board of Chrysler made the world's most stupid decision when it agreed to the "merger" with Daimler. Daimler raided the company for it's billions - Chrysler had a big fat bank account, no debt, and was the world's most profitable car manufacturer when taken over.

Daimler destroyed all of Chrysler's small car projects (there were a LOT of them) because it wanted to produce its own and sell them in the US under the Chrysler name. Not build and sell in the US, just export to the US. More profitable, you know.

Daimler has managed to all but kill Freightline, Sterling, and every other company they bought in the 90's.

Chrysler survived, and the new management has been remarkably effective at dealing with shrapnel, chaos and horrifying mismanagement that was Daimler, less than 2 years ago. They're not perfect, but they are NEW management, and Chrysler efficiency is as good as any, anywhere. Quality improvements have been nothing but statistically staggering. Public perception may not reflect it, but that is reality.

Chrysler has made huge commitments and is still keeping them, in terms of putting new technologies on the road, from electric cars to completely new and innovative transmissions, engines, and production.

Chrysler is just over a year away from producing a new engine line which will best everyone. Period. From fuel efficiency, to production efficiency, and technological improvements. And that includes the imports. They have, if they can work out how to build it, the most efficient transmission concept we've seen.

Am I arguing for the bailout? No, I'm just pointing out that ONE of the American car companies was already in the process of renewal and rebuilding prepared for the future. Chrysler is, like the poverbial ballerina, suddenly caught in the middle of a leap of faith, when the game changed.

As long as Cerberus doesn't destroy them, Chrysler will survive. And not just survive, become a bright point in American industry.

Right now, Chrysler's cars have more American content on average than anyone else's. Their plants rival the most efficient in the world. They get more done per man hour than any other company. And they are nowhere near done with what they want to do.

No, I'm not for bailing out the car companies. But I did want you to consider that they're not all monolithically "the same". At least one is fighting with everything they've got, and they started that fight the moment they were freed from Daimler.

1. My understanding from the news reports was that the AIG retreat was for various groups of sales people and corporate (i.e. Agency) customers, not executives, per se. Reasonable people can disagree about whether those weekends with customers, and/or weekend rewards for top sales people, make sense or not, but this was different than the executives going off to play.
2. If GM or the others go bankrupt, their manufacturing capacity won't disappear. The X million cars they currently sell (as opposed to the Y million they have capacity to make) will still be sold, somewhere. Probably X will be divided between imports (not great for US economy), "foreign" cars made in the US (good for the US economy), and the re-organized GM/Ford/Chrysler, which would have shed enough legacy costs to now be able to sell cars at a profit (draw your own conclusions about the effect on the economy).

I wrote a long comment--wise, too, and was told my entered text was wrong.

The server managed to eat most of my comment. I give up.

The text entry is like being forced to put your shoes through the airport scanner--annoyance and humiliation to no purpose.

What's wrong with extending bridge loans to the Big Three in exchange for major concessions from labor and management?

The Big Three have legacy costs that add an additional $2000 to the retail price of each vehicle. I'm surprised they've managed to compete as well as they have against Japanese and Korean manufacturers.

Have them declare bankruptcy to get out from under these costs and then extend them bridge loans so that they can reorganize.

BTW, all of you in public sector jobs ... you're next. States and municipalities simply cannot afford to carry similar legacy costs anymore. You can pretty much kiss your cushy retirement benefits good-bye. State and municipal reorganization is in the offing.

Perhaps I need to connect some of my previous statements, which may appear to be contradictory.

Treasury and the Fed must fight a rear-guard action (TARP, ZIRP, etc.) to keep the current financial system intact for as long as possible while preparing a mountain redoubt (nationalization, debt monetization).

Baldy,

I have a 2007 Wrangler JK. While the shifter takes a bit of practice, I am overall happy with the product. It's a great improvement over the previous TJ line, though I would have liked to have bought a two-door JK Unlimited.

I am baffled by our unwillingness to help the Big Three.

Because we've been down this road before. We had the Chrysler bailout in '79 and the import quotas of the 80s. Moreover, a lot of foreign companies are making cars in the U.S. with far better quality/dollar of productivity. Honda's doing this in Ohio. It's not like the Japanese are doing this in Indonesian sweatshops. Yes, they've had help from their government in the past in the form of tariffs, but so have the Big Three.

Help may be justified on national security grounds, but it should be more than just writing them a check. We need some kind of assurance that we're going to fix the problem so they don't have to come back again. Maybe we can excuse a company like Chrysler and let them off with a subsidized loan, but there should be some good grounds for doing this.

I was curious as to how the auto execs' use of their private jets to travel to DC got to be such a talking point in the news last night. I think it has to do with the American public's and legislators' growing impatience with ostentatious displays of wealth. Regardless of the fact that the majority of Americans have their own conspicuous consumption to feel guilty about (myself included undoubtedly) and the fact that we do need to keep the ability to manufacture vehicles (Kunstler wrote something about still needing to make military vehicles, but I couldn't tell if he was being sarcastic or not) the government seems likely to make the auto industry wait a bit until they show some signs of at least outwardly embracing frugality before getting more government bailout money. Rod's post earlier this week about the Dutch retaining economy and economic modesty as virtues could be instructive for these execs.

I know NOTHING about economics. Can someone answer this question for me: What would happen if the federal government put money aside to guarantee the Big Three's warranties--since they keep griping about how if they go bankrupt no one will buy their cars b/c there's no one backing up the work? Then the companies can file bankruptcy/restructure and get out from under their legacy costs, their corporate suits who drove them into the ground are not indulged and Americans can get over any "fear" they may have about buying the cars in bankruptcy.

Seriously, wouldn't it be cheaper to fix a few thousands transmissions than to spend $65 billion by tossing it in these buggers' tin cups?

I have a mentally ill son, now 26.

We have done everything humanly and inhumanly possible to "solve" this problem, with few if any rewards.

When you're in that position, and I believe we collectively may be in that position vis a vis the Detroit automakers, it doesn't matter how much money and energy you pour in, the thing's a black hole.

That's the fear, and the danger. I don't think anyone would begrudge the automakers a reasonable government hand up if we thought it would solve the problem. Think how many American jobs are involved!

The doubt comes nagging, though.....would this really do any good? Or are we just pouring good money after bad?

Pyrrho: Our first task is to land the plane we're in. We can design a new one later.

Now *that's* keeping your eyes on the prize! And remember: "A good landing is anything you can walk away from."

Lets clear up some misinformation...

Chrysler did not get a "bailout" back when. They asked for, and got a sizeable 'cosign' by the government to some loans they wanted. No public money ever left the treasury for any aspect of what happened back then. The federal government actually collected quite a few million in cosigner fees for their role.

Further, the conditions Congress imposed upon Chrysler damaged their future, by stripping them of their aerospace and defense divisions, which were healthy and still are operating well.

But Chrysler paid back the loans. Early. And then put its heart and soul into remaking itself. By the early 90's Chrysler was the most productive car company, most profitable, and most creative by far... in the world. I have no idea what kind of snake oil pitch Daimler made to the board of directors, but somehow, Daimler convinced them to "merge".

Daimler, the master of efficient destruction, promptly ran the awesome management of Chrysler off, and then raided the piggy bank for everything they could get. They replaced the US management with the utterly and completely incompetent people, twice. To his credit, Dieter Zetche realized the mistake and led the move to make Chrysler once again, a real American company.

Daimler merged with Chrysler - who had NO debt, and 13 billion dollars in cash, a growing market share, and rapidly improving reputation - and awesome cars to boot. In 2007 Daimler had to cough up a billion dollars in cash to offload an in-debt and decimated Chrysler to an investment group. After just nine years, Chrysler went from industry leading, to the back of the line.

It hasn't even been a year and a half since then. In that short span of less than 18 months, Chrysler has actually pulled its production quality up by huge margins, has reduced warranty claims dramatically, improved productivity to match the best there is. They have introduced practical electric cars which are being readied for production, 2009 will the actual cars in service in fleets.

While not a public company, Chrysler's statements just a month ago indicated they had about a year's worth of cash and credit remaining, and they were continuing to find ways to stretch that farther WITHOUT cutting any of the new and essential products projects.

Chrysler is a shadow of its former self, to be sure. But many of the really awesome people who were driving Chrysler in the 90's are still around. Muzzled and robbed by Daimler, they've been turned loose to try to turn the company around.

Nardelli gets no golden parachute, no big paycheck. His only hope of big monetary compensation is turning the company around. Should Chrysler fail, Nardelli gets almost nothing, and the same is true of all the other management.

Cerberus capital, which owns Chrysler LLC is acting like it wants to kill off Chrysler in the worst way. But they have different interests than the rest of us. Chrysler is not big and fat and overweight. It bears no resemblance to GM and Ford now. They're fighting with everything they've got left to survive, from the top down.

While I am not in favor of bailouts, I do believe it is incorrect to lump Chrysler in with GM and Ford, when it comes to analyzing what they are and how they got where they are. If the merger with Daimler had not happened, Chrysler would now being talking about buying up GM's scraps. They had the most absolutely awesome future planned out when Daimler took over, but Daimler killed it. Awesome cars, efficient operations, etc.

Even today, Chrysler has signed a number of deals to build Nissan's midsize and large trucks for them, for instance, and will be selling Nissan built small cars in south America, and has been very agressively pursuing not a path of dead-end "we're too big to fail" strategy, but one more like a "hail Mary" move, where they have set about a course of complete renovation and renewal, and the only question is whether "broke" or "success" arrives at their doorstep first.

Next year, Chrysler will be introducing a broad line of the most efficient engines produced anywhere, US OR Asia. They have developed a brand new, super efficient transmission that is both light and inexpensive, along with being incredibly sturdy and more efficient than even your normal stick shift. And cheap, too. It would have been introduced next year, except that the joint venture arranged to build it failed to get sufficient financing to do the job, and has now gone broke.

If they can find a way to get the factory built to build them, you're going to see most efficient cars in the world built right here in the USA, with the Chrysler brand on them.

GM's been hyping that they're going to have an electric car, but now claim they lack the money. Chrysler WILL have them in pre-introduction fleet service next year. They're real, they work, and they're practical. An SUV, Minivan, and sports car have been shown to the public. And the technology is not a purpose built car just for electric use. They have made it modular, so they can adapt the technology to any car they produce quickly and cheaply, if it appears to be worth doing.

It can be retrofitted with minimal re-engineering to any car they sell now, or have planned.

They, if anyone, are worth saving. In fact, if they could just be pryed away from Cerberus Capital, and get a few billion dollars in capital, would do very well and be a bright star in our industry and economy.