Detroits Troubled Big Three and Bail Out plan

The government infusion of capital to banking system did not really impress the tax payers despite the explanation that a financial crisis hurts everyone. An average tax payer felt that Wall Street extorted money from government to stay solvent, magnifying the impacts of financial crisis to the nation.

Treasury Secretary Henry Paulson probably did the right thing in rescuing some institutions and infusing capital to others. However, tax payers can never put these things in perspective - the top executives and shareholders got fat dividends at good times and when there is a crisis government should rescue them. Worst of all, the crisis was a sub product of their own financial engineering.

The big corporations like GE lobbied hard to get their share from the bail-out package and was successful in getting the Government to buy their CPs, when Wall Street was shy in lending. Detroit big threes are also in the race for capital. As I write this, GM unsuccessfully, sought 10 Billion to acquire Chrysler and just now came out with a bleak future statement. When GM goes down millions get impacted and that remains as the selling point to the government.

Ford and Chrysler also joined GM to meet the speaker, Nancy Pelosi, to ‘brief’ her on the impact and surely the lobbyists are trying their best as well. The question is should the Government rescue the auto makers?

Its true millions of people – manufacturing jobs, dealer ships, suppliers – get impacted but they are unlike banking system. A financial crisis not only impact insurance and 401k, it freezes the capital required for small and medium businesses and they primarily depend on banks for working capital. If the businesses do not get working capital, they are going to close the shop and lay-off people.

Big corporations like GE might find a direct window in treasury but that’s not the case with smaller fries. Apart from the credit crunch, financial crisis could impact the exchange rates and inflation and push the country to a deep depression.

Earlier I supported the idea of government making investments in financial institutions as it might be proved to be a best use of tax payers’ money. It not only averts a crisis that impacts the whole nation but brings in a return at some point when the government exits. Additionally, the government gets a commanding voice on how to run the business, including the executive pay J .
Investing in big three makes no economic sense unless they agree to change their business model to make it competitive with the imports. The big threes always lobbied for higher restriction on imports and resisted any alternate fuel /environment friendly legislation. Ford under Alan Mullally, is at least trying to make it more efficient but GM shows no signs of improvement. Its doubtful that the government is going to let any of these fail - especially when many of their unions support the Democratic party. However, any investment in those would not be the efficient use of capital.

Today, Henry Paulson shelved his earlier plan to buy the troubled mortgage assets of bank as part of the rescue plan. He plans to use that funds to help the financial services sector- auto loans and credit card businesses- that started showing trouble already. Considering the large auto loan portfolio of Big Three, its possible that they could get substantial help through that route.