Just Say No To Detroit: Let’s Cut Our Losses And Let Society’s Scarce Investment Flow To Better Uses

Given the abysmal performance by Detroit’s Big Three, it would be better to send each employee a check than to waste it on a bailout, says NYU finance professor David Yermack in today’s WSJ:

Our government is being asked to put tens of billions of dollars in GM (GM), Ford (F) and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.

Over the past decade, the capital destruction by GM has been breathtaking. A net $182 billion of society’s capital has been pumped into GM over the past decade — a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM’s market capitalization was $46 billion and Ford’s was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. When a company makes money-losing investments, the cost falls upon all of society. Investment capital represents our limited stock of national savings, and when companies spend it badly, our future well-being is compromised.

Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.

Americans are not going to stop driving cars, and if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share, adding jobs in the process. Many suppliers will also stay in business to satisfy the residual demand for spare parts even if the Detroit manufacturers go under. If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.

It’s time to cut our losses and let society’s scarce investment capital flow to an industry with more long-term potential to create jobs and economic value.

Posted in Categories: Auto, Contributor, External Research, Stocks.

Subscribe by RSS Subscribe by Email

Comment by Mike C

2008-11-21 11:46:51

Its truly sad how misinformed the public is about American automobile manufacturers. Yes they have issue, including union issues, (by the way the Wagner act is a US Federal Law.) They have also been involved in the public good for 100 years, like having real federally mandated affirmative action programs (of which their foreign competitors don’t have to meet) and supporting retirees and spouses 500,000+ some now in their 90s and higher. -These policies included substantial influx of capital investment to society for the public good including massive injections of capital in the health care system, about 25% of which is for people outside of their responsibility as a result of hospital billing models that add indigent health care to everyone’s bill. — (because of lack of government support) — All again for the public good and by the way much more than the 25 billion loan request.

The fact, and we need to emphasize fact because most of what so many like Senator Richard Shelby say today (and for a while now) is just conjecture and concluded based on personal dislike and not real 2008 competitive analysis. The Fact is that American cars compete in every segment of the market with truly excellent vehicles. — They have to. If one really does their homework instead of what is nothing more than attacking without cause they would conclude this. Anything more is just generalization and is no less than concluding an individual is of no worth because of their race or gender. I am truly ashamed of the American public (including politcal incumbements like Shelby) for this.

Does anyone remember the Toyota Tundra and Sequoia? Well,they should because there was huge fanfare from Toyota’s PR and marketing departments just last year when they were unveiled as “All New”. They are not fuel efficient vehicles nor are the other full line of SUVs that Toyota builds. - That’s not being green or fuel efficient.
Funny? But it seems all, including the media turn a blind to this FACT. I often wonder why?

As far a Senator Shelby’s position; Could he maybe be in a position where his state could benefit from a big three collapse? I challenge anyone to study this and then wonder if out of possible conflict of interest rules he should remove himself from these discussions based on the past massive handouts his state has granted to foreign automotive competitors to manufacture there.

Well thank god up to now that we still have vehicles built in USA that offer living wages. Seems like everyone else in manufacturing form textiles to televisions decide to pull-up stakes and move to China.

Reply to this comment