Banks and Cars--Is there a difference?

[RichardJensen]

http://blueovalblogs.com/blogs/?p=98

[RangerM]

http://blueovalblogs.com/blogs/?p=98

 

Yes, there is a difference.

 

Banks are federally-insured. Automakers are not. (the pensioners being excepted, but there are far fewer of them than depositors)

 

Banks have far greater impact on the economy in general. Even if 3 million jobs (theoretically) are lost with the Big 3, this pales in comparison to the effect on the greater economy if the banking system fails, or is perceived to fail.

 

It is a question of priorities, and banks take precedence over automakers.

 

Interesting bit of off topic. The Federal Government could forgo ALL individual (income AND payroll) taxes in the first quarter of 2009 at a cost of $900 Billion. Would that stimulate anything?

[battyr]

Yes, there is a difference.

 

Banks are federally-insured. Automakers are not. (the pensioners being excepted, but there are far fewer of them than depositors)

 

Banks have far greater impact on the economy in general. Even if 3 million jobs (theoretically) are lost with the Big 3, this pales in comparison to the effect on the greater economy if the banking system fails, or is perceived to fail.

 

It is a question of priorities, and banks take precedence over automakers.

 

Interesting bit of off topic. The Federal Government could forgo ALL individual (income AND payroll) taxes in the first quarter of 2009 at a cost of $900 Billion. Would that stimulate anything?

 

Richard is right about the Myths. RangerM correctly explain the real reason why the Banks need the money first.

 

This whole mess is as bad as it is, not because the government is not doing enough, but because the government and the Fed, acted 6 months to a year too late. Had they acted only 6 months earlier, the Auto industry, and the rest of the economy would not be in such a bad crisis now. I think the high oil prices in the summer made everything worse. Now oil is cheaper, and interest rates are cheaper, this will help.

 

This could end up as a normal recession, over in an other 6 months to a year. But if a major shock hits the economy like the failing of GM and many of GM's suppliers, then you can extend it another year or 2. More if other major companies go under.

 

I think support for the housing market by helping home owners, not just the banks would have helped too. Should have happened last year.

[wescoent]

Every single bank you mention, with the exception of Citi, is dead or run by the government now.

 

A "bank-style" bailout would mean a shutdown of Chrysler, a government takeover of GM, and Ford getting billions to cherry pick assets it wants.

[RichardJensen]

this pales in comparison to the effect on the greater economy if the banking system fails, or is perceived to fail

If GM goes Ch. 7, it'll be a mess coast to coast. It will affect every other auto maker, and while, in theory, it wouldn't be as serious as the banking industry 'collapsing', I would argue the risk of the banking industry 'collapsing' if the Feds allowed Citi to fail is substantially smaller than the risk of GM going Ch. 7.

 

If the odds of GM going Ch. 7 without any gov't assistance are 30%, then you'd have to be looking at a risk of equal impact being higher than 30% if Citi failed.

 

----

 

Besides, the point Barron's made that I took issue with was NOT "Banks are more important", the point I took issue with was "Banks have different problems". They don't.

[RichardJensen]

Every single bank you mention, with the exception of Citi, is dead or run by the government now.

Well, the government's handling of Citi makes a mockery of everything they lectured the big three about.

 

They panicked and threw billions at Citi with NO strings attached. Simply unconscionable, IMO.

[Extreme4x4]

This is why all of the articles about how ill prepared the auto execs were, just reeks of sensationalism.

 

What precedent did the automakers have, that they would be grilled like a 13-year-old that snuck out of the house to meet a boyfriend??? Absolutally none. All they knew, is every entity that had appeared before Congress, and spun a tale of gloom and doom, had piles of cash thrown at them............... with literally no strings attached. They had no reason to believe that it would be any different for them, one of the largest industries in the country, that affects parts of the country that noone could imagine.

 

Nobody told them to bring their hip waders and a paddle.

 

It seems that the automakers were singled out, due to the publics massive distaste about all that was happening with the banks............... and the massive amounts of money thrown at them................. with little to show for it. Thus, Congress had to put on a show. See, we are not pushovers............. we know how to think things through before panicing and throwing money at yet another industry.

 

It is BS, and most who follow automobiles knows it.

 

I can just picture the execs sitting in their cars, driving to the new hearings, talking to themselves and rolling their eyes. They will then get in front of Congress and tell them what they want to hear, even if it is BS also. Seeing as the public is so willing to believe massive piles of "telling you what you want to hear, even if we have no intention of carrying it out."

 

Hmm................ reminds me of a recent election.

[wescoent]

Well, the government's handling of Citi makes a mockery of everything they lectured the big three about.

 

They panicked and threw billions at Citi with NO strings attached. Simply unconscionable, IMO.

 

No strings attached?

 

Seriously?

 

Limits on executive pay, a massive dilution of shareholder value, an agreement to modify mortgages, and CLOSE government scrutiny of banking operations?

 

I'd love to hear the wailing and gnashing of teeth if GM had to undergo the same treatment.

 

The government is yet to allow an automaker to go down... can't say the same about the banks.

[NickF1011]

The government is yet to allow an automaker to go down... can't say the same about the banks.

 

I don't recall Uncle Sam bailing out Nash, Packard, Studebaker, Cord, etc....

[wescoent]

I don't recall Uncle Sam bailing out Nash, Packard, Studebaker, Cord, etc....

 

When was the last time they allowed an outright failure?

[NickF1011]

When was the last time they allowed an outright failure?

 

All of the ones I mentioned outright failed, didn't they?

[RichardJensen]

No strings attached?

 

The government is yet to allow an automaker to go down... can't say the same about the banks.

Okay, I overextended myself there. Still, the government's bailout of Citi allows current management to stay in place, and as near as I can tell, doesn't include any requirement that they improve their core ops. I live in Sioux Falls, SD, where all of Citi's legal vehicles are chartered (I think all of them now have SD charters). At any rate, I know enough people that work in the credit card unit's CFO's office to know that the company's internal structure is a non-stop disaster area.

 

I should've been clearer about 'no strings attached', in that the biggest ongoing problem with Citi--its abysmal structure--is only being addressed in fits and starts.

 

===

 

Also, we have the PBGC because Studebaker failed back in the 60s.

[one2gamble]

Banks have far greater impact on the economy in general. Even if 3 million jobs (theoretically) are lost with the Big 3, this pales in comparison to the effect on the greater economy if the banking system fails, or is perceived to fail.

 

Its one thing to secure the system, its another to secure fraudulent entities while simultaniusly creating larger and more powerful entities with a bigger stranglehold on the economy than those that should have failed. Banks are not the "system" they are simply business within the system in the same way Ford and GM are businesses within their industry.

 

I dont disagree with your premise either way, though a 3 million job hit would cripple this economy/country to no end.

[wescoent]

All of the ones I mentioned outright failed, didn't they?

 

40 years ago? When the US was the only industrial game in the world and GM was the world's largest company?

[NickF1011]

40 years ago? When the US was the only industrial game in the world and GM was the world's largest company?

 

All you said was that the government has not allowed an automaker to fail. You didn't put any time limits on it. And well, GM and Ford are still amongst the largest companies in the world.

Edited December 2, 2008 by NickF1011

[RichardJensen]

40 years ago? When the US was the only industrial game in the world and GM was the world's largest company?

Well, the Studebaker failure had a significant effect on US legislation in the typical "close the barn door after the horse gets out" fashion.

 

the PBGC & ERISA came about in no small part due to public angst over poor pension funding brought to light by the Studebaker collapse.

[Mark B. Morrow]

I don't recall Uncle Sam bailing out Nash, Packard, Studebaker, Cord, etc....

 

 

A very different time. If it had been GM, Ford or Chrysler back then the response would have been different. When the independents failed, the Big 3 were there to pick up the slack. Who would be there now. The transplants don't have the money or capacity here to do it. Nissan isn't in great shape. Toyota has plenty of capacity here for trucks. The rest is overseas. In addition, the transplants couldn't support the parts manufacturers that would follow GM, Chrysler or Ford into bankruptcy.

 

BTW Nash didn't fail. It and Hudson became AMC which lasted another 20 years as an independent.

[NickF1011]

A very different time. If it had been GM, Ford or Chrysler back then the response would have been different. When the independents failed, the Big 3 were there to pick up the slack. Who would be there now. The transplants don't have the money or capacity here to do it. Nissan isn't in great shape. Toyota has plenty of capacity here for trucks. The rest is overseas. In addition, the transplants couldn't support the parts manufacturers that would follow GM, Chrysler or Ford into bankruptcy.

 

My point was, the government has allowed other automakers to fail, no matter how small or during what period.

 

BTW Nash didn't fail. It and Hudson became AMC which lasted another 20 years as an independent.

 

And where is AMC now? They ultimately failed. The name on the building at the time doesn't really matter.

[Hemiman]

Not sure about cars, but I put a Banks system on a truck once and there was a big difference!

[RangerM]

If GM goes Ch. 7, it'll be a mess coast to coast. It will affect every other auto maker, and while, in theory, it wouldn't be as serious as the banking industry 'collapsing', I would argue the risk of the banking industry 'collapsing' if the Feds allowed Citi to fail is substantially smaller than the risk of GM going Ch. 7.

 

If the odds of GM going Ch. 7 without any gov't assistance are 30%, then you'd have to be looking at a risk of equal impact being higher than 30% if Citi failed.

 

----

 

Besides, the point Barron's made that I took issue with was NOT "Banks are more important", the point I took issue with was "Banks have different problems". They don't.

 

If GM were to go Chap. 7 it only proves that they are merely a healthcare company......that happens to make cars.

 

If (as I suspect) NOONE is going to walk away from a $193,000,000,000/yr revenue business (2005 figure), then Chapter 7 is a lot less than 30% likely.

[battyr]

Banks and Automakers are completely different animals. They also server a different purpose in the economy. The biggest difference is that the banks are highly leveraged.

 

If you want to start an auto company, the share holders provide $1 billion, then you borrow another $1 billion. Then you start to build cars.

If you want to start a bank, the share holders provide $1 billion, then you take $100 billion in bank deposits. Then you lend out $90 Billion in loans.

 

If an auto company goes bankrupt, the share holders take half the loss.

If a bank goes under, the loss is 50 times bigger and share holders stake is only 1%.

 

IMHO had the bank bailout only happened a year earlier, the banking, housing and automotive crisis would not have been as bad as it is now. We would still be in a recession, but you would not have the uncertainty that they have now.

[RichardJensen]

If GM were to go Chap. 7 it only proves that they are merely a healthcare company......that happens to make cars.

 

If (as I suspect) NOONE is going to walk away from a $193,000,000,000/yr revenue business (2005 figure), then Chapter 7 is a lot less than 30% likely.

Did you miss the part this week where GM said they needed $4b by the end of the year?

 

Chapter 7 means parceling out the company instead of rebuilding it. GM's North American operations are, in present form, beyond salvage. Just about every aspect of the way they do business in NA needs to change.

[RichardJensen]

Banks and Automakers are completely different animals.

One crucial similarity:

 

They are both run by people.

 

Another crucial similarity:

 

The banks worst off TODAY were the ones that pursued unsustainable short term gains (be it through aggressive risk taking in derivatives--AIG, aggressive acqusitions--Citi, or aggressive pursuit of subprime mortgages).

 

That furnishes an unmistakable point of comparison to practices at the Big Three in other areas.

[RangerM]

Did you miss the part this week where GM said they needed $4b by the end of the year?

 

Chapter 7 means parceling out the company instead of rebuilding it. GM's North American operations are, in present form, beyond salvage. Just about every aspect of the way they do business in NA needs to change.

 

$4B would carry GMs operations for how long? 2-4 months...at most? That would be a fart in a hurricane.

 

If they really are 'beyond salvage', why not just do what most companies do? Close the door on Friday (Chap 11), and re-open on Monday under a new name, with $4b in seed money, and an $14B credit line?

 

By your own language, it would appear that we would be throwing money down a bottomless pit.

 

It's not America's fault that things got this far (except the politicians whose short-sighted policies provided the circumstance).

 

How would things have been different for GM if they came to Congress a year ago? Things did not get like this overnight.