Pimp Your Finances

For all the media coverage of the bailout, there’s been little talk of details.  Here are 14 questions that explain everything you need to know about the bailout.

1. Why is a bailout needed?

According the Bush, letting Chrysler, Ford, and GM collapse is not an option in the middle of a recession, housing slump, and credit crunch.

The automakers argue that bankruptcy would further hurt sales, making recovery impossible.  Consumers don’t want to buy products from companies that may not be around to honor warranties.  Many also believe Detroit’s downfall would spark a chain reaction that would bankrupt hundreds of suppliers.

2. How much money was given out last week?

$17.4 billion in emergency loans was approved, and $13.4 of it will be distributed in December and January.  $9.4 billion will go to GM, and $4 billion to Chrysler.  GM will receive an additional $4 billion after money from the financial bailout is freed up.

3. What will the true cost of the bailout be?

The true cost is much higher.  In a separate measure passed before the credit crisis occurred, Congress approved $20 billion in loans to Chrysler, Ford and GM.  This figure is not included in the auto bailout package.

Additionally, the Big 3 are expected to ask for more money after the new President and Congress take office.  The automakers originally asked for $34 billion in aid, so no one will be surprised if they came back and ask for the rest.

On top of that, Chrysler, Ford, and GM have all indicated they will seek more money from the financial industry buyout.

Mark Zandi, of Moody’s www.economy.com, estimates that the real cost of the auto bailout could end up around $75 to $125 billion.

4. Where does the money come from?

It was taken from the $700 billion financial industry bailout.

5. Why didn’t Ford take any money?

They are in better shape financially.  They have more cash on hand, as well as a $23.5 billion line of credit that they set up in 2006.  Another reason could be that it hopes distinguish itself by not asking for any funds.  They came out looking stronger than GM and Chrysler, which could help sales.

Ford has said they do not need bailout money, but that they would be further hurt if the others go under.

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6. What oversight does the government have over the money?

There is no “car czar” as had previously been suggested.  White House Deputy Chief of Staff Joel Kaplan explained that:

We don’t think that’s something we should impose…just for 31 days when the next administration may or may not have a different view about how they want to handle it.

Instead, control will be handed over to Treasury Secretary Henry Paulson.  In a bankruptcy case, a judge would be able to force changes in restructuring the company.  The government does not have any such power in the bailout.  Instead, it will judge whether or not Chrysler and GM are able to transform themselves into economically viable companies.

7. What changes do Chrysler and GM have to make?

They have to restructure themselves into companies that are more competitive with foreign owned manufacturers.  To do this, they must dramatically cut costs and reduce debt as part of their transformation.  They’ll also have to change their production and marketing strategies.

President Bush has said that:

This restructuring will require meaningful concessions from all involved in the auto industry – management, labor unions, creditors, bondholders, dealers, and suppliers.

8. How long do they have to make the changes?

Until March 31st, 2009.

9. What happens if they don’t?

They will be required to pay back the loans.

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10. How will they pay back the loans if they are not economically viable?

A good question.  Repayment would probably force them into bankruptcy and liquidation.  So the companies have motivation to change, but there is no guarantee that the government will be repaid.

11. What concessions did the Union of Auto Workers make?

By 2010, their hourly pay must be reduced so it is on par with foreign competitors.  This will be a point of contention, as the biggest discrepancy comes from benefits, not hourly pay.

Union contracts must also change so that they are more flexible in areas like holidays, and not restricting employee duties.  This will help make them more competitive with foreign producers.

The UAW has offered to eliminate their JOBS program, which gives laid off workers up to 95% of their salary and benefits for several years.  However, they are continuing their supplemental pay program, which kicks in immediately after being laid off, and combines with state unemployment to give workers up to 72% of their previous pay.

12. Will the bailout change after Obama takes office?

The White House has kept Obama informed throughout the discussions, but he did not have any input into the decision making process.

Obama is free to renegotiate the contract from the government’s side after he takes office.  The UAW has already announced its intentions ask Obama and the new Congress to do so.

13. Will the bailout save the Big 3?

Standard and Poor’s Robert Schultz says that:

If all these adjustments they’re talking about are made, they’d certainly be better off.  Whether they’ll be profitable is hard to say.  A lot will depend on what happens with the economy between now and 2011.

Mark Zandi (of www.economy.com) doubts that all three US automakers will survive, but still thinks the bailout is a good idea.

Years down the road, that investment will be deemed a good one, although it may take a decade or two for us to see that.  I think they can be molded into viable companies.  I think there will be a domestic auto industry on the other side of this.

14. What’s my opinion?

I don’t think it’s fair that they get a bailout, but the consequences of letting them fail would be far worse, especially when consumer and investor confidence is one of the worst problems facing our economy.

What’s your take?