detroit and the big 3

[Richard Vath]

What are you folks thinking about all of this? Living here, and
knowing a lot of people directly or indirectly glued to the industry,
has certainly colored my thinking... probably a little too much. So
I'd like some perspective from smart friends.

thanks,
-Rich

*****
Richard Vath
Doctoral Candidate in Education and Psychology
Impact of Online Professional Development, HICE
University of Michigan
vath...@umich.edu

[Brandon Downey]

Here's the issue, as I see it: These guys have a business model which
is unsustainable. The principle causes seem to be:

(1) They spent a decade or two building giant cars people now no
longer want or can't afford.
(2) They have a lot of concessions made to union workers which have
become so onerous that they can't turn a profit
(3) They simply aren't competitive with foreign manufacturers. Adding
insult to injury, the foreign companies now have plants *In the US*
and still manage to make money producing the cars here.
(4) We are in the middle of the biggest financial collapse since the
Great Depression. (*knock on wood*)

If we didn't have (4), I would say let them go Ch. 11, re-organize
their crushing debt (bondholders are going to have to eat it),
renegotiate their worker compensation (much easier to do in
bankruptcy), and come up with new management & a new plan for how
they're going to retool to actually be competitive.

Unfortunately, (4) means that it would be almost impossible to obtain
the capital necessary to tide the company over during this
re-organization, because, well, all the banks are holding onto every
dime they can get, and everybody else is panicking and unwilling to
task any risks at all. Also, did I mention we're headed toward
_de_flation, which means that all debts become worse?

Now, let's go read some articles like this:

http://www.portfolio.com/views/blogs/market-movers/2008/10/15/detroit-housing-datapoint-of-the-day?tid=true

"The median price on a house or condo sold in Detroit last month
plummeted 57%, to $9,250, from $21,250 a year ago, according to
figures released Monday by Realcomp, a multiple listing service based
in Farmington Hills."

*

Yikes.

Now, what's to be done? Depending on who you ask, approximately 1-2
million workers are employed by the auto industry in the US. If the
Big Three go bankrupt now, it's Ch. 7. Stuff gets liquidated,
contracts take months to work out, and lots & lots of people lose
their job. This, in the middle of (4) above.

That said, it's nonsensical to have a 'bailout' for the auto industry,
where you just dump in money, because along with being pretty
governing, it also won't fix the fundamental problems. I'd like to
say: screw it, they deserve it.

Unfortunately, I don't really want another great depression, which we
could very well be in sight of now.

I think the best thing we can do now is this:

- Allow them to go bankrupt and re-organize
- Grease the bankruptcy courts or make a law to make sure this
prospect is transparent. This might include bondholder getting screwed
(even more), and some more pushback against the UAW on benefits that
are no longer sustainable
- Any trade barriers to the companies getting sold or outsourced have
to be lifted. If it has to be Toyoto-GM, then so be it.
- Ditto for any anti-trust provisions.
- The 'bailout' should come in the form of a government loan to tide
them over while they negotiate a sale to new owners or be conditional
on some sort of plan
- Their needs to be a change in leadership, and reduction in executive
compensation (if for nothing more than good faith effort)

My hopes for this, or something like it, working are not that high
though -- it may be these guys just are not savable.

Bad news no matter how you slice it.

- Brandon

[Louis Jeansonne]

I don't think we should ever bailout any company, ever.  It rewards bad behavior, and there is no reasonable place to draw the line between who should be bailed out and who shouldn't.  It sucks that people will lose their jobs, but the government's purpose is not to prevent all things that suck.

--
Louis Jeansonne
L...@Jeansonne.com
225-572-9791

[Chris Macaluso]

I agree with Lou. The government is bailing out folks left and right and we should not feel sorry for all of these folks, despite what the president elect or the outgoing president would have you believe.

Contrary to popular belief, the "big three" which is really the big two now because chrysler was bought by Mercedes and then sold and now is probably going to be scaled back enormously and sold again, does not make bad cars any more. And, they sell cars too. GM and Ford's share of the global market is competitive with Toyota and Nissan and Honda, etc. They are not facing anything that the Japanese auto makers aren't at this point. Toyota built a plant in San Antonio just to build Tundra pick-up trucks and it is shut down for long periods of time now because of lack of demand. Nissan came out with a full-size pick-up and SUV 5 years ago... its sales suck. Honda even came out with a less than efficient truck three years ago. All because that's what the market called for.

The biggest problem the Detroit auto makers deal with is the United Auto Workers Union and the politicians who are closely tied to the unions. If you don't join the union, you don't work in those factories. meanwhile, the automakers are paying much higher salaries to UAW members than other factory/manufacturing industries pay. No one in the UAW was complaining when they were making 85,000 a year installing windshields without a high school diploma and living well beyond their means. Now, they are losing their jobs and it's all the auto makers fault. Anytime the industry tried to be more efficient in the past and cut away fat, make their factories match demand for product, the Michael Moores of the world called them evil, money hungry, unfair etc etc... as if the Auto Industry was somehow completely responsible for the social well being of everyone in a community. It's the same as the oil industry in Louisiana and Texas... when oil was booming in the early 70s, everyone made money and no one complained or thought about 10 years from then. Then the profits dried up. people lost jobs. If you wanted to survive, you did something else.

It has been well documented, especially by media like NPR, that UAW members were living well beyond their means. salaries close to 100,000 a year to work in a factory. Four weeks of paid vacation. some with no high school diplomas. They had summer homes. They had RV's and big boats and big houses that they couldn't afford. Some were even being paid to read the newspaper and look for other jobs because their union deal with afforded them that option. If a position was eliminated, some were allowed to stay on at full sa;ary while they looked for work despite not producing anything. Well, that isn't there anymore. It's not that I'm not sympathetic to folks losing their job. I don't want to lose mine. I know none of you want to lose yours. But, I remember specifically one gentleman from Michigan who was interviewed by NPR last year who was a member of the UAW who acknowledged that he was one of the reasons why the "big Three" were suffering. He worked in a GM plant for 20 years. he made more than 100,000 a year. he had a high school diploma, two houses, an RV and no experience with anything else but working in the plant. He said he wasn't the only one in that situation. He knew the money would run out one day and he said he was lucky to have made it that long because he was close to retiring with full benefits and had a feeling the factory would shut down soon.

Bottom line... the folks who are in Michigan, Ohio, Indiana etc who work for Ford and GM could try to move to work in Japanese factories in the US. Cars will be sold again as soon as the economy rebounds. But, they are unlikely to get jobs in those factories because of their union backgrounds and fear from the japanese automakers that unions will form and they eventually will run into the same issues facing the detroit companies. Bottom line is, if this is what it takes for the auto industry to become more efficient, more competitive and self-sustaining again, then they need to file for bankruptcy, reorganize, renegotiate the union contract and get back to work. But, we taxpayers should not be asked to foot the bill always just like we should not be asked to subsidize the farming industry just like we should not be ponying up cash to help people pay for houses they never should have bought in the first place. If Barney Frank wants to save the sinking UAW ship, let him raise taxes on the people he represents. I'm tired of paying for it.

thanks,

cmac

---

Date: Thu, 20 Nov 2008 08:14:38 -0600
From: l...@jeansonne.com
To: hol...@googlegroups.com
Subject: [Holiday's] Re: detroit and the big 3

---

Get more done, have more fun, and stay more connected with Windows Mobile®. See how.

[Scott Alister McKinley]

Well, I'm shocked (Shocked!!) that Lou doesn't think the government
should be involved.

Of course, as always, there is a difference between the government
just giving money away and the government taking steps to absorb the
economic shock in such a way that smart and flexible companies can
survive. (While the real dullards really will die.)

As usual, I tend to agree with Brandon ... especially on the notion
that any government money should come in the form of low-interest
loans. I've been reading that a fundamental byproduct of the banks'
panic is that even though the federal rate is as low as it can
realistically go (I think 0.3%), the rate at which banks loan each
other money, and lend to major institutions is closer to 5+%. Paul
Krugman yesterday argued that the effective rate is closer to 8%
(although I didn't completely understand the graphic.) That gap
between the federal rate and the actual business to business rate is
something that has never existed to this extent in our lifetimes. And
it makes the rate cuts and increases by the Federal Reserve
effectively useless.

The significance of a federally secured loan, or a direct loan from
the Treasury is that we can actually make a low-interest or
no-interest loan available. Furthermore, if the company does
eventually go under completely, the government will have some
ownership stake and can recoup some of the cost to the taxpayers.

...

From what I understand, another thing the government can do is mediate
a pre-negotiated bankruptcy settlement with critical creditors.
Fighting these things out in the courts over many months can cripple a
company's recovery efforts and if a deal can be struck ahead of time
(especially since the mediator -- the Federal Government -- has
considerable leverage over many of the creditors -- presumably the
banks we just bailed out) these huge industries can pivot faster and
offer a more viable product line in time to save the company.

The point is that none of this "rewards bad behavior." If the car
companies don't radically alter their business model they _will_ go
under. However it is in our national interest to give these companies
one chance to do the right thing.

Until next we watch "free-market conservatives" nationalize major industries,
Scott

[Louis Jeansonne]

Of course, as always, there is a difference between the government
just giving money away and the government taking steps to absorb the
economic shock in such a way that smart and flexible companies can
survive.  (While the real dullards really will die.)

 

Actually, there's no difference.  You're just calling it something different.  A low interest loan is just another way of giving money away (the interest money they're not collecting).

 

How is it in our "national interest" to help these specific companies survive, more so than any other company?  The fact that they make cars, a "necessary" product, is irrelevant, because there are other companies that also make cars.  So the only factor is the loss of jobs, which would exist regardless of the type of industry we were talking about.  So why should we bail out car companies but not the "paint your own pottery store," which also employs people?  (And if your answer involves matters of scale, then you may imagine thousands of pottery stores scattered about the country employing thousands of people.)

 

[Scott Alister McKinley]

Chris,

I certainly agree with you that the unions have not taken a realistic
stance in their negotiations. However, to blame this impending
bankruptcy on the union is beyond not true and stands as yet another
success by the Right of blaming the victim.

I acknowledge that in today's market, auto workers are overpaid. I
furthermore acknowledge the crippling effect of legacy costs due to
pensions.

However the union had nothing to do with

1) GM developing an electric car ahead of everyone else in the 90s
and completely ignoring its potential.
2) GM's inability to keep a good thing going in their Saturn line.
3) All 3 companies pursuing a completely unsustainable product line
of gas-inefficient vehicles.
4) All 3 companies refusing to make serious management side
concessions at the same time that they ask for concessions from
workers.
5) All 3 companies undermining government efforts to shift the burden
of health care costs from businesses to a government single-payer
system. (That's right, being anti-centralized health care is being
anti-business, as has been recognized in _every_ industrialized nation
except our own)
6) And as we speak, GM's refusal to make realistic plans about how to
go into and come out of bankruptcy reorganization because they are
purportedly convinced that no consumer would buy a car from a company
in financial trouble.

I contend that if there were some real leadership anywhere in sight,
the unions would be willing to make the necessary concessions to go
forward. They're currently not playing ball because they don't want
to be screwed by management that's so insincere about their
willingness to concede that they're still blind to the PR disaster it
is to fly personal jets to go beg for handouts in Washington.

Until next we blame the perp in addition to the victim,
Scott

> Get more done, have more fun, and stay more connected with Windows Mobile(R).
> See how.
> >
>

[Scott Alister McKinley]

Lou, two points:

1) Your fundamental misunderstanding is in the following line:

> So the only factor is the loss of jobs, which would exist
> regardless of the type of industry we were talking about.

As pointed out by Chris, autoworkers have lifestyles that are adjusted
to $100K per year incomes. In terms of paying their mortages, car
notes, kids' tuition, etc., losing one job and replacing it with
another (say for example, Wal-mart greeter at $20K per year) is not a
one-for-one exchange. Such an impact on hundreds of thousands of
people would result in a shock to the consumer market (in Detroit and
surrounding areas in particular) such that thousands of completely
unrelated businesses would fail simply because their customer base was
gone. Further deepening the unemployment problem.

In other words, the [auto worker --> Wal-mart greeter] transformation
puts pottery stores out of business; whereas the [pottery-store worker
--> Wal-mart greeter] transformation does not put auto companies out
of business. This is why the entire society should be concerned.

2) You say

>> A low interest loan is just another way of giving money away (the interest money they're not collecting).

In fact, much less money is being given away, and in come cases none
is given away in the long run at all.

In the event of a collapse of the company, the government can take
over significant assets and sell it off. This has happened before
(but I do not at the moment have the time to do the appropriate
research). Second, the government has made these kinds of loans to
Chrysler before (I believe) in the early 1980s. Every dollar was
paid off including the interest and since high-paying jobs were
preserved, the government made money on the transactions in light of
the extra taxes paid by those high-income workers.

Until next we finally point out that obviously it is in our national
interest because we really do have friends and family who are hurting
pretty bad right now, and even though the "invisible hand of the
market" can sort this out over the next 20-50 years, it actually is a
good idea to help people along right now,
Scott

[Randy Cresap]

This is a tough one, because I just don't know enough about the industry and how long it takes to retool, etc.  But the industry certainly faces some huge, huge problems that I don't think a bailout will solve.  I say no bailout, but take other focused action to reduce the economic fallout.

 

  While the UAW contracts are a big problem, they aren't the whole problem, as Brandon pointed out.  Sure, they have some car lines that are smaller than your typical suburban; but a very large proportion of what they sell are fuel-chugging SUVs, hummers, etc. 4 years ago every parking lot in the south was 75% full of SUVs, trucks, and other big vehicles.  That market disappeared very quickly with high gas prices and dried up consumer financing / consumer demand. 

 

These oversized vehicles have one market: the United States.  They don't drive big hummers in Tokyo (although I'd pay an arm and a leg to see one of those puppies on a boulevard next to a bunch of little Toyotas) or Europe.

 

So in the only market for most of GM's product, in just a couple of years, gas went from $1.50 to $4 a gallon, and consumer financing disappeared overnight, while high levels of consumer debt and low savings rates make people buy cheaper cars, and less often.  These are long-term problems with demand that aren't going away for a long time.  Now GM and Ford can sell some smaller cars, but so much of their cash flow is dependent on more expensive gas guzzlers that no one in this country wants to buy, and they can't sell anywhere else, that they are in big trouble.  Fast (enough) change is nearly impossible -- and it's not just retooling the factories that they have to do to be competitive; it takes time for a new model to gain acceptance and to build up the brand. 

 

For example, GM competed with Honda by selling SUVs against Honda Accords, or by occupying a different market niche in which their higher worker costs wouldn't make the difference.  Now that it has to move away from SUVs, and rely on Neons(?)  v. Camry (don't even know the GM equivalent, goes to show how much their brand is invisible), it's going to lose.  Cost of production will make a difference in that consumer choice.  It's also starting at square one in the efficiency-focused (gas and price) car brand.

 

They should have seen it coming, but they stupidly relied too much on the existence of a defiantly wasteful flag-waving culture in this country, and in the South, that couldn't possibly be maintained over time.  So now the Titanic is about to hit the iceberg and doesn't have enough room to turn.  There are simply too many changes to be made in a short period of time, during an economic downturn, for the companies to survive, it seems to me.  For GM to crawl out of its hole would require the kind of revival in consumer spending that we're not going to see until people pay off a lot of their debt and begin saving, and the trade deficit closes -- things that will take many years, not months, as well as $2 gas for the foreseeable future. 

 

I see bankruptcy as inevitable -- either some form of liquidation of a large part of the company in a Chapter 11 that leaves a smaller GM; or in a total Chapter 7.  The problem with a bailout, or even a  Chaper 11 filing is that it would very likely fail -- they don't solve all the major competitive problems facing the company, which will reqire BOTH long-term action from GM and fast chanegs in the economic environment -- it'll take a perfect storm of circumstances for the dang thing to even have a chance of surviving. 

 

Gm is going to lose. I'm convinced of it.  The government can only make this as painless as possible for the economy by facilitating a breakup and selloff in a way that keeps everything in as much continuous production as possible.  The problem with a selloff is: who is giving out financing right now, for a risky bet like a post-bankruptcy GM component?  Who would want to buy a lot of these assets?   There may be no one.  The danger is that a lot of economic activity will be gone overnight, causing additional shocks to the economy.  How to facilitate a "productive" selloff, I don't know; some of the steps offered by Brandon seem reasonable to me.  I just don't have the background to know what I'm talking about on a lot of the details (on top of completely pulling everything else I am saying out of the air).

 

But the point is this:  The USA's justification for acting here is the protection of the economy as a whole, not the protection of GM investors or pension holders.  A bailout takes the "eye off of the ball" by reorienting US action on saving a company and people interested in its success.  Action should focus instead on keeping factories and car lots in the economy, whoever the owner is, and whichever investors or pensioners get screwed in the fallout.

 

Until I next re-phrase everybody else's posts and say what has already been said,

 

Randy

 

[Erik Miller]

To respond to Lou and Chris, there is a very important job for the government to do given the state of the economy in the United States: maintain faith in the markets.  Our entire way of life is based on the fact that everyone believes that contracts are enforceable and money has value.  If these beliefs are weakened or destroyed, the United States economy as it currently exists cannot function.

 

One of the strengths of our economy is our bankruptcy code.  Without an organized restructuring that has the force of a legal mandate, creditors will be falling over each other ripping what they can from a company while it falls apart.  The least bad scenario in this case is for the government to force any of the automakers that can't pay their bills into Chapter 11, step in as the primary financier for the reorganization, recoup the money that went into the reorganization, and return the previous creditors to the line after the companies come out of bankruptcy protection.

 

A housing bailout is tough to stomach, too, but some form is necessary.  Irresponsible lending and buying led to the glut of bad mortgages, and many of the mortgage brokers and banks responsible have already gone out of business.  If we just allow forclosure on every bad loan, though, we're going to get caught up in a vicious positive feedback loop.  Flooding the market with forclosed homes will lower prices, which will turn previously "good" mortgages upside-down, which will drive more people into bankruptcy and forclosure, which will put more houses on the market and drive prices down, etc.  Housing prices will come down, and lending requirements will tighten.  I'd rather see a managed deflation than a sudden crash, though, for everyone involved.  The only player with enough credit and clout to make a difference is the Federal Government.

 

We tried the approach of liquidating the rot out of the system once after a stock market bubble.  It didn't work out so well for the Hoover administration.  I wouldn't mind seeing the Fed take part in financing some reorganizations as long as it goes through the bankruptcy courts.  It leaves some of the moral hazard in place, as the management and shareholders of companies get wiped out.  In the case of homeowners, it destroys their credit rating if they go that route.  The collateral damage from a free-for-all liquidation of the American auto industry and housing market lets me put my qualms about government intervention aside with a clear conscience for now.

 

Erik

[Louis Jeansonne]

Scott,

 

Your arguments could be used to justify a bailout of any industry in which employees are grossly overpaid.  In fact, you're basically using an argument based on trickle-down economics, which I agree with, but I think you're missing something.

 

Yes, auto workers will take a pay cut, but they won't all become Wal-Mart greeters.  Many of them will find jobs working for other auto companies, which will have to expand to cover the market that was previously covered by American companies.  Also, the money that was previously used to pay auto workers' salaries will not just disappear -- it will still exist in the economy.  Specifically, cheaper foreign cars will leave people with more money to spend on other things, which will create jobs in other industries.

[Randy Cresap]

I guess the question boils down to 2 things:

 

1) (Assuming you're not philosophically opposed to government intervention), what plan has a reasonable chance of succeeding?  The government is facing a lot of pressure to "do something," but I haven't seen anything that satisfies the threshold of being a plan that just might work.

 

2) If there isn't a plan that works, is prolonging the inevitable a justifiable reason for intervening -- i.e,, deferring a business failure until later in the hopes that economy would be able to deal with it then?

 

There are so many arguments going on at once -- whether bailouts are necessary, what kind of bailout, who should do what, etc. -- but I have yet to see a specific plan from GM or the government that might work to save the company. I don't think you can even answer "should we bail out GM?" until you can answer "what's the goal, and how do we get there?"  The whole debate at the governmental level seems so unfocused.

[Scott Alister McKinley]

For Randy:

I agree that no money should be offered until the Big Three eat crow
and show explicitly how they'll change. Dems on Capitol Hill agree as
well.

Note that Nancy Pelosi today said, "Until you show us the plan, we
won't show you the money."
http://www.google.com/hostednews/ap/article/ALeqM5gbjFY-o07QeryRxtFR3oC1w_v1PwD94IRHUG0

............

For Lou:

Most of your arguments hinge on the assertion that the market will
correct itself in time. The point is that "in time" may mean over
generations or overseas. If we would like our lives to be pleasant
in this generation in this country, we should probably put together a
serious strategy for easing this transition.

For example, you say that other other auto companies will increase
production to match demand. But there's no reason that's going to
happen in the US. And certainly there's no reason for that to happen
in Detroit. Even for those foreign-owned companies that are
manufacturing in the US, I'm thinking Honda, Hyundai and Toyota here,
their factories are located in the South where non-union (often
Mexican immigrant) labor is available at a much lower cost. For
auto-workers to stay in the industry, they will have to take a 50% pay
cut not to mention losses in retirement and health benefits while
moving from Detroit to undetermined locations all over the South.

In a best case scenario, this still devastates the economy of the 10th
largest metropolitan area in the country. It would be good if that
could be avoided.

Scott

[Brandon Downey]

I find this sort of ideological analysis not super useful when we're
in the middle of a crisis.

It's like this:

Suppose we're having a debate about FEMA. We can go back and forth
over whether there should be a federal emergency response agency, if
there is, whether it should be the Coast Guard running it, or a
civilian organization, what its budget should be, etc. What *wouldn't*
be reasonable would be to announce we were closing FEMA and reducing
its budget the day before Katrina makes landfall. In other words, we
may disagree philosophically on the role of government in the economy,
but the fact is, it is there now, today, and institutions and
expectations have developed around its presence.

In the case of the auto companies, I think there is a reasonable
argument to be made that right now, we have an economy that is
teetering on the edge of panic and precipitous collapse. More
importantly, the economy is 'tightly coupled' -- meaning that the
pieces are not nicely and cleanly linearly separable.

Taken together, this means that if we were to lose the big three to a
destructive liquidation (something like ch. 7), we would have vast,
unforeseen financial consequences, _along_ with a million+ people
being dumped out on the street. Some of these unforeseen consequences
could be things like, "Waves of auto dealerships fail", "Financial
institutions invested in the auto industry could fail", and "the parts
of the economy reliant on those million workers could fail". If enough
of these bad things happen, you could generate a cycle of failure that
leads the entire country into a very long recession, or even a
Depression.

Before you say this is only a conjecture, this very thing almost
happened once already this year, when Lehman brothers was allowed to
fail destructively. Within a week, the nation's financial system was
having the equivalent of a heart attack, and in the next week we lost
two of our largest banks, and the rest of them were left teetering.
The *fallout* from this failure is a big part of why the auto industry
is about to fail right here, and right now, and in turn is a big part
of why so many concerns about the failure.

We also have some history on this, as others have pointed out: The
government loaned Chrysler money ('debtor in possession' financing) in
the early 80s, and it saved the company, and the government got all of
its money back.

If we could pull that off here (and I acknowledge that's a big if),
don't you think that would be better than avoiding a Japan-style ten
year recession, or another great depression?

- Brandon

[Randy Cresap]

Scott:

 

       Whether or not the money will be used to change the industry / make it more competitive isn't the same as whether the money will allow the companies to survive in the long and short terms.  Designating the use for the money (use it to transform your companies), it seems to me, is what they're talking about, rather than the probability of success -- 2 related, but different, questions. It just seems that the discussion in Congress isn't focused on this point -- are they going to do something just to do "something" and not stand idly by, or do they make as sure as possible that they will be getting results for the money over the long haul before committing? 

 

      

[Randy Cresap]

 

I just read another article, it looks like viability is exactly what they'ree asking for, so never mind, ignore my previous post. Whoops

[Chris Macaluso]

Just some food for thought... why, if maintaining big industry that employs a lot of people at relatively high salaries is so important to the economic survival of this country, why has this country decided to make the oil and natural gas industry its whipping boy and remove its tax incentives and rope off areas where it could expand? Could that not help parts of this country with good paying jobs similar to the ones being lost in the auto industry?

Until we next think that the "Left" is doing anything more than helping out its pocket liners,

Sincerely,

Cmac

> Date: Thu, 20 Nov 2008 13:49:36 -0500
> From: scoot...@gmail.com

> To: hol...@googlegroups.com
> Subject: [Holiday's] Re: detroit and the big 3
>
>

[Scott Alister McKinley]

because the oil industry just had a decade of record profits.

[Thomas Stuckey]

so the oil industry should increase everyone's salary and make some bad
business decisions until its profits drop low enough to make it a
sympathetic figure

[Brandon Downey]

On Thu, Nov 20, 2008 at 5:22 PM, Chris Macaluso <cma...@hotmail.com> wrote:
> Just some food for thought... why, if maintaining big industry that employs
> a lot of people at relatively high salaries is so important to the economic
> survival of this country, why has this country decided to make the oil and

I don't think anyone here has said this.

What has been said that the sudden evaporation of a million jobs, the
debt owed by the big three, and the web of contracts and dependencies
in the supply chains used by these companies, might very well be too
much for the economy to handle at this point. That means while it
would be great to have another industry just as big as the auto
industry that takes its place, what we're concerned about is the
effect _right now_ of suddenly and dramatically losing the above.

Whether or not this will come to pass is both a question for economic
and financial analysis -- fine if you want to argue that you believe
that the country can take another collapse at this point, but pointing
to some hypothetical oil and natural gas renaissance is not going to
fix this problem, today.

> natural gas industry its whipping boy and remove its tax incentives and rope
> off areas where it could expand? Could that not help parts of this country
> with good paying jobs similar to the ones being lost in the auto industry?
>

See above why as a general plan, turning to gas and oil are not what's
going to fix the immediate risk of collapse.

There are longer term issues why this is not such a great foundation
for an economy:

(1) Seen the price of gas and other petroleum based products at the
moment? Thanks to the stiff deflation which is the fruit of several
major financial institutions going belly up, fears over *other*
country's economic state, and a number of other macroeconomic factors,
oil is plunging to dirt cheap levels.

As of today, oil is now trading at $46/barrel (!)
[http://www.msnbc.msn.com/id/12400801/ for an article about this].

It's not a great candidate for economic expansion, particularly since
our recession is going to drive down production in the developing
world that builds things for us.

(2) It's finite, and will eventually cost more and more money to pull
up out of the ground

Let's suppose we could generate a boom by the "drill, baby, drill"
economic plan. How long would it be good for? 5 years? 10? 30? It runs
out eventually, leaving us right back where we started. You might make
a good case for it being a short term stimulus, except...

(3) It would take years to explore & expand our nation's oil industry.
Estimates I've seen indicate that we're talking a minimum of three
years to start producing meaningfully more amounts of oil. Three years
is a little too late.

(4) Oil (and gasoline) have substantial negative externalities
associated with their use.

Oil spills. Pollution from emissions. Global warming.

The oil industry in the US as it exists today is not on the hook for
the costs of these externalities. If they were actually forced to bear
even a fraction of the costs to fix the damage done by these fuels, it
is unlikely they would be seen as profit centers.

-

Oh yeah, and if you're wondering why oil companies are viewed as
'whipping boys', it probably doesn't help that they spend lots of $$
lobbying Congress to toss subsidies to their industry, or all the
money they've poured into junk science dedicated to climate change
denial.

> Until we next think that the "Left" is doing anything more than helping out
> its pocket liners,

I'm sort of puzzled why you're attacking the left on this issue, when
it appears the divide in Congress is more between the congressmen who
live in states who benefit from the auto industry and those who do
not. I think they may be a convenient scapegoat in your particular
worldview, but it's important to realize that the right seems just as
eager to offer bailouts to the corporations which they are politically
tied (such as the financial industry).

From an article today [http://biz.yahoo.com/ap/081120/congress_autos.html]

"Until they show us the plan, we cannot show them the money," Speaker
Nancy Pelosi, D-Calif., said at a hastily called news conference in
the Capitol."

[...]

"But with GM warning it could go under before year's end, Democratic
leaders were unwilling to close up shop for the year and appear to
turn a deaf ear to the industry. They called for a Big Three viability
plan by Dec. 2, scheduled hearings that week on the report, and said a
vote on a bailout could come the week of Dec. 8."

[...]

The White House criticized the delay, saying the plan to let the
automakers tap the fuel-efficiency loans for their short-term cash
needs should be considered.


*

Bottom line: Pointing to the oil industry as a panacea, or even a
quick fix for our economic problems is a fairy tale. The idea that
there is a secret left wing agenda to hand out money to the Big Three
is questionable.


- Brandon

[Louis Jeansonne]

so the oil industry should increase everyone's salary and make some bad
business decisions until its profits drop low enough to make it a
sympathetic figure

 

Or we could just tax them into oblivion, then debate whether to bail them out.

[Randy Cresap]

I'm glad we're all concerned about a company (Exxon) that had a 40% return on equity this year, 27% return on capital, and a 10 year AVERAGE of 25% return on equity. It truly is on the verge of being squashed by the governmental overlords.  Its very existence hinges on that one plot of land in Utah.

 

But then again, Exxon is the market leader so maybe my sarcasm is unfair.  Chevron Texaco only had a 20% return on capital, the industry average, and about a 30% return on equity.

 

Earning only 40% profit in the entire year is completely unfair and a sign of government oppression.  They deserve less regulation or they won't survive.

[Thomas Stuckey]

No, we're agreeing with you. They make a lot of money, so obviously
they are evil and should be continually branded as such by the media.
Of course they're not on the verge of being squashed by the governmental
overlords, so those overlords need to try harder! I think they should
be more heavily taxed since they are doing well. In fact, the obvious
thing to do is take those huge profits and give them to GM because they
need it more.

[Louis Jeansonne]

Randy, those numbers are deceptive.  Oil company profit margins are between 9 and 10%, comparable to other industries.  Return on equity is kind of a meaningless number.

[Randy Cresap]

Return on capital is not.  That's THE purest measure of profitability and the measure used in determining the worth of a company in M & A's.  Profit margin is only one component that doesn't tell the whole story.  That's why Walmart is highly profitable but has a razor-thin profit margin (2 - 3%).

 

Return on equity is the bottom-line profit compared to equity stake.  It's only deceptive if the company is highly leveraged (which neither Exxon or Chevron are), which is why I also included return on capital statistics (return on equity + long term debt investment).

[Randy Cresap]

Who said there's anything wrong with making money?  It's a corporation, that's what it is built to do.

 

However, the fact that these are companies getting a 20% profit on investment per year  -- roughly double the profitability of the average S&P 500 company -- while gas prices were sky-high indicates that they're benefiting from a distorted marketplace, and asking for special help from the government (opening up government lands) instead of acting like responsible players and reinvesting the profits in new exploration and new technology instead of passing it mostly on to the shareholders through dividends and stock buybacks is nauseating.

 

Why should the government give any help to them?

 

  And what are we talking about with higher taxes for oil companies?  To my knowledge there is no windfall tax on oil companies.  So now we're upset that they don't get special tax breaks or tax incentives?  They have more money to reinvest than anyone else -- more profitable than Microsoft.  Let them spend their own money, they've got enough of it.

 

On a side note,  as far as taxes go, no one wants to pay taxes.  But we've got to collect them from somewhere with a deficit nearing $1 trillion.  That means cutting expenses and raising taxes.  Period.   but as far as I know, no one has talked about putting a special tax on oil companies.

[Louis Jeansonne]

I disagree.  I think it's deceptive because different industries require different ratios of assets to sales.  Let's say I just started a company in my home. My company has no assets.  I borrow $9, use it to buy an umbrella, and sell it for $10 on ebay, for a profit of $1.  My profit margin is 10%, and my return on equity is infinity.  I'm more evil than an oil company!

[Randy Cresap]

And that is exactly why I referred in my last post to a) return on capital, not return on equity, being the purest measure of profitability and b) return on equity is only deceptive when the company is highly leveraged, and your example is nothing but debt.  Your return on invested capital -- the profitability compared to investment -- was 11%.  Average for the Fortune 500.  Exxon's was close to triple that.

 

Return on equity is relevant because that's the amount of profit from the point of view of the shareholder rather than the company as a whole.  When a company is highly leveraged the shareholder makes more profit compared to the equity he put up assuming constant profitability.

 

Returns (on capital and equity) are a comparison of the profit to the company's investment.  Profit margins are a comparison of revenues and expenses in a vacuum without regard for how much of an investment you made.

 

 

[Louis Jeansonne]

Sorry, I misread your previous post.  It still seems to me that return on capital is more of a reflection of the nature of an industry (and how much it takes to make a profit) rather than a company's profitability, but maybe that's an irrelevant distinction.  I see what you are saying about profit margins.  Is there another single number that takes into account both the investment and the expenses?

 

Hopefully we can at least agree that the accusation of "record profits" is the most useless metric of all.

[Randy Cresap]

I'm not sure if there's anything (widely followed, at least) that shows how much capital spending a company needs other than looking at the financial statements and comparing capital expenditures over time to profitability.

 

 

but I think it says a lot when you look atthe ten year history of Exxon -- the justification for extraordinary profits in one year is to make up for a) a "boom and bust" cycle, and to make up for leaner years that happened before this one and that will return as the business cycle moves along; or b) greater risk in having to put up a bunch of capital in "hit or miss" explorations.  In either case you'd expect some "off" years. 

 

But over the past ten years, at least, Exxon and all the other oil major oil companies have been consistently profitable at a level well above other Fortune 500 companies -- at worst, they've had an average level of profitability, and at best they've been as profitable as any company in the history of the world (as Exxon's total profit was this year).  Granted, Exxon's a huge company -- but even comparing it to the company's size, the profits were extraordinary.  "Record profits" doesn't mean anything out of context, but the numbers don't lie.

 

My biggest concern is that Exxon will never push for innovations, etc. that are currently higher-cost (like offshore drilling, alternative sources, oil sands, etc.) if it can convince the federal government to free up additional "easy oil" sources.  If it gets another low-cost source of oil for free / through lobbying, it will forgo putting its energy into other existing sources of energy that may be slightly less profitable at the current time, or developing new ones.  If someone believes that the free market will incentivize Exxon to innovate and develop new sources of energy / develop existing resources more efficiently, then dumping more easy access oil on it (by opening up federal lands) is not the way to do it. 

[Chris Macaluso]

yeah... I'm coming in late on this beat up session, but that may be the most ridiculous, left wing nonsense you've ever spouted, Scott. Typical of today's go getter "change" movement. Someone's doing something right and doing it well and making money so instead of encouraging that and realizing its potential for investment in growth and development, you just get the government to lop it off and give it away to someone or something's that's not so good. Did I say left wing? I'm sorry, I meant to say populist. Huey Long was a populist. Worst thing that ever happened to Louisiana.
 
Until we next fool ourselves into believing that encouraging stupidity until we are all equal is better than fostering success,
 
love,
mac

> Date: Thu, 20 Nov 2008 20:41:55 -0500

> From: scoot...@gmail.com
> To: hol...@googlegroups.com
> Subject: [Holiday's] Re: detroit and the big 3
>
>