My Two Cents - "Big Bank vs. Big Car "

12/05/2008

In watching what could easily be considered a three-ring circus weren’t the implications so dire, the latest push for access to bailout billions has commenced. GM, Ford, and Chrysler executives piled into the most fuel efficient models in their fleet to begin a second pilgrimage to Washington DC. The move to hybrids which was somewhat humorous was brought on after Big Car execs were chastised by members of Congress for the use of private jets and also for a lack of candor about past mistakes. At stake, at least according to the execs, is the future of the US auto industry.

The tactic, at least on the surface, sounds awfully familiar. We were told just a little over two months ago that if a bank bailout plan wasn’t passed immediately that the entire financial system would implode. Sure we haven’t seen financial Armageddon yet, but you sure wouldn’t know it by looking at the retirement accounts of most Americans. Amazingly, $700 billion of bailout money and subsequent trillions in Federal Reserve loans found their way to Wall Street banks, but it seems like you’d have to travel pretty far to find a penny that hit Main Street. Now we are assured that a Depression will ensue if Big Car is allowed to fail. While this is not the forum to nitpick over which failure would be more catastrophic, it would seem that given the relative importance of the productive base in a properly functioning economy that Big Car is infinitely more important than Big Bank. Congress, on the other hand, seems to feel the opposite.

So really, what gives? Inquiring minds want to know. It cannot be disputed that Big Car has done a thoroughly stupendous job of shooting itself in the foot. From the jobs bank to legacy costs to a complete and utter failure to interpret signals from their market niches, Big Car has been a textbook case of what not to do.

And in similar fashion, Big Bank has done essentially the same thing although they were considerably better at making money prior to D-Day. However, their implosion has been a completely spectacular failure on financial steroids thanks to the miracles of leverage. The ramifications have already been felt in every corner of the globe and keep in mind that this has been the case despite massive financial intervention by central banks on 6 continents. Iceland has already gone bankrupt with more countries likely to follow. But perhaps most ironically, little has changed about the way Big Bank conducts business other than the nagging fact that they’re hoarding bailout dollars for themselves or buying US Treasuries while essentially choking off the real economy. Clearly, Big Bank wasn’t forced to put even an iota of thought into how they might reform, nor have they taken any meaningful action other than to layoff scads of ‘non-essential’ employees.

The real question at issue has nothing to do with how much Big Car is asking for, if they ever hope to pay it back, or what sort of business plan they have. It has to do with how Congress can get away with showing absolute contempt for an industry which is inextricably linked to the real economy and average Americans while giving what has amounted to a free pass to a banking system that produces nothing but trouble and rides upon the back of the US Economy like an $8 Trillion albatross. Add to that the absolute hypocrisy of our elected representatives who criticized Big Car CEO’s for the same transgressions they themselves commit each and every day. There used to be an old saying that you shouldn’t throw stones from a glass house. I would take this one step further and assert that Congress is using a flamethrower from within a house of cards.

The decision to either bailout Big Car or let it fail would be a pretty easy one if it weren’t for the three million manufacturing jobs that would be lost if these firms cease to exist. In addition, the loss of many millions more in related industries must also be considered. Unfortunately, given their current dire financial straits and an absolutely rotten economic outlook for the foreseeable future, Big Car may fail even with a bailout. Even the strongest of companies will be severely tested in the coming months and years. Those already in need of life support will likely need frequent and repeated cash infusions. So once again, we walk the slippery slope just a few short weeks after the last time. We talked about the bailout mentality in an early 2007 column. The financial rescue has already grown by a factor of 10 in the 9 weeks since its passage. Enough emphasis cannot be placed on the fact that this is only the beginning of the bailouts. Perhaps Chrysler CEO Bob Nardelli, formerly of Home Depot has unknowingly helped coin the perfect slogan for the current dilemma: “We can do it – you’d better help.”

If you are interested on cutting edge analysis on the auto and financial sector bailouts and their many implications, go to Contrary Investor’s Café and listen to our weekly Internet radio segments ‘Spin Cycle’ and ‘Beat the Street’. This week, we discuss the trillions in bailout dollars, where they're going, and the likely unpleasant consequences of these realities. We also tie in oil prices and the impact on the real economy. If you want to know where things are headed, these are episodes you cannot afford to miss. To listen, please visit: http://www.contraryinvestorscafe.com

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.