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Sunday, November 22, 2015

Bailout Post-Mortem: Walking The Gangplank of Death Sharpens Focus


2006 Chevrolet Corvette Z06

General Motors and the former Chrysler Corporation stared fate in the face in 2008 and 2009. Death looked back at them and breathed cold, wretched air up their noses. The U.S. government offered them a big bailout, yet many politicians and much of the public opposed it. Speaking about how the government would have an effect on the U.S. auto industry, Eric Cantor, then a Republican leader in the House of Representatives, stated “they’ll run it into the ground.”

Today, GM’s product line up is stronger now than it has been in decades. Financially, with GM’s year to date adjusted earnings through the third quarter at $3.63 per share, it’s up 96 percent compared to 2014 with total third-quarter earnings at $3.1 billion compared to $2.3 billion compared to 2014. So, if GM was an employee in performance review, it would be a solid high performer.

2006 Chevrolet Corvette Z06

Contrary to popular belief, Ford took $5.9 billion in government funds in June, 2009, exactly when GM filed for bankruptcy, but from a funding pot that did not require declaring bankruptcy. GM and Chrysler divvied up $64 billion in support from the federal government, with more coming from the Departments of Energy and Treasury.

Ford today is looking at $2.7 billion in pre-tax profit and $1.9 billion in net income with $2.8 billion in cash flow. Rosy. Products like the Focus, Fiesta, the new F150 truck, the very well-regarded Mustang and far-reaching exercises like the upcoming Ford GT supercar show a company humming along at peak revs.
There’s nothing like walking the gangplank of death to sharpen one’s focus.


Meanwhile, Fiat Chrysler Automobiles (FCA) is currently experiencing a different story. While FCA has some automotive standouts in the Grand Cherokee, the Jeep brand overall, and enthusiast traction with various high-performance models, other products like the Fiats offered in the U.S. have fallen flat or sub-par on reliability ratings and residual value.

On top of that, FCA’s third-quarter earnings was best swallowed with Tylenol, posting a big loss to cover future recalls. In July, FCA suffered civil penalties of $105 million due to completing recall campaigns poorly. The NHTSA also forced them to buy back roughly 200,000 Dodge SUVs and Ram pickups.

FCA also recently shared with analysts that profitability will not recuperate against Ford and General Motors thanks to its truck and SUV market share outlook being grim in comparison. Also, the whole strategy for Alfa Romeo and Maserati is being reviewed.
As a result, FCA’s stock dropped in the third quarter by 4.7%. Overall, FCA lost $330 million in compared to a $208 million profit over the same period in 2014. The good news? Last month, Fiat spun off the jewel in their crown, Ferrari, to raise about $4 billion in cash to deal with growing debt.


But this is the short financial view. Many expected doom even with the bailout. Some experts predicted that five years after the bailout, neither GM nor FCA would survive.

Despite the currently disparate tale of two companies, the long view of both GM and FCA is one that showed them both turning a desirable profit starting in 2010 and regaining some market share. FCA’s enduring success is more questionable than GM’s, however.
This recovery fully proved the arguments by bailout critics like Eric Cantor (who is now an investment banker on Wall Street), the politically conservative Heritage Foundation and the free-market thinkers at The Economist fully wrong. And they’ve admitted it.

And let’s consider an additional little lesson learned in macroeconomics. In 2008-9, what would the greater problem have been? Waiting for payback to the government by bailed out corporations (currently paid back, by the way) or losing the estimated 2.6 million jobs directly affected by American manufacturing and suppliers that support them and the tanking of two corporations? Talk about industrial scorched Earth.

2011 Chrysler 200 S sedan

So far, $70.5 billion of the $80.7 loaned was repaid and some people have a problem with the missing $10.2 billion, including myself. But let’s all at least understand that the value in stabilizing one of our biggest industries during a crisis was worth vastly more. And those who make it a political issue of the Left or Right are woefully uninformed. President Bush started the bailout rolling and President Obama continued that path.

Cantor, et al could not have been more wrong and an industry survives and fairly thrives now because of it.