Uncle Sam: I'm Your Daddy!

By Markos N. Kaminis - Economy & Markets

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U.S. automakers are after a bridge loan that amounts to more than their entire net worth in terms of market value. If Uncle Sam is entitled to AIG's assets (NYSE: AIG) in exchange for a bailout, then why shouldn't we also take conservatorship of the auto industry. After all, the best collateral is asset ownership.

This way, with proper oversight, we can ensure sincere effort toward reform from automakers and the UAW. The reward would be eventual recapitalization of a leaner, meaner and more competitive auto industry. That would mold a survivor that wouldn't drift precariously at every economic trough. It would be one that would employ Americans at lower average pay, yes; however, it might also employ more Americans as the companies regain market share and find more reason to produce cars at home. Still, be careful, because it's the net assets we would own. The only way we could defend a loan over ownership is if we anticipate future bankruptcy as highly possible, and ensure first lien. It's clear that the government does not want bankruptcy though, so let's buy Detroit!

(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK)

What Makes Them Different?

Rescue from the brink should come at real cost. The government, via the Treasury especially, has not offered free money (or near free) to other firms, so why should Detroit get preferential treatment? One might argue that Citigroup (NYSE: C) got a sweet deal, but Citi was not about to go under just yet. Lehman Brothers couldn't say the same, and it is nonexistent. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) were taken under conservatorship for the sake of America! Bear Stearns and IndyMac shareholders lost everything, and the shareholders of Wachovia (NYSE: WB) and Washington Mutual didn't do much better. (NYSE: JPM, NYSE: BAC)

Because Chrysler got a bridge loan back when Lee Iacocca led the company's rise from the depths of peril, automakers have precedent to stave off lost equity interests. Do they deserve it though? One thing is for sure; if they get it, AIG's former CEO and one of its largest shareholders, Maurice "Hank" Greenberg, would have the right to cry bloody murder! The man lost a great portion of his entire net worth because of how things unfolded around the insurer's government led resurrection. What makes Greenberg any less worthy of salvation than Cerberus Capital?

Beggars Can't be Choosers

If you don't like it, tough luck. You should not have gotten your company so precariously close to decimation then! Beggars can't be choosers. The question keeps coming up, what can these companies put up for collateral for such a "bridge loan?" While General Motors' (NYSE: GM) market cap is currently about $2.7 billion, its enterprise value is estimated at $32.25 billion and book value is negative. However, its assets hold immense value.

GM is asking for a $12 billion loan while it aggressively cuts costs so it won't need more. Theoretically, it could be acquired for that much or less, based on market cap, which is of course impacted by its precarious situation and current cash flows. Would you lend a company money that you could buy outright control of for equal or less value? I wouldn't, unless I was the government. The worst case scenario for an equity acquisition is bankruptcy, liquidation and loss of investment.

Here's Why You Might Lend to, Instead of Own GM

As a creditor with a likely first lien on assets, bankruptcy does not likely result in worst case loss of total investment. Liquidation of assets would return the lent money back to the government in some form, and maybe even in whole. The government could tie the loan to specific assets as well, but an overriding first lien works best. Still, that might violate other interests, driving lawsuit. But, when you're the government, you can guarantee those other covenants are insured. Maybe you're worried that GM's liabilities are greater than its assets? Well, much of those liabilities are debt that would be subsidiary to the government's. Aha! we hear you saying...

I say, if we are really serious about keeping these companies from bankruptcy at all cost, then our acquisition of them commits us to it. While it might cost us more in the end, it would also likely reward taxpayers more. GM's 52-week high this year was 6.5X more than it's current value. "But Greek," you're screaming, "that contradicts everything America stands for; that goes against capitalism!"

What if the government just keeps its GM afloat until economic recovery? While it might take until the 2011 time frame that Ford (NYSE: F) points to, wouldn't auto demand eventually recover to at least prior levels? Well, capital should be harder to come by for unqualified borrowers who are no longer able to still get a car, as they might have in the past; so there's not a clear yes answer to that question. However, overriding global development and growth seems to ensure it. In that case, maybe massive shrinking of the companies doesn't make so much sense. In normal economic conditions, the Detroit three wouldn't be as ready to leverage operations to exploit demand when the time came. Maybe employee union concessions and some other fat cutting might be enough. Or maybe they just got too big. More asset sales or resizing really seem necessary.

GM's plan offered up to Congress also speaks of another 20K layoffs. Is that why we're giving them money, so they can fire more folks? Well, 20K lost jobs is still far better than 1 to 3 million. We will have to shrink these companies, and we will have to undo some of the gains made by the UAW, the strongest union in the world.

When a US automaker makes more than some folks who sacrifice years of their lives to schooling, not to mention the debt they burden themselves with to do so, well, that sure seems out of balance to me. Why would I bother going to school or reading one book if I could land a job on the line. To this question, I hear a lot about how hard these guys work, and the sacrifice born by their bodies. I don't think the 65 hour work weeks I put in without overtime or big bonuses were easy either. I think a lot people work hard at great sacrifice to their physical and mental health, but not everybody has as strong a union as the UAW behind them. Also, everybody thinks they make less than they're worth. At least executive compensation needs inspection. My goal is not to belittle another man's work, nor judge him by the size of his paycheck. I'm just making a point that auto workers have done pretty well in recent years, and that's a great testament to their union. However, it's helped to create a competitive cost advantage for foreign rivals.

Okay, okay, those sweet deals are gone now, I know. They've been grandfathered to some, but weeded out of more recent contracts due to UAW concessions already made. Still, the cost advantage Toyota Motors (NYSE: TM) and Honda Motors (NYSE: HMC) still enjoy are not because of child labor cheating. More UAW concessions are necessary and they're coming. The UAW understands it has to do its part for the sake of the industry's survival.

The only way to ensure 3 million employees keep their jobs, for the most part, and to be certain these companies have enough bargaining power with the union, is to buy them outright (or controlling interest). As socialist as this sounds, it may be the best way to protect the industry from itself. Would the union fully grasp the levity of the situation and give back enough otherwise; and would management think enough about the employees or the greater good otherwise? Their actions have been questionable in the past. Heck, automakers fought against the turn signal!!! THE TURN SIGNAL!!! I think many of us would agree that they've put profits before safety and fuel efficiency often enough.

So, as it turns out, Main Street isn't much better than Wall Street is it... Gosh, the ugly side of capitalism has never been so exposed. If only people could regulate themselves, maybe greed wouldn't ruin us. But it's not capitalism I blame. I'm a pure capitalist! It's not guns that kill people; people kill people. Look inside yourself and ask, "am I proud of what I've become? Would my father be proud of me and my actions..." Ask those questions of yourself, whether you're on Wall Street or Main Street Detroit. Right now though, it's time for poor old Uncle Sam to say, "I'm your daddy!"

I'm looking forward to your comments, and please don't direct your anger at me (target my opinions freely though). I'm just looking for answers and progress, same as you.


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