Right now, my stimulus money is earmarked for a Ford Fusion (see, Iím Buying A Ford). According to the experts, itís as good as a Camry or an Accord in performance and reliability and better in safety and fuel economy. However, it looks like G.M. and Chrysler are going to get more bailout money Ė amounts so staggering that Iím pretty sure even I could build a good car. So letís take a look at the likelihood of them coming up with something better than a Fusion.
In the initial bailout, G.M. got $9.4 billion, Chrysler $4 billion. G.M. got another $4 billion Tuesday after the government approved its restructuring plan. This brings their current total to $13.4 billion. However, G.M. is now saying that it will need up to $30 billion. Chrysler says it needs up to $9 billion.
It wasnít that long ago that any size bailout request would have been laughed off. But with the way our political leaders are throwing our money around, I have no doubt they will readily cough up the full $39 billion.
The precedent set by the Bush Bailout and the Obama Recovery & Reinvestment Act has sunk us to uncharted depths of gullibility. It has also propelled our political leaders to uncharted heights of irresponsibility. When asked if the government should pay up to save G.M. and Chrysler, Representative Sander Levin (Democrat, Michigan) indicated that since we gave $150 billion to AIG, it shouldnít be a problem. Such absurd statements, however, may be the best way to spin it. Because when you throw in the amounts dealers and parts suppliers are requesting, the total auto industry bailout could reach $130 billion. In the minds of people such as Levin, we wonít be paying $130 billion; theyíll be saving us $20 billion.
Certainly this is fiscal insanity. Indeed, I thought we would revolt in the streets against the original, now measly, $13.4 billion bailout. Barely two months later, the price tag has almost tripled to $39 billion, and thereís hardly a whimper of skepticism. I guess weíve just been conditioned to accept politiciansí unbridled carelessness with our tax money. Now that I think of it, if I were buying something for other people with a virtually unlimited amount of other peopleís money, I probably wouldnít care either. If I was buying something for me with my limited supply of money, Iíd be much more thoughtful and much less capricious.
In any case, with that kind of money they should be able to build some really good cars. But, alas, there are catches. Even though the geniuses in Washington would have us believe they know how to run the auto industry, what else would you expect when the price tag is more than 20 times the market capitalization of the bailout targets? For example, the total value of G.M. stock is $1.33 billion Ė the amount G.M. could be purchased for lock, stock and barrel. There has to be a very big catch if the government is willing to pay as much as $30 billion to save something that is only worth $1.33 billion.
So unlike Ford, G.M. and Chrysler must assure Obamaís auto industry task force that they wonít keep coming back for more money. To do this, they must work out a debt-for-equity exchange deal with their bondholders. G.M.ís goal is to trade enough stock to reduce their debt from $63 billion down to about $30 billion. These creditors would take notes worth 30Ę on the dollar and stock. However, there are at least two problems with the scheme. First, itís not likely G.M. will get many existing bondholders to go for it when they are offereing 50Ę on the dollar to the U.A.W. Second, these guys would be wiped out in bankruptcy court. They know they would have to stand in line behind quite a few lenders: the holders of secured debt, the government (all bailout money would have to be paid back next), and any vendors considered by the bankruptcy judge to be critical suppliers.
It doesnít look promising, but maybe theyíll still be able to build some decent cars. They canít give all the money to the U.A.W. and bondholders. But they might. And they might go bankrupt before they get to the good cars. Enter, again, the geniuses from Washington D.C. In the scramble to blow our tax money, make auto industry executives look like greedy morons (themselves as intelligent altruists), and pay off political favors, they have overlooked what is probably the most important catch of all Ė selling lots of cars that lots of people can afford. Building cars that appeal only to the rich and politically correct wonít cut it.
The likes of Senator Charles Schumer (Democrat, New York) have decided that the future of the industry should be structured to build plug-in hybrid electric cars such as the Chevy Volt. On paper, the Chevy Volt got my attention. Existing hybrids are a hoax. They cost thousands more than their gasoline counterparts and their fuel economy is hardly impressive. For example, the hybrid Camry mpg rating is 33-city/34 highway. I had a 1978 VW Rabbit that got 38 mpg. The Prius has a better mpg rating (48 city/45 highway) but is feebly slow, taking 10.5 seconds to reach 60 mph. I could have beaten its fuel economy with the diesel version of my Rabbit, rated at 53 mpg.
Itís hard to believe that all of the fuel efficiency development in the almost 40 years since the Arab Oil Boycott has produced such pathetic results Ė evidently, negative results. Owners of todayís hybrids have been duped into believing that they are saving the planet. They pay a premium, with alacrity, for the privilege. But they are paying extra for vehicles that are less fuel-efficient than many 1970 vintage internal combustion engine cars. Todayís hybrids donít even make sense at $4.00/gallon.
The Chevy Volt, on the other hand, doesnít even use gas for the first 40 miles. Thatís good news for me. It means that for more than 80% of my driving, I wonít use a drop of gas. You canít beat 80% operation at zero pollution. Then again, Iím not sure how much it will increase my electric bill when I plug it in at night to recharge its giant lithium-ion batteries, not to mention the extra air pollution generated by the coal-fired power plant (about 50% of U.S. electricity is generated from coal) supplying electricity to my house.
Will the plug-in hybrid electric car be the "game changer" or "paradigm shift" itís hyped to be, thereby confirming that our tax money is being wisely spent? Well it doesnít look like the Volt is going to pave the way to G.M.ís recovery. Its MSRP is $40,000 and G.M. (which, for perspective, sold over 15 million vehicles in 2005) expects to sell ďtens of thousandsĒ of Volts in the first year. All of these will be produced at a loss and G.M. isnít sure when the first year will be. Promised for the 2010 model year, there are significant technological obstacles that must be overcome with battery development. Furthermore, the company that will produce the batteries is unknown.
This is not shaping up to be a car that a lot of people will want, assuming they can afford one. Its 0-60 mph time of 9 seconds is exceedingly slow for a $40,000 car, explaining why some refer to the Chevy Volt as "a Viper for tree huggers." But tree huggers will like neither its fuel economy nor the pollution it spews after 40 miles. This is when its gasoline engine kicks in and must generate extra horsepower to transport the hundreds of pounds of now lifeless batteries. Tree huggers should also worry about possible groundwater pollution issues when these batteries are not properly recycled. Everyone should worry about maintenance and repair costs, especially backyard mechanics.
Yet the Obama Administration wants G.M. and Chrysler to retool their factories to build cars like the Volt. The urgency this time is that we must begin to build a green economy. The imminent bankruptcy of the auto industry is the excuse. But I donít think itís that close. Otherwise, Ford would have joined the begging. And the descent of G.M. and Chrysler has been going on for many years, although President Obama seems to be hastening that end with his incessant economic fear mongering. Despite economic conditions, people still need cars. So whatís the hurry? Let them recover on their own, as Ford is doing. Without government meddling, they will probably build cars that people want and can afford. There will be some pain, but not $39 billion worth.
Instead, G.M. and Chrysler seem to be as happy as Congress in using the threat of bankruptcy to extract more tax money. So far, itís working. The Obama Administration is caving in. Ironically, if bankruptcy is to occur, the strings being attached to the bailout are likely to be the cause. That is, saddling G.M. and Chrysler with additional costs, delays, ridiculous CAF… standards and technological hurdles to build cars that most people wonít want will surely lead to bankruptcy, urgently. And, as syndicated columnist Charles Krauthammer put it:
ďÖThe new Detroit churning out Schumer-mobiles will make the steel mills of the Soviet Union look the model of efficiency.Ē
Given the state of the Chevy Volt, Iím not counting on it being available. Thanks to the Obama Administration, itís not looking like I can count on G.M. being available. So Iím still buying a Ford. The Fusion (or the Focus, if gas prices go back up) beats the existing hybrids hands down. I can get a new one for Ĺ the cost of the Volt (assuming government-induced ruin doesnít beat them to the show rooms). And since it isnít being pulled into the Schumer-mobile abyss by the strings of the bailout, Ford will probably still be around when I get my stimulus check.