Auto Bailout

2074 Words Jan 9th, 2013 9 Pages
Should Obama Bail Out the Auto Industry?

Context and Situations

By November 2008, Chrysler’s sales had shrunk 25%. GM posted losses of $18 billion, and Ford lost $11.5 billion. Despite Ford’s elimination of 1/3 of its workforce, GM’s elimination of 30,000 jobs, and Chrysler’s cutting of 13,000 employees, the Big Three were on the brink of bankruptcy. All three testified before both houses of congress asking for loans to avoid default. The Big Three stated their demise would trigger 3 million layoffs within a year, plunging the economy further into recession.

The purpose of the loans was to provide operating cash for GM and Chrysler, and to keep making auto loans available for car buyers. Ford Credit planned to use funds from
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The question is: Did the government structure the financing correctly?

The government decided to take an equity stake at GM and thus was facing the possibility that a substantial amount of these funds would never be repaid. The government has already written off or realized losses of over $7 billion as of April 2012[2]. More losses will come as the government sells its remaining stake in GM and Ally Financial. The Congressional Budget Office estimates that the auto bailout will ultimately cost taxpayers a total of about $20 billion[3]. The Treasury Department is even more pessimistic, projecting that, at GM’s current stock price, taxpayers will lose $23 billion[4].

Consequences

Consequence for the labor unions: In an opinion editorial published by The Detroit News, Mitt Romney not only attacks the way the administration handled the bailout of General Motors Co. and Chrysler Group LLC, but argues that the United Auto Workers (UAW) union benefited from the bankruptcies in wake of contributing millions to Democrats and Barack Obama 's campaign.

This spending greatly benefited the UAW and its members. Without the Administration’s intervention, a smaller bailout would have required incumbent UAW members, not just new employees, to accept pay and benefit cuts. Average labor costs would have fallen to the same levels as the foreign transplants, approximately $47 an hour. While this is still substantially higher compensation than the average
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