Big 3 Executive Summary

Detroit, Michigan grew up around the automobile industry. At its peak, Detroit was the fifth-largest city in the United States, becoming the home to over 1.8 million people by 1950 (Davey, Monica 2013). The prolific population was due greatly to the success of the auto industry in the city. At that time, Detroit was flying high, its name coined “The Motor City” (americaslibrary.gov), and automobiles greatly impacted commercialization. From transporting goods to hastening production, to selling parts, to manufacturing and selling new automobiles, the auto industry completely transformed Detroit. Things seemed

In 2009, the Obama Administration bailed out the General Motors and Chrysler automobile companies. Having begun their decent into bankruptcy in 2008, losing thousands of jobs, sales plummeting forty percent, with a high threat of liquidation, General Motors and Chrysler finally reached government-assisted chapter 11 bankruptcy in 2009. Obama allocated eighty five billion dollars in TARP funds to the auto industry, close to fifty billion dollars of it going to General Motors. The allocated funds were successful in keeping two of the Big Three auto companies afloat, keeping taxes from sky rocketing and saving millions of jobs.

On December 18th 2014 the auto industry bailout ordeal came to a close when the US Treasury Department sold the last of its stock in General Motors, for 19 billion dollars, in the end recouping about 39 billion out of 50.1 billion that was pumped into the Big Three automakers at the tail end of 2008 by the Bush and Obama administrations (Muller). The big question that comes up in the end of this ordeal by many people on both sides of the party line is that, was all this worth it? What would have happened if we didn’t bail out the automotive industry?

In 2008 and the years after, the auto industry along with most other industries suffered greatly due to the recession. This impacted Detroit, the Motor City, greatly. Thousands of people were out of work, many companies leaving the area, and the overall moral of the city changed.

The Federal Reserve made emergency loans to the big companies in order to prevent large banks from failing when their investors frightened. With the stock market crashing, on October 3, 2008, President George Bush signed the Troubled Asset Relief Program into law. TARP used 250 billion dollars of federal money to “bail out” the banks, and later automakers including General Electric. Government-working accountants reviewed large Wall Street banks’ balance sheets and disclosed to the public which were sound in order to instill more confidence within investors.

In the hyper competitive world of today’s mega corporations controlled by the sway of the stock market, giant old industrial era companies rule over the automobile market in the United States as well as large parts of the global automobile market. Companies such as General Motors, Chrysler, and Ford were at the center of it until the economic crisis now known as the Great Recession of the late 2000s. The whole market was declining in sales with General Motors and Chrysler taking the biggest hits while Ford only suffered decline comparable to foreign automakers’, Honda and Toyota, levels due to restructuring in prior years. However, the tipping point was edging closer to bankruptcy with General Motors and Chrysler that ultimately

An article published by the New York Times details Obama’s bailout. According to the article, the bailout was mainly focused towards the auto companies General Motors, and Chrysler. Evidently, this costly bailout was in vain. For example, cars such as the Focus and C-Max Hybrid were being sold at such a low rate that factories producing these vehicles were shut down for over three weeks. Also, due to low gas prices, automobile companies will have a harder time selling fuel efficient cars. This bailout is a great example of why the market should be allowed to regulate itself based on consumer demand. Libertarian economic policies are constructed with this value in

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].

Under the Bush Administration, General Motors and Chrysler auto companies were stuck in a situation that had 2 options; get a loan, or file for bankruptcy and lose 3 million employees. Due to the carelessness of General Motors CEO’s and the failure to create a viable business plan were the reason why they must make this choice that could affect millions of people worldwide. General Motors and Chrysler went to President Bush to look for a loan where Bush then went to the Troubled Asset Relief Program, (TARP) to lend General Motors 9.4 billion and $4 billion to Chrysler. The loan of $13.4 billion (Ikenson) lasted long enough for General Motors and Chrysler to get the next future president convinced that they were worth funding. Although he admitted there was not a viable business plan, President Obama was convinced through the fear of traditional bankruptcy and he decided to help fund General Motors and Chrysler. The Obama Administration decided to have the taxpayers pay for 60% of General Motors and 10% of Chrysler. Obama told a group of General Motor workers, “Your survival and success of our economy depended on making sure that we got the U.S. auto industry back on its feet.” (Ikenson) The greatest concern of the auto bailout is the consequence that could affect people worldwide - “the undermining of the rule of law, the property confiscations, the politically driven decisions and the distortion of market signals” (Ikenson)

In the latter part of 2008, the United States’ economy was rapidly plummeting - the stock market crashed, the housing bubble burst and gas prices skyrocketed. The majority of U.S. based firms faced the reality that they would not be able to survive during such desperate economic times. The U.S. automobile industry, in particular, began to buckle under the depressed economy. The government stepped in proposing a multi-billion dollar bailout to stimulate the economy and restore economic balance. The possibility of this unprecedented government intervention was condemned by many economists. If the government helped the ailing automotive industry, this industry would have to tighten their expenditures and plan for the future to prove to

According to The Economist, the intent was a “jump start the consumption of durable goods, a boost the hard-hit car industry, and an improvement in the fuel efficiency of America’s fleet” (The Economist). But, many organizations, such as aftermarket parts suppliers and auto-body paint companies, opposed the program. Organizations such as these would lose producer surplus since new vehicles would be covered under manufacturer warranties. The older vehicles were required to be disabled and the parts melted down.

This recession hits home with the automobile industry. During this current recession GM is facing the possibility of bankruptcy, but is hoping to be helped out by the government. History

Investopedia, the American auto industry has struggled to keep U.S market shares higher than they were

The financial crisis starting in 2008 and the following recession hit hard the US auto sector. Traditional car makers had to realise that substantial changes were needed in order to maintain their strong position in the

The collapse of GM also results significant impact on their shareholders. Investors in $27 billion worth of GM bonds, including mutual funds and thousands of individual investors, will end up with new stock in a reorganized GM worth a fraction of their original investment. The government's plan calls for 10% of the new GM to be owned by existing bondholders, while a United Auto Workers union health-care fund will own 17.5%. However, Owners of GM shares, which closed at just 75 cents a share on Friday of the bankruptcy week, would have their investments essentially wiped out. So their investors incur enormous loss from it.