Auto Industry: Cheap at Twice the Price

This post may be far more interesting a year from now, or five years from now than it is presently. At the moment the auto companies are in an epic struggle to extract loans from the federal government to stave off the prospect of a bankruptcy filing.

First they showed up on private jets looking for $25 billion. Then a few weeks later, drove to Washington and asked for $34 billion. The House offered and approved $14 billion, which the Senate summarily rejected.

Now questions abound. Will the White House step in and appropriate TARP funds? Will the auto companies file bankruptcy pre emptively? Can a new package be put together before the auto makers run out of cash? Will American consumers buy products from a bankrupt company?

“Enough already. Lend them the cash.”

And I say this not as an American taxpayer, but rather wearing my private equity investor hat. The reason is simple: It’s chump change. If one of our portfolio companies needed cash, and the amount required was, on a relative basis, so small that it did not even require disclosure to our investors, we would do it in a heart beat.

Let’s examine the chump change statement for a moment. The $14 billion is:

• 2% of the TARP funds allocated
• 0.55% of 2008 federal receipts
• 0.47% of 2008 federal outlays
• 0.1% of 2008 gross domestic product

And if you have ever spent some time examining the federal budget – which every American should do – it will help you put the $14 billion request into perspective. Specifically, $14 billion is:

• 2.1% of the estimated 2008 defense budget
• 2.3% of estimated Social Security payments in 2008
• 3.6% of estimated Medicare expenditures in 2008

When looked at in this light, I begin to wonder what all the hearings and hand wringing is about. It’s not like this is the first time Congress has authorized and spent $14 billion. It seems like a lot of high minded posturing.

I understand tough love. And I understand the reasoning behind the statement that ‘We will doom the auto companies to failure if bail them out this time.’

But I also understand this: tough love is always an option. If we loan the auto companies $14 billion and they fail, there will be plenty of time for tough love. But at the moment, it’s relatively cheap to see if they can turn themselves around, while cost of standing on principal, in terms of jobs and the multiplier effect of their loss, seems very, very high.