Dominos falling

Here's The Cato Institute sharing a little bit of common sense:

Daniel Mitchell, a senior fellow at the libertarian Cato Institute, said the government should have no role in helping the (auto) industry, except to provide positive economic conditions -- "a lower corporate tax rate, less red tape and things like that," he said.

Mitchell added that if the government takes control of the auto industry, it will be a recipe for disaster.

"The free markets allocate resources and reward people for doing good things and punish them for doing dumb things," he said. "Government misallocates resources and rewards people for doing dumb things and punishing them for doing good things.

"We're in this very dangerous situation where you're going to have people, Harry Reid and Nancy Pelosi, making these decisions," he said. "I wouldn't trust these people mowing my lawn, much less running a private company."

That quote is a little dated. As we now know, last Friday Congress approved a $13.4bil loan package to GM and Chrysler. Lest you think that money comes without any strings attached, here are the terms of the deal:

Fact Sheet: Financing Assistance to Facilitate the Restructuring of Automobile Manufacturers to Attain Financial Viability.

Purpose: The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing.

Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second of TARP funds.

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

Definition of Viability: A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan.

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:

• Firms must provide warrants for non-voting stock.
• Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
• Debt owed to the government would be senior to other debts, to the extent permitted by law.
• Firms must allow the government to examine their books and records.
• Firms must report and the government has the power to block any large transactions (> $100 M).
• Firms must comply with applicable Federal fuel efficiency and emissions requirements.
• Firms must not issue new dividends while they owe government debt.

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

• Reduce debts by 2/3 via a debt for equity exchange.
• Make one-half of VEBA payments in the form of stock.
• Eliminate the jobs bank.
• Work rules that are competitive with transplant auto manufacturers by 12/31/09.
• Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.

Basically they have 3 months to get their acts together. Judging by how long it has taken them to not adjust their business models in order to stay competitive in the first place, it is laughable to think that they will, in fact, get their acts together in a mere 3 months time. No doubt they will ask for a time extension or use the "non-binding" clause to bend the terms more to their liking when nobody is looking. Besides, in this day and age a $13.4bil loan is almost a rounding error, so who really cares if they pay it back at all?

Do not get me wrong, I want to see our domestic auto industry succeed. From what I understand GM's Rick Wagoner is a helluva nice guy to boot, but I do not think that any good will come from the government getting involved in what should be a private industry affair. The excessive statism that we are now witnessing will only serve to undermine the economy in the long run.


This whole auto industry bailout story is old news already. Though if you listen closely, you'll hear jostling and footsteps as the commercial property developers line up for their alms from Uncle Sam.

Where does it end?