Sunday, November 09, 2008

Bailout 'scope creep'

It's a term most often heard in engineering, architectural and technology projects: scope creep. It's when you make your plans and start your project only to find, along the way, a bunch of new 'wants' or ideas that participants want included.

Since you're re-doing this, why not re-do that at the same time? It's not always that easy and it usually ends up costing a lot more than anticipated.

That's exactly what is happening with the bailout. The legislation was supposed to be limited to the financial markets - to provide liquidity in the financial sector so loans could continue to be made and institutions that were critical to the liquidity/credit areas would be solvent.

Now, it's the automotive industry. Remember when they got their own legislation for $25 billion? Well, that just wasn't enough. Now automotive CEOs and many in Congress are saying that some of the $700 billion in the bailout bill should go to the auto industry.

"In a letter to Treasury Secretary Henry M. Paulson Jr., House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry M. Reid (D-Nev.) asked Paulson to "review the feasibility . . . of providing temporary assistance to the automobile industry during the current financial crisis."

The letter notes that Congress granted Paulson broad discretion to use the bailout money to "restore financial market stability. A healthy automobile manufacturing sector is essential to the restoration of financial market security," the letter continues, as well as to "the overall health of our economy, and the livelihood of the automobile sector's workforce."

If the request is granted, it would expand the federal government's role in private enterprise far beyond the financial sector."

That's scope creep.

The logic is that survival of the American auto industry is critical to the economic health of the country. The problem is, that logic can be applied to any number of industries - and the expansion is never ending. Fortunately, the Treasury Department, so far, is restricting its focus to entities that are subject to federal regulation.

Friday, General Motors reported a $2.5 billion net loss for the third quarter. Ford's quarterly loss was $129 million.

GM has lost $57 billion since 2005. Ford has lost $24.5 billion since 2006. But these losses are only part of the problem.

"Going into the third quarter, GM had 21 billion dollars on its books. By the end of September, that had plunged to 16.2 billion dollars, coming perilously close to the 11 billion to 14 billion dollars it says it needs on hand to keep the company operating.

Ford burned through 7.7 billion dollars in the quarter, though its reserves are nearly twice as richer thanks to a massive line of credit it acquired last year.

Though it doesn't report its full financial data, the privately-held Chrysler LLC is also thought to be fast running out of cash: one reason, analysts believe, why its parent, Cerberus Capital Management, was so eager to sell Chrysler to GM.

That deal, however, was scuttled by GM, and observers believe Cerberus may now rush to find another buyer as the economy continues to worsen."

So my first question is: what have they been doing since 2005/6 to address their obvious problem? And why must I, as a taxpayer, save them when they haven't indicated their willingness to do what is necessary to save themselves?

They're already getting a $25 billion low-interest loan package to help them retool their factories to produce fuel-efficient vehicles that meet tough new emissions standards. (That Congress passed new emissions laws whose compliance needs to be funded by said Congress is a problem in the first place.) These are funds coming from you and me to reward them for not paying attention to the market and our wants in terms of vehicles over the past several decades.

"But the seeds of the current crisis date back to the last big oil shock, of 1979, which helped the Japanese gain a foothold for small, fuel-efficient products.

As gas lines faded from memory, the Asian automakers continued to gain ground by focusing on quality, something GM, Ford and Chrysler have only recently come to grips with -- and with varying degrees of success.

Further compounding the situation, Detroit has been consciously slow to embrace changes in the American automotive marketplace, especially the shift from big trucks to small, fuel-efficient passenger cars.

And even where it has, lamented Consumer Reports' auto analyst David Champion, it has needed "more models that were exciting for people to buy.""

Yes, the auto makers have started their redesign efforts which is why they say they need additional money. Their new designs, which they hope will lead to long-term success, need the influx of capital in order to bring them to market. Without such cash infusions, they are likely to cut back on the very designs the market desires in order to save money.

And there is some relief in labor costs anticipated beginning in 2009, which will also help. But the argument is that this industry is 'too big to fail.'

Again, that's scope creep.

Many criticized the warnings being shouted by others of the 'slippery slope' the government was approaching. It's here - and it will be even harder to stop the slide now that we've begun.


The A-Hole Lawyer said...

The article also quietly cites to Lee Iacocca (sp) saving Chrysler after a $1.2 billion loan, by cutting costs, executive compensation, gaining MAJOR concessions from the unions, and developing the mini-van.

So Big 3; time to cut costs, trim waste, reduce wages and concessions to the unions, and get inventive.

The doom and gloom, chicken little argument Pelosi, Reid, and Obama's new adviser JENNIFER GRANHOLM, are presenting could - as Maggie points out - be applied to many industries in America, and soon the Government could have an "ownership interest" in all the means of produciton.

"BACK IN THE USSR! you don't know how lucky you are."

Thats the creep (not the shady guy who hangs out at the club cruising for younger girls) the creep of government's incremental intrusion into our lives. Do liberties get stolen away all at once? No, that might lead to revolt. But small, steady, paced reductions in freedom through government regulation is how rights get trampled with the public unaware.

Walter Williams uses the ban on smoking as an example. Was it all at once? No way. But in the late 70's few blinked when the argument that restricting smoking on planes was ok, then schools, then government buildings, then public places. No where in that progression were private property rights protected, and soon it will be abuse for parents to smoke at home.

Creep, creep, creep....Uncle Sam, with fear in place - you don't even have to try and sneak up on us.


Tim Higgins said...


Why should we be surprised that the Democratic leadership is seeking to payback an industry which almost completely employs a union work force?

There are no god guys here. Management focused on the short-term profits of muscle cars and big trucks and SUVs, ignoring the impending fuel standards and rising oil costs. Now that their failures have come home to roost, they do their John Belushi imitation from "The Blues Brothers" kneeling in a sewer and screaming that it isn't their fault. Like the Carrie Fisher character, we soften, smile, and are beguiled by the kiss; only to be dropped in the muck as our erstwhile partners runs away on business as usual.

Personally, the Big Three don't worry me as another of those shining examples of fiscal responsibility, Starbucks. Where will the world be without a $6 cup of coffee in these troubled times?

navyvet said...

If union contracts are not renegotiated...any efforts to "Help" will fail....

Am not holking my breath...

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