Transcript of Five Things You Need To Know the Podcast: Are We Facing the "Japan Scenario?"
By
Kevin Depew
Nov 03, 2008 12:50 pm
Just like Five Things the Podcast, only transcribed.
Editor's Note: What follows is a transcript of the Five Things You Need to Know Podcast, featuring Professor Kevin Depew and Cory Bortnicker.
Cory Bortnicker: Welcome to 5 Things You Need To Know: The Podcast. I’m Cory Bortnicker, and joining me is Minyanville Columnist and Executive Editor, Kevin Depew. Kevin, let’s start today with General Motors (GM). Over the past few weeks we’ve seen the government bail out banks and insurance companies, institutions that we know have a direct effect on our lives. Now General Motors, a car company, is asking for a bail-out. Why does GM think it deserves to be bailed out?
Kevin Depew: Well, here’s the story with GM, -- they want to merge with Chrysler. Between the two of them, they feel like they can save about $9 billion a year in cost-cutting by merging the two companies, even though they really don’t have anything in common whatsoever among their models, and it’s not really like they’ve done any business together in the past. This is clearly a desperation move born of the fact that the companies are, frankly, on the verge of going under.
So, in order to make this merger happen, though, they can’t -- they’ve gone out and they’ve tried to raise the money. And all of Wall Street has looked at the deal and said, I’m sorry, we’re not going to do this. They need about $10 billion, and that’s what they’re asking for.
CEO Rick Wagoner went down to Washington on Friday to try to plead with the Treasury Department to make this deal happen, and there’s been some receptiveness there. The feeling is that the Treasury Department may make some of the bail-out money available to GM, possibly in the form of a loan to GMAC, which can technically be classified as some kind of banking institution. You know, they don’t want to tarnish the so-called “bail-out TARP money.”
The bottom line is that even if they were to merge, probably what’s going to happen over the next few years is that you would see a steady stream of layoffs from these two companies, continued more of the same. Because even if the Treasury Department can loan them money to make the deal happen and bail them out now, they can’t make people buy cars.
And the reality is that their business models were predicated -- all the car companies -- their business models were predicated on people wanting to buy cars every three to four years, whether they needed to or not, and also maybe buying more than one car. So that a family of four that might ordinarily have one car or, in some cases, two cars, now the average family of four has over three cars. That’s from the Census Bureau. That was of the last census. I was shocked to see that. More than half the families in America of more than four people have more than three cars. It’s like 3.2 or something. So that’s clearly a business model that is probably saturated, and the reality is that we don’t need to have all these car companies.
The next question is, economically, what would be the impact of if, say, GM were to file for bankruptcy? Well, it’s disastrous. You know, that would be the loss of about maybe four-and-a-half million jobs and you could have health benefits for almost three-quarters of a million people lost.
In addition, you would have economic hardship that you’re already seeing, but even on a larger scale, in companies that provide steel and rubber and plastic, all of these things that the car companies use.
So there’s no question it’s going to have a huge economic impact, but the reality is that -- is that impact going to happen when GM files for bankruptcy, if that’s next year? Or is it going to happen five years from now when GM and Chrysler together lay off all these people and continue down the same path?
Cory Bortnicker: If GM and Chrysler’s businesses are predicated on people buying cars, how would bail-out money actually help them?
Kevin Depew: Well, it doesn’t help them. It doesn’t encourage anyone to buy a car. You’re right. That’s really the hard sell. I mean, Rick Wagoner has tried everything. He reportedly in the New York Times today -- reportedly said that, you know, Hey, this -- GM is -- America is proud of Detroit.
And when companies start appealing to a pride level and some kind of nationalistic, perverted sense of pride about a company, then they’re on their last legs. By definition, I mean, that’s just an absurd argument that, for some reason, because Detroit -- GM symbolizes something about American strength and might, that it deserves the bail-out.
No positions in stocks mentioned.
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2008-11-03 22:18:00
podcast
Excellent and comprehensive. Many thanks for the transcription ! Some of us (OK, maybe just 1 Dill) are in places where the slow internet doesn't let us see the podcast !
2008-11-05 18:06:09
Too big to fail
Kevin says:
""is deregulation a good thing?" Maybe it's not when you start to have companies reach such proportions that their argument is that they're too big to fail. Well, how did they get too big to fail? They got too big to fail because of a lack of regulation. "
This statement made me so upset that I had to register at Minyanville and make this comment. The government sets all rules that define the market. If they create an incentive for companies to become 2big2fail, what will they get? Guess. Companies that are 2big2fail.
GM just follows the incentives and does the right thing when almost going bankrupt. The same goes with banks. Why did Bank of America buy Merrill Lynch?
A market is a regulation by itself. What is a deregulation of the market? A deregulation of the regulation? What is a regulation? A regulation of the regulation? It is more constructive to talk about the rules and incentives that should define the market.
""is deregulation a good thing?" Maybe it's not when you start to have companies reach such proportions that their argument is that they're too big to fail. Well, how did they get too big to fail? They got too big to fail because of a lack of regulation. "
This statement made me so upset that I had to register at Minyanville and make this comment. The government sets all rules that define the market. If they create an incentive for companies to become 2big2fail, what will they get? Guess. Companies that are 2big2fail.
GM just follows the incentives and does the right thing when almost going bankrupt. The same goes with banks. Why did Bank of America buy Merrill Lynch?
A market is a regulation by itself. What is a deregulation of the market? A deregulation of the regulation? What is a regulation? A regulation of the regulation? It is more constructive to talk about the rules and incentives that should define the market.
2008-11-05 19:29:12
"Hey, we're shocked that all this is not working"
Is it possible that they aren't actually shocked but just need to pretend to be since the public wants them to do something to 'fix' the 'problem' and there is nothing that can be done that doesn't involve long term sacrifice and hardship?
Its kind of like in the Wizard of Oz...the wizard doesn't really believe he can fix anyone's problem he just needs everyone to believe he can.
The Fed and the Treasury pretend they can do something to make this go away and we pretend we believe them.
Didn't you get the memo?
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