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Monday, December 15, 2008

Who Benefits from an Auto Industry Bailout?

Who are the beneficiaries of an auto industry bailout?

Do the executives asking for a handout benefit? Certainly. They may treat the corporation's assets as if it were their personal property. Even though they're accepting a $1 salary, they're still getting options. They still get their corporate jet and other expenses paid by the corporation. If there's an inflationary boom, then all the corporation's debts may be repaid with devalued money, leading to profit. Inflation makes all those stock option grants very lucrative.

Do the shareholders benefit? They do benefit a little, to the extent that the bailout money increases the corporation's value. Shares in an auto industry are essentially a call option. If there is inflation, which means the debts can be repaid with devalued money, then shareholders may benefit. If the automakers can start manufacturing cars for a profit, then shareholders may benefit. However, most of the benefits of a recovery or inflationary boom will go to the creditors or executives.

Do the unionized employees benefit? Only a little. In bankruptcy court, they would be forced to make concessions. However, the workers have already made concessions similar to those they would be forced to make in bankruptcy court. By definition, the union wage scale cannot drop below the free market wage for those workers, because then they would quit and the automaker would have job openings.

Unions help add the illusion of legitimacy to the auto industry monopoly/oligopoly. The State bureaucrats may say "Workers aren't exploited! They're unionized!" This ignores the fact that people pay higher prices for lower quality cars, due to the State-licensed monopoly. A skilled mechanic cannot easily start his own car manufacturing business, due to State regulation of the market. Really smart students don't bother learning auto repair or manufacturing, because your only options are to work directly or indirectly for the auto cartel. When automobiles were first invented, there were lots of small car companies, and it was as hot as the ".com" boom, where anybody could start a car manufacturing business (web business).

Here's one way you could figure out how much a unionized job is worth. Suppose an auto worker could sell his job to someone else. How much would it be worth? It'd probably be worth $100k or more, due to the expectation of earning an above-market wage for your entire career. Also notice this means an autoworker will obey the rules, lest he lose his job, his perks, and accumulated retirement benefit.

Who are the real beneficiaries of the auto industry bailout? The creditors are the beneficiaries. They bought the debt at junk prices, and due to the bailout, they will get paid off. The creditors don't just have an unleveraged long position in that debt. They borrowed at the Fed Funds Rate of 1% and bought debt at junk yields of 10%-20% or more, using leverage of 10x or more. They will now get that debt repaid at face amount, for a huge profit.

The beneficiaries of the bailout are the usual financial industry insiders. The auto executives are the ones asking Congress for the bailout, but the bankers will be the prime beneficiaries.

Also, Chrysler is currently owned by a hedge fund. A bailout means the State is protecting them from loss on their investment. Of course, the hedge fund that owns Chrysler is only accepting bailout money if they're getting a good deal.

Even though the auto industry is incredibly inefficient, State restriction of the market makes it hard to start a new car manufacturing business. The bankers love the fact that each industry is organized as a cartel/oligopoly. This guarantees that their loans will be repaid, or there will be a State bailout.

What ever happened to chapter 11 bankruptcy? Why not allow the auto manufacturers to file for bankruptcy? That used to be the way that insolvent, but potentially profitable, businesses were reorganized. The bankers who lent the automakers money knew about the risk. They should be forced to take the loss in bankruptcy court, rather than receiving a bailout.

Due to the bailout, bankers who bought auto industry debt at discount/junk prices will now have their investment paid off at face amount.

The auto industry bailout is another way that the financial industry loots the rest of society. Superficially, the unionized workers are benefiting from the bailout. Actually, financial industry insiders will be the prime beneficiary.

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