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This Wednesday, November 19, the Senate is expected to vote on a bailout for the U.S. auto industry. The cost is expected to be $25 billion. At the moment there are not enough votes to pass a bill, but proponents are hopeful that they can secure the necessary votes to pass.
The big three have had problems since the 1970s. This crisis is different, though. Ford, GM, and Chrysler are having problems getting funding from banks. GM and Chrysler discussed merging, but apparently that is not going to work out.

They want the bailout to update their factories to make more fuel efficent cars and hybrids to compete with the folks from Japan. The hearings this week produced two questions that shold be answered, though. First, lawmakers want to know what will be different now? Management is not going to leave, so what is the guarantee they will change? For years Detroit has relied on the larger profit margins of the likes of Tahoes, Silverados and Durangoes, shunning the fuel efficient market. Year after year, though they lost market share to their Japanese competitors, who concentrated on the fuel efficient market. Second, when pressed by lawmakers to prove they only needed $25 billion they could not. None of the company presidents could tell Congress just how much money they would need. Lawmakers suspect they will need more. They just got finished giving AIG more. They are now up to $150 billion. Up from $85 billion.

While this credit crisis is hitting the entire automobile industry, including Toyota, Honda, and Nissan, it is the U.S. auto makers that need the bailout. Companies have the responsibility to plan for the future. While, ultimately no one can forsee the future, the Big Three guessed wrong, and now should pay the piper. There are two problems with government bialouts. First, it prevents bad behavior from being punished. Everyone likes profits, but losses are just as important. Losses tell management that there is something in their business model that needs correcting. For years, Detroit has lost market share and money and continued to ignore the signs that it needed to change. It made unreasonable promises to its workers and retirees, and now there is a very good chance that taxpayers will have to foot those bills, in addition to providing short term cash for long term problems. Second, bailouts give other industries an excuse to come to Congress and ask for money. One of the arguments GM, Ford, and Chrysler have made the last couple weeks is that if Congress can give banks $700 billion, surely they can spare $25 billion for them.

Remember this all started with Bear Sterns in the Spring. So many companies have been deemed too big to fail. (e.g. Bear Sterns and AIG) So many investments have been deemed too complicated to let unravel. (e.g. CDOs) These contentions may be true. But, all of the doomsday scenarios assume that no one will do anything while the economy implodes. As I discussed in previous blogs, this crisis is being caused by over valued assets, primarily real-estate related. In such situations, investors holding these assets sell them, and others, wait for the price to get to a palatable level, and then buy them. We have seen the selling. The buying, however, has been sporadic, though. Some investors are scooping up foreclosures, but, for the most part, investors are waiting for the housing market to get closer to the bottom, which it cannot do unless the government puts away its wallet and allows prices to stabilize.

In a post script, Congress has asked the Detroit automakers to come back with a plan. They anticipate this to occur in a couple weeks, at which time they will again consider giving the Big Three a bailout. But, nothing will change. What needs to happen is the automobile industry, as well as the financial service industry, consumers, and anyone else that has or will get a piece of the bailout pie, needs to be left to fend for themselves. Doomsday will not happen. What will happen, if we allow it, is that other, stronger companies will buy the sick firms, and pick up the market share they deserve. In addition to getting us out of this financial mess quicker, it will show companies that they cannot count on the taxpayer to bail them out of the difficulties they got themselves into.