Raising significant equity capital would, if even possible, result in massive dilution. No private bank in the world will loan them a dime, and let's not naively blame that solely on the banking crisis. Banks weren't rushing to loan the U.S. auto industry any money before the meltdown either. The capital markets simply don't deem them worthy of investment.
Our legislators, however, always think they know better, so they've rushed in to supply the industry with $25 billion that no other sane institution/investor would provide. To add a touch more insult to the U.S. taxpayer, this loan is not accompanied by an equity stake in the participants, and these loans are coming at a below-market interest rate. According to a
Detroit Free Press article:
Under the loan program, automakers and suppliers could borrow at interest rates close to what the U.S. Treasury does -- roughly 5% -- rather than the 15% they would have to pay on financial markets. On a loan of $1 billion, that's a savings of $100 million.
That, of course, is $100 million less that the U.S. taxpayer will make from this "investment," and that 5% interest rate is lower than even our best companies can get in the market. Let's remember this the next time we read how our U.S. officials are complaining about foreign tariffs, subsidies, trade barriers, and unfair trade practices. This is no different.
Why is the government intervening to prop up these companies? As I detailed in my article "
General Motors - It's Your Money Demand Better", GM has lost a cumulative $33 billion since 1993. Shouldn't it be clear by now that the U.S. has no competitive advantage in auto manufacturing? Is the auto industry really vital to the US? If our ambition is to solidify our position as a leader in the manufacture of inferior and unprofitable products, then by all means, this loan package is a master stroke.
I don't know about you, but I don't need GM, Chrysler, or Ford. There are plenty of foreign-owned car manufacturers making a better product at a better price who are eager to sell to me. Furthermore, many of these competitors have been opening up manufacturing facilities and creating jobs in the U.S. over the years. They have the cost structure and manufacturing know-how to produce profitably, and some of them have been leaders in the development of more fuel efficient vehicles. This loan supports those who have failed and is a slap in the face to every strong competitor.
Clearly, the only reason the government is making this loan is to stem the loss of thousands of jobs that would result from the failure of the industry. It's all politics, all the time. Where do we draw the line? Nokia and Research In Motion have better cell phones than Motorola, and Motorola has had to cut jobs. Why don't we give Motorola a sweetheart deal? Our U.S. furniture manufacturing industry has suffered due to low cost Chinese competition. Let's throw billions at them. And what about our Swiss Army knife manufacturers? The Swiss are killing us! Let's give them some cash so they can compete!
Disclosure: The Rubbernecker is long the Bankruptcy Code and short arsonists.
