The Great Deformation (115 page)

The claim that the entire auto industry was at risk and that the nation faced the loss of more than a million jobs is plain stupid propaganda. Worse still, the pro-industry shills who issued it, such as the Center for Automotive Research, actually received substantial funding from taxpayers.

In truth, the North American auto industry was at the time swamped in excess capacity—a reality punctuated by the plunge of capacity utilization to just 27 percent at the January 2009 bottom. And it remains amply supplied even after nearly 3 million units of capacity have been shuttered. On a three-shift basis and with activation of mothballed plants, there are still 22 million units of light-vehicle assembly capacity in North America, but no economic scenario in which sustainable demand for NAFTA (North American Free Trade Agreement)-built cars and light trucks would exceed 16–17 million units.

At the end of the day, the GM bailout was about whacking up the wage bill between plants north and south of the Mason-Dixon Line. Under steady-state conditions the wage bill for the power-train, stamping, and assembly operations of US OEMs is about $15 billion, representing around
300 million man-hours at a fully loaded average cost of $50 per hour. This flows from the basic math of auto sales, output, and productivity.

Because of the deep-seated brand preferences and buying behavior of the American consumer, it can be easily stipulated that imports will capture 20–25 percent of the US market, as they have for several decades. Accordingly, assuming a steady-state US demand of 15 million light vehicles, about 3.5 million vehicles will be imports and 11.5 million will be sourced in North American plants, including about 10 million units from the US assembly plants operated by a dozen NAFTA-based auto OEMs (the other 1.5 million units would be sourced in Canada and Mexico).

From these facts of auto industry life, the political food fight over the auto wage bill can be seen as the stark, straightforward battle it was. Senator Richard Shelby of Alabama fought for the free market and the twenty-seven newer, more efficient auto assembly complexes mainly in the South. Ron Bloom, the labor bosses' designated hitter on the White House auto task force, fought for the fifty older, high-cost UAW-organized plants in the north.

When the dust settled after GM's whirlwind forty-day faux bankruptcy, several billions of the national auto wage bill had been arbitrarily shuffled from Senator Shelby's side of the line to Ron Bloom's. Had nature been allowed to take its course, GM Lite would have emerged from bankruptcy with 25,000 hourly jobs, representing about 45 million annual man-hours. Owing to the White House political fix, however, GM ended 2011 with 48,000 US hourly jobs, representing about 85 million man-hours. At $60 per hour, the 40 million man-hour difference made for a lot of UAW political gratitude—about $2.5 billion worth to be exact.

HOW THE FREE MARKET WAS LOST AND THE 2012 ELECTION WON

Yet even this stupendous figure does not capture the full measure of gratitude the Obama administration paid to the UAW. None of GM's “bad debts” related to labor issues were canceled or even significantly hair cut—not pensions, not retiree health care, not wages. Auto czar Steve Rattner removed all doubt when he later told the Detroit Economics Club, “We did not ask any UAW member to take a cut in their pay.”

Needless to say, this capricious $2.5 billion shuffle of wages from the plants of one region to those of another generated no public welfare benefits whatsoever. American consumers will not buy one more car because of the bailout, even if they are presented with about 600,000 more vehicles (i.e., reflecting GM's current 19 percent market share rather than 15 percent)
coming out of GM plants and the same amount less coming out of Ford, Toyota, Nissan, Honda, and Hyundai plants.

Likewise, there are approximately 20,000 auto dealers in the United States and they, too, experienced not a whit's gain in volume—only a shuffle among brands. In fact, all the usual suspects trotted out by bailout apologists fit this same template. Everything claimed as a “benefit” from the bailout—from higher payroll checks to increased electrical power purchases, plant maintenance contracts, hazardous waste hauling volume, local taxes, and more contributions to the United Way—amount to nothing more than a reshuffling of these expenditures among approximately two dozen counties within the United States that host the major auto OEM complexes.

During the two years after the bailouts, auto sales recovered smartly from the 9–10 million unit panic lows of late 2008 to a 13–15 million unit level after mid-2010. However, this natural but modest rebound in final sales had a bullwhip effect on production of parts and finished vehicles, because the auto industry's supply chain had been virtually depleted of inventory during the first half of 2009. In fact, never before in peacetime history had the automotive supply chain's cupboard been this bare. Accordingly, the ballyhooed “booming” production of 2010–2011 was actually just an aggressive one-time fill of this depleted inventory pipeline.

Not surprisingly, in the midst of this inventory refill in November 2010, Wall Street triumphantly brought GM public at a nosebleed valuation. The fast money then bid up even higher during the next few months, so that at its early 2011 peak GM was valued at $60 billion.

Needless to say, that wasn't the real thing—the White House auto task force had not sprinkled GM with fairy dust. Instead, Detroit's lumbering dinosaur was temporarily minting profits by restuffing its dealer channel with a new round of excessive inventories and burying some of its running costs in the massive cookie jar of “fresh start” accounting reserves created upon its bankruptcy exit. Likewise, money printing by central banks the world over had engineered a short-lived auto rebound that had staunched GM's losses in Europe and generated sales and profits boomlets at its operations in Brazil and China.

By the end of 2012, however, GM's miraculous recovery was all over except the shouting. Stuffed dealer lots in the United States put the clamps on production and profit in North America. At the same time, GM's European operations plunged into multibillion-dollar losses, Brazil headed south, and the bulging profits out of China were rapidly vanishing as red capitalism entered its hard landing phase.

The White House's forty-day rinse cycle had cured nothing. But it did
produce a temporary rebound that was perfectly feathered into a completion date of November 6, 2012. Pure and simple, the leading edge of President Obama's reelection was in the General Motors (and Chrysler) precincts of Ohio.

The pro-bailout triumphalists who celebrated GM's post-IPO surge because they didn't recognize a Wall Street ramp job when they saw one will now receive a stinging rebuke. GM is heading for a relapse into red ink, and its now vastly diminished market cap has already shed much of its post-IPO value.

What happened between mid-2009 and mid-2012, therefore, was not a miracle in Motown; it was just another lamentable episode of crony capitalism on parade. Wall Street fixers—first Secretary Paulson and then auto czar Steve Rattner—had wantonly eviscerated the curative mechanisms of the free market. The outcome was “winners” picked by Washington and “losers” who didn't even know what hit them; that is, taxpayers who had to foot the bill and competitors from whom the bailsters stole the business.

In this respect, Chrysler had also been kept alive when there was no earthly reason for it in a North American market already served by seventeen different global suppliers. Any number of them would have gladly purchased its only viable components, the Jeep franchise and Dodge Ram trucks, but none would have been interested in its rundown UAW-controlled car plants.

Indeed, the wage bill at the latter plants was about $1.5 billion, meaning that from the artificially resuscitated parts of GM and Chrysler combined, the auto task force had gifted the UAW with a wage bill of about $4 billion that would otherwise have gone to workers at the North American plants of Hyundai, Toyota, Honda, Ford, BMW, and six other OEMs. By the same token, the auto task force did not add one dollar of sales or one job to the supplier base; it just spun the roulette wheel on the available business, shifting the mix to parts plants in the rust belt from those in the mid-South.

Nevertheless, even this arbitrary tampering with the auto supply base came at a large price. The unmistakable message of the bailout was that the auto OEMs are also in that privileged class of “too big to fail.” Even more importantly, it demonstrated unequivocally that the White House is for sale and, therefore, that the nation's fiscal solvency and free market economy have been mortally compromised.

THE AUTO BAILOUT LOBBY:

BORN AND BRED IN THE ECCLES BUILDING

Self-evidently, it was not the car company executives who famously brought their tin cups to Washington in Gulfstream jets that pulled off the
auto bailouts. Nor could this blatant heist have been accomplished even by the assembled might of the UAW alone. In truth, the auto bailouts happened because the entire auto supply chain—from toolmakers and parts suppliers to vehicle haulers and car dealers—was up to its eyebrows in debt.

The era of bubble finance had left this vast swath of the US economy massively leveraged and therefore vulnerable to a cascade of bankruptcies and harsh downsizings in the event of a material decline in car sales. Consequently, when new car sales temporarily plummeted in the weeks after the Lehman failure, the level of desperation across the entire auto chain was palpable, and especially so among car dealers.

There was nothing about the sheet metal moving business that wasn't immersed in debt. Dealers had hocked their showrooms and had borrowed nearly 100 percent of the wholesale value of cars on their lots through floor plan loans. Likewise, they were utterly dependent upon loans and lease financing, much of it with deep embedded losses, to support their retail customers. All of this was the handiwork of the Greenspan-Bernanke Fed's financial repression policies and the resulting destruction of honest price signals in the lending markets.

Not surprisingly, the nation's 20,000 auto dealers and the 2 million job holders reported by the BLS for “motor vehicle and parts dealers” were not about to acquiesce to the harsh justice of the free market—not after Wall Street's ten giant banks had lined up in Hank Paulson's office on October 10 to receive checks for $10 billion to $25 billion each. And so a mighty caravan of car dealers figuratively descended upon Washington demanding an auto bailout. Leading the pack was the nation's largest car dealer, a giant pyramid of debt called AutoNation and its shrill, crony capitalist CEO, Mike Jackson.

The desperate circumstances of publicly traded AutoNation in October 2008 were not only indicative of the plight of the entire auto dealer sector, but also were a microcosm of the financial deformations that had been visited upon much of domestic business by the explosion of borrowing after 1994. In the final analysis, what became “bailout nation” when the lucre from TARP and the Fed's alphabet soup of credit lines was spread far and wide had actually been born and bred during the Fed's two-decade-long régime of bubble finance.

AutoNation had followed the usual script during this period, beginning with an M&A spree in the latter 1990s which assembled more than two hundred car dealerships representing the entire spectrum of domestic and imported brands. Built on a diet of heavy debt, the company sold about $20 billion of new and used cars annually, from a $2 billion vehicle inventory
financed by “floor plan” loans, and sported brand new showrooms and lots financed either with operating leases or balance sheet debt.

Based on debt and M&A deals, AutoNation's sales grew explosively, rising from $5 billion in 1996 to $20 billion in 1999, but already it was an accident waiting to happen. In typical fashion, AutoNation massively overpaid and overinvested in its dealerships, and was therefore eventually required to take a giant $1.8 billion write-down of goodwill and franchise assets in 2008. As a result, during the six-year period between 2005 and 2011 when it sold $85 billion worth of cars, parts, and service, its cumulative net income of just $50 million amounted to a rounding error. In other words, all of the positive net income it booked during the period was cancelled out by the value destruction represented by its huge asset write-offs.

MIKE JACKSON: CRONY CAPITALIST PITCHMAN

Not surprisingly, AutoNation's longtime CEO, Mike Jackson, has been a pitchman for every raid on the US Treasury that the auto industry has concocted, including the bailouts in 2008–2009 and the absurd waste of taxpayer money called “cash for clunkers” in 2010. During October 2008 especially, Jackson gave voice to a hysterical view on the potential impact of the Wall Street meltdown on the auto industry and Main Street generally.

Sitting on $4 billion of debt at the end of 2007, AutoNation could not afford even a brief slump in the rate of car sales. Its entire inventory of cars was hocked to floor plan lenders, and the real estate and showrooms from which its two hundred dealerships operated were also each encumbered with multi-million debt obligations.

So when the new car sales rate plunged to about 10 million units for a few weeks after the Lehman events, Jackson raced around in Chicken Little fashion yelling that the sky was falling. The reality, however, is that it was an apparent air pocket in auto sales that wasn't real.

In another of the great deformations engendered by the Fed's cheap-money campaigns, the new car sales rate had been vastly inflated for more than a decade. Indeed, the 16–17 million SAAR (seasonally adjusted annual rate) that the industry and AutoNation desperately depended upon included 3–4 million units that were literally being stuffed into the economy with cheap debt.