The Shotgun Blog
Monday, December 08, 2008
Canadian auto sector bailout one step closer: Big Three submit restructuring plans
After spending $75 billion in taxpayer dollars to bailout Canadian mortgage lenders, the federal government is now in negotiations to bailout Chrysler, Ford and General Motors – Canada’s Big Three automakers.
Today, Industry Minister Tony Clement confirmed he has now received the restructuring plans requested from the automakers.
"I am happy to have received these plans today as they are a part of our due diligence," said Minister Clement. "Before committing taxpayer dollars, we need to review the plans to ensure that they have met our requirements and contain a long-term solution that sustains the industry in Canada."
The restructuring plans include details of cash holdings, an analysis of pension liabilities and the obligatory proposals for building fuel-efficient cars.
While the Harper Conservatives are taking steps to save auto manufacturing jobs in vote-rich Ontario, Alberta's resource sector economy has been offered no reprieve from low energy prices and poor access to investment capital. Finance Minister Jim Flaherty has refused to reverse his decision to scrap the income trust tax structure favoured by Western Canadian oil and gas companies looking for financing, and by seniors looking for investment income.
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The government hasn't spent a cent on "bailing out mortgage lenders". There's a difference between purchasing good mortgages (that were already insured by the government, no less) to improve the banks' reserve ratio, and loaning money to a group of automakers who can't possibly pay them back.
Posted by: Andrew P | 2008-12-08 10:32:27 AM
If this goes through, one has to wonder if it is about the economics, the politics, or what proportion of each that is in play.
It doesn't matter what kinds of vehicles the big three promise to produce, if consumers don't want to buy them - the bailout is pointless.
My last car from Ford was a 1999 Focus. At 70K is was, mechanically, a piece of junk - the dealership would not do anything about the defects nor would they do anything about getting me into another vehicle with any kind of a reasonable deal. Their problems have been in the making for a long time and now they want a taxpayer bailout (or whatever) to cover what they should have been doing in the past but did not do.
The Canadian Banks were handed a $70B bailout (or whatever) and are posting their usual $.5M to $1M profits during the last quarter. The optics of this, at first look, seem not to be good.
Posted by: Calgary Clippper | 2008-12-08 10:59:03 AM
Canada's natural competitive advantages are mostly found in the resource / commodity sectors. Clearly, the boom in commodities is over for a while. Subsidizing any industry disguises it's competitive advantage, encourages rent seeking, and is morally wrong. The dead hand initiatives (regulations and taxes) of government that were piled on those industries during boom market prices are now threatening the viability of those industries. Canada's auto sector is likely incapable of competing internationally without restructuring beyond what the CAW would tolerate, therefore making taxpayers subsidize a sector that has no apparent competitive advantage is dumb and wrong. But then who said vote-buying is moral or economically intelligent.
Posted by: John Chittick | 2008-12-08 11:01:23 AM
You are 100% correct in the fact that the $75 billion was never spent and not one cent of taxpayers' money went toward a simple accounting procedure to open up credit capacity among the chartered banks.
As for bailouts to the auto industry ... seems the US Congress has approved $15 billion in bridge loans. That in itself is wrong, since the Big Three should have gone to US banks, who are set up to take those types of risks.
Considering a Toyota Prius plant just opened up in Woodstock, Ont. and a Nissan plant just opened up in Tennessee, there's some doubt that the auto industry is in as much trouble as is claimed.
The Canadian Big Three branch plants are asking for $6.8 billion.
One, it's disproportionate to the package the taxpayers may be stuck with in the US (Bush said he could veto it).
Two, since the Canadian feds opened up credit room, send the Big Three to their favourite chartered bank.
Posted by: set you free | 2008-12-08 11:07:01 AM
Regarding the auto bailouts in the US, I wonder who is going to be buying the cars over the next 2 or 3 years? The sixteen million car sales per year has now fallen to about the 10 million sales level in North America.
And the buzz is that American credit card companines are going to be withdrawing around $2 trillion worth of credit availabilty off the credit cards, because of the quickly deteriorating job situation.
No job, no credit, no buy car.
The backside of the US financial hurricane is still coming. This is going to get main street messy.
Posted by: Rocky Thompson | 2008-12-08 11:50:02 AM
Banks and credit card companies are now lending money to people who 1) have a job and 2) have an ability to repay.
Sounds abour right to me.
Unless I'm mistaken, US financial institutions took the blame for lending mortgage money to people who 1) did not have jobs and 2) did not have an ability to repay.
The US political culture, which encourages such irresponsibility, really has nowhere to turn now.
Are the going to blame the banks for tightening up their lending standards closer to what we have in Canada? Or, are they going to blame the consumer who's now living within their means?
If I were in the financial industry in the US right now, I would be doing exactly what they are doing .... reducing the risk of toxic loans on their balance sheets.
Ball's in your court now, Obama. Try to make the consumer spend.
Posted by: set you free | 2008-12-08 12:10:58 PM
Am I the only one who feels that the government bailing out anybody...anybody at all is morally wrong? And who (which politicians buddy) do you have to be to qualify for a bail out? Aren't we simply rewarding ineptitude?
Oh well, so much for the myth that we live in a free enterprise capitalist system. When government and business are in collaboration you're seeing what some would consider fascism.
(But that's a fairly open ended analogy.)
And when a mortgage is "government insured"
is it not still insured with taxpayer's money?
Because as far as I know our government produces nothing of value, certainly nothing any one would buy...
Posted by: JC | 2008-12-08 12:22:00 PM
Ball's in your court now, Obama. Try to make the consumer spend.
Posted by: set you free | 8-Dec-08 12:10:58 PM
Good point Set.
Posted by: JC | 2008-12-08 12:23:12 PM
The government invested our money in sound mortgages -- that's the argument. OK. Here's my response:
First, what the government is doing is de-risking lending decisions. Taxpayers are now on the hook for mortgage defaults and not private lenders. This creates what economists call "moral hazard" which created reckless lending decisions and the mortgage mess we are seeing in the US.
Second, what is the government doing buying mortgages with the full benefit of knowing what can go wrong when the government – or quasi government agencies – backstops lending? We are witnessing a housing meltdown in the US which will no doubt effect Canada. Sure our housing market may be stronger -- but we've got zero down and 5% down mortgages, we’ve had loose money supply, and we've seen housing bubbles in our major cities.
Many Calgary home owners, for instance, have negative equity in a slowing oil and gas economy. Vancouver has one of the most inflated real estate markets in the world by some estimates, and it's correcting rapidly. This will mean mortgage defaults when the recession comes to Canada in full force – and that will mean mortgage defaults.
Does anyone think the government bought these mortgages as an investment?
Finally, the government is the buyer of last resort. That means nobody else wanted these mortgages, which now belong to taxpayers. We got the ugly girl at the dance – and now we’re stuck with her.
You may a recall a news story some months ago about the government buying asset backed securities as part of our Canada Pension Plan fund before things bottomed out, claiming it was a sound investment. Nobody thought it was a sound investment then, and nobody thinks it is a sound investment now.
It's a bailout masquerading as an investment.
Posted by: Matthew Johnston | 2008-12-08 8:37:07 PM
Chrysler Corporation has resorted to a fairly crude attempt to blackmail the Government of Canada today for $1.6 billion dollars in return for saving about 8000 jobs.
Outside of the moral dimension of a private corporation blackmailing the taxpayers and the government, there are three very compelling reasons to oppose such a bailout:
1. Chrysler's owner, Cerberus Capital Management LP, refuses to invest any more money in the firm.
2. Chrysler has already hired law firm Jones Day as Bankruptcy Counsel, indicating the bailout request is too little, too late, and;
3. $1.6 billion left in the productive economy is the resources needed to create 32,000 full time jobs. Transferring this amount of wealth from the taxpayer to Chrysler is a huge net loss for Canada and Canadians.
The conclusion is clear: Let them fail.
Blogburst this and write your MP to stop the blackmail.
Posted by: Thucydides | 2008-12-09 11:09:47 AM
Chapter 11 sounds about right.
Then, they can deal with some of the cushy aspects of their labour contracts.
Nobody objects to auto workers receiving a fair wage. There is a huge problem in the contract that many are not aware of.
In the US, at least, a worker can refuse to take a job at another plant if his plant is shut down. And, that worker would receive 90% of his salary forever without having to work another day in his life.
Although wages of the people actually working on the assembly line are pretty comparable, it's side deals like this that make it impossible for companies to be profitable.
Since it's taxpayers' money, not the government's money, the question has to be asked.
If consumers are not buying the product, why should those same people who are not buying the product have to shell out their hard-earned money to legitimeze these cushy deals?
Chapter 11 will solve that in a hurry. The unions, large financial suporters to both Obama and Canada's marxist putsch, would not want any company to go to Chapter 11.
If they do, their members may end up with nothing.
Don't gamble with my money.
Posted by: set you free | 2008-12-09 11:46:34 AM
Don't gamble with your money, SYF? What do you think $75 billion in mortgages is doing?
Posted by: Matthew Johnston | 2008-12-09 11:55:42 AM
Go back to the top of the thread.
That $75 billion was an accounting shift of PERFORMING mortagages, taken on by the CMHC.
In case you don't understand what the CMHC's role is, it's an insurer of mortgages. Every person who takes out a mortgage is required by law to pay a certain insurance premium.
That money goes to the CMHC, one of whose primary functions is to cover failed mortgages.
The mortgage portfolios of the Canadian chartered banks cannot, in any way, be compared to the toxic mortgages encouraged by the US political culture.
The purpose of the accounting shift was to give chartered banks more ability to lend.
You're pissing up the wrong rope, my friend. It's either 1) you are totally ignorant of how Canada's financial system works or 2) you're trying an emotional appeal without consulting factual information.
When you're in a hole, it's advisable to stop digging.
Posted by: set you free | 2008-12-09 1:22:37 PM
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