The Failed Federal Bailout and the Automakers
By Michelle Krebs September 30, 2008By Michelle Krebs
No one is happy about the U.S. House of Representatives' rejection of the $700-billion federal bailout of the financial services sector and subsequent stock market crash - least of all automakers.
In the short term, auto stock prices for almost every global automaker and their suppliers tumbled on the news Monday - some plummeted to record lows. No bailout means no end to the credit crunch that is keeping belt-tightening customers from even bothering to go to a showroom as September sales to be reported Wednesday will show.
Longer term - and maybe not all that long term - even more belt-cinching by automakers will likely result in deepening production cuts and job losses.
Auto Stock Prices Tumble
The immediate impact of the news that the House had rejected the bailout package sent auto stocks, like most stocks, tumbling -- in some cases to new lows.
On Tuesday morning stocks were edging up, but on Monday, the Standard & Poor's 500 Index fell the most since the October 1987 "Black Monday" crash and the Dow Jones Industrial Average -- of which General Motors is a component -- fell 7 percent or 778 points -- its single largest one-day drop for a loss of more than $1 trillion in market value.
General Motors stock plummeted to a 54-year low. GM stock fell 12.8 percent to $8.51, losing $1.25 a share, its lowest close since June 1954, according to the University of Chicago's Center for Research in Security Prices quoted by Bloomberg News. GM's market cap fell to $4.8 billion.
Ford stock fell 13.3 percent to $4.17, losing 64 cents a share, hitting its lowest close since February 1986, Bloomberg reported. Ford's market capitalization fell to $9.43 billion.
Stocks of Japanese automakers fell not only on the news of the failed federal bailout but also on reports that Japanese domestic auto production suffered its largest decline since May 1988 and exports fell for the first time in three years.
According to Bloomberg, Toyota's shares fell 4.6 percent, its lowest close since August 2005. Honda shares dropped 3.7 percent. Nissan lost 4 percent. Fuji Heavy Industries Ltd., the maker of Subaru vehicles, fell 3 percent. Isuzu, Japan's largest light-duty truck market, lost 2.4 percent. Mazda, of which Ford owns a third, dropped .2 percent.
The stock price declines spread to Europe, where Daimler AG's shares fell $5.84, or 10.3 percent, to $50.84, and global automakers, like Lear Corp. which saw its stock price fall to its lowest level since at least 1994, closing at $10.55, down $1.20, or 10.2 percent.
Auto Financing Crisis Worsens
Even worse for automakers is the fact that the bailout plan would have allowed the U.S. Treasury Department to not only wipe bad mortgages off banks' books but also move bad auto loans off lenders' books. At the very least, automakers say the bailout package could have led to more stable credit markets, which would free up money for car loans.
Automakers have blamed the credit crunch as the major factor for slumping vehicle sales of late. If consumers can get credit at all, it is more expensive and requires higher credit scores. General Motors has said the credit crisis has cost it at least 10,000 sales a month, the Detroit News reports.
Automakers have gotten that message across to some lawmakers. The Detroit News quoted Rep. Barney Frank, D-Mass, chairman of the House Financial Services Committee, Tuesday as admitting, "the greatest threat the auto industry faces right now is this credit crisis."
Rep. John Dingell, D-Dearborn, chairman of the House Energy and Commerce Committee, said the bailout bill would have ensured access to credit for auto finance companies. "The credit crisis is already having an impact on the automobile industry that is so important to my constituents in Michigan, and to hundreds of thousands of families around the country," Dingell told the Detroit News. "If access to credit continues to dry up, the automobile financing companies will be unable to keep vehicles on dealership lots and help customers obtain financing."
Added, Chris Stinebert, president and CEO of the American Financial Services
Association, the trade group representing Detroit's Big Three automakers' finance arms, as well as major foreign auto finance companies: "Absent intervention from Congress, the ability of manufacturers to finance motor vehicle sales may come to a halt."
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