BRIEF ASSIGNMENT 4: "Bailout or Bankruptcy?"
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General Motors, Ford and Chrysler -- known for decades as the Big Three, or simply as "Detroit'' -- have endured humbling times before, but nothing like the situation they faced in the fall of 2008, when their chief executives turned to Washington for not one but two bailouts. A measure of their desperation could be found in one of the arguments against the second bailout: that even the $25 billion in cash the companies were seeking (on top of $25 billion in loan guarantees already pledged) might not be enough to keep them alive. Thirty years before, the automakers had also staggered, although only one of the three - Chrysler - came near to the brink. The oil shocks of 1973 and 1979, the economic turmoil of the decade, troubled labor relations and the flood of imports all combined to buffet an industry that had been a pillar of the economy throughout the 20th century. In the fall of 1979, Chrysler implored the government for aid, and was kept afloat by $1.5 billion in federal loans. A decade later, Detroit was on firmer footing, thanks to a combination of factors. Their cars were, by most accounts, better than they had been before the import challenge. Perhaps more important were government rulings that exempted truck-based vehicles, like pickup trucks, sport utilities and many minivans, from fuel-economy regulations. As oil prices eased in the late 1980s, Detroit came to dominate in these sectors, in which they faced little foreign competition. As oil prices fell steadily through the 1990s, sales of large vehicles rose just as steadily - as did Detroit's profits. The three were making record profits, and building up what seemed like invulnerable reserves of cash. In financial terms, if not in market share, they had more than recovered from their earlier days of desperation after the oil shocks of the 1970s, when soaring gas prices had made their cars seem less attractive than more efficient imports. Gas prices fell through the late 1980s and 1990s. Favorable regulatory rulings by the government made it possible for the American automakers to focus on large vehicles -- pickup trucks, sports utility vehicles and minivans -- which also carried fatter profit margins. But the price of oil began to rise again, and the Big Three's fortunes began to sink, a trend that has been compounded by the increasingly severe economic slowdown. Despite shedding more than 100,000 jobs since 2006 and closing factories nationwide, the Detroit automakers have not been able to cut their costs fast enough to keep up with the steadily declining market for new cars and trucks. Industry sales in the United States have fallen 14.6 percent this year, including a dismal 31.9 percent drop in October. Sales began declining in the spring because of rising gas prices, but have since gotten worse. The sales rate in October was the lowest recorded in 25 years. Analysts predict the market will remain weak into 2010. GM has lost more than $18 billion this year. It briefly contemplated a merger with Chrysler, whose sales have fallen farther than any other automaker since it was acquired last year by the private equity firm Cerberus Capital Management. But GM's leadership abandoned the idea when their company's financial deterioration accelerated as a nationwide credit crunch took hold in the fall. While Ford is not running out of cash as fast as GM, the company said that its automotive operations lost $2.9 billion in the third quarter. In September, the three companies' chief executives traveled to Washington to ask for $7.5 billion that would be used to fund $25 billion in loan guarantees that had been promised in a 2007 energy bill. The loans were to be used to retool to produce the more energy-efficient cars the market was demanding. With little debate, the $7.5 billion was approved as part of a continuing resolution in October. But as consumer spending retreated in the face of what looked to be a long, deep recession, the companies came back to Congress with an even starker message: give us cash to carry us over until customers start buying again or we will go under. During a lame-duck session of Congress in mid-November, Senator Harry Reid, a Nevada Democrat who is the majority leader, introduced a $100 billion economic stimulus that included $25 billion for the automakers, which would come out of the $700 billion set aside for government aid to failing businesses. The White House opposed the idea. It argued that Congress should rewrite the terms of the loan guarantees, which were still in the process of being issued, so they could be used to keep the companies afloat and not just to build more efficient cars. Other Republicans said they would oppose any bailout since the companies were, in the words of a key Senator, "dinosaurs.'' |
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BRIEF ASSIGNMENT 4 ALL ASPECTS OF THE BERKELEY HONOR POLICY APPLY TO THIS ASSIGNMENT |
Your Brief is due at the end of Tech Time during the class on the assigned due date; assignments turned in after class will be penalized one point per day late. |
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