Cars designed in DC won't sell

Bridge Loan to Nowhere - Congress and business 'viability' rarely mix.


All three restructuring plans are heavy on promises to build the "green" cars that a Democratic Congress wants built. GM promises 15 hybrid models by 2012 and 37 miles per gallon on average for its cars. Chrysler commits to putting flex-fuel engines, which can run on ethanol or gasoline, in half of its cars. Ford promises to save 16 billion gallons of gas by using "advanced technology" and to invest $14 billion to improve fuel efficiency.

This is not a bailout that Congress is debating. It is a federal takeover. We don't mean that in the sense that the feds will own the companies on paper, although that can't be ruled out. What Congress wants to own is their business plan, and Detroit seems prepared to oblige.

The core problem is that the companies can't pay their creditors in fuel-economy standards. Two economists testified that the ultimate cost of this bailout would certainly be much, much higher than $34 billion. Mark Zandi of economy.com put the number at up to $125 billion -- and he supports the bailout. NYU's Edward Altman said the company proposals were "doomed to fail." He proposed a prepackaged bankruptcy for GM and Chrysler, with the government providing the debtor-in-possession financing if necessary. His point, which ought to be sobering, was that outside of bankruptcy there is no way to make these taxpayer loans senior to existing secured debt -- meaning the government might never get paid back if the companies go bankrupt later.

The car makers' request for a bridge loan, by contrast, looks like a $34 billion bridge to nowhere. It has already morphed into an opportunity for political extortion -- and we don't even have a bill yet. When, in a couple years, costs have not come down as expected because of political pressure to keep the unions happy and the green cars aren't selling -- because they were designed in Washington, not for consumers -- the companies will be back for more money.

The bailout commitment, in other words, is effectively open-ended, no matter what anyone says. And with the feds so invested in the companies, it will only be a short step for Congress to begin to coerce consumers to buy the cars that Washington prefers. Mr. Friedman, the concerned scientist, is already planning for that day. He said Friday that we'll eventually have to impose a "fee" (read: tax) on cars that "pollute too much" or use "too much gas."

This fairy tale, in other words, does not end happily ever after. A bankruptcy, prepackaged or otherwise, keeps looking better.

Comment: What Washington gives ... it takes away.


  1. Jim:

    They won't be designed in DC. But perhaps they will be designed by the big three in a new R&D lab that will be under 'one roof' with DoE helping to leverage it's best and brightest. The car makers could then differentiate themselves via their product lines, leveraging off this R&D. It's the best plan I"ve heard of yet to remove stove pipes.

    If you watched the CSPAN coverage the other day you would have seen some good thoughts going on in this very regard and all of the big three and several sharp members of congress thought it seemed like a good approach for starting something interesting from the comments made during the hearings.

    I have 'renewed' hope ..!


    Atomi Motor Blog

  2. Johnathan ... I appreciate your comment. Thanks

  3. 37 mpg. That is so lame. It's like the big three have a cure to cancer but don't want to offer it to the dying. When a guy can convert a hummer to get 60 mpg using 97% stock parts, a promise of the big three to make a car that gets 37 mpg is ridiculous.

  4. Yeah, the government does such a good job with NASA. Always on time, under budget, never a problem, right?

    Just like the Post Office, Amtrak, and any number of other federal agencies?

    Sorry, Jonathan, I think we need less government "help" here, not more.


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