PrintJune 21, 2009
Pimp My Ride DC Style
In a Freudian slip, "Cash for Clunkers" is the latest Washington brainstorm to goose car sales while striking a fashion pose of being green. "Pimp my ride" would be more accurate. The legislation, which is passed and awaiting President Obama's signature this next week, offers up to $4,500 in vouchers to purchase a new car if it gets between 2 and 10 mpg more than the old car it replaces.
The industry, led by Undead Motors (formerly GM) and Zombie Motors (formerly Chrysler), is more than willing to grab a free lunch at our expense. Along for the ride are the Japanese car makers, the UAW, and everyone else dining off the US taxpayers' carcass. With apologies to the Eagles' Lyin Eyes, has Congress ever wondered how it got this crazy?
It got this crazy because we forgot about the employees, shareholders and bondholders of Ford, let alone those of GM and Chrysler and the taxpayers. Ford deserves to expand its market share because it fought its way to survival against competition. Now, prospectively, Ford will lose market share, and therefore, the full appreciation shareholders deserve in Ford's stock price, because the government is now a deep pockets partner of its competitors. I guess Ford, which has a stock market value of $ 18 billion, would be worth $26 billion today had the government let GM and Chrysler alone so the Ford shareholders have lost something like $8 billion (or more than $2.50 per share) courtesy of congressional wealth destruction.
How do I arrive at that number? The industry is roughly projected to have sales of 12 million domestically built vehicles next year, with Ford having about 2.3 million, GM 2.7 million, and Chrysler 800,000. GM and Chrysler are typically projected to have 30% of the post bankruptcy market. But with a real DIP lender lending only what they are sure they'd get back (IF they lent at all), perhaps the combined bankrupts might have had a projected market share of 15%.
Assuming Ford, with about 20% of the market, would have emerged with an additional 20% of the bankrupts' lost market share, Ford would have grown to 23% to 24% of the North American Market, with about 2.7 million vehicles projected sold in 2010, and incremental sales of about $10 billion. Some analysts think that Ford's equity is worth 16% to 18% of its sales in 2010, so an extra $ 10 billion in sales would indicate an extra $1.7 billion in market cap. Ford reached a deal with the UAW in March saving the company up to $3 billion, mostly on job banks, when it was clear that GM and Chrysler were getting up to $ 50 billion to stick around.
Assuming a normal GM bankruptcy, Ford's 40,000 UAW workers might have accepted an additional cut of $15 per hour, representing $1.3 billion dollars of cuts per year, all of which should have dropped to the bottom line. Using generic analyst valuations of 5x EBITDA in 2010, incremental EBITDA of $ 1.3 billion would have added another $ 6.5 billion to Ford's stock market capitalization today, for a rough total of $ 8.2 billion in equity value sacrificed by the Ford shareholders who are also taxpayers funding their competition.
What do we tell Ford's team? "You had them on the ropes, but now the government is on their side, so pony up to keep your competition alive so you can really give it your all the next time? "
And what do we tell the Indiana pension fund bondholders of GM? "Thanks for the money, sucker!" The Chrysler bankruptcy debt voting was as corrupt as the Iranian election, defying all prior norms. The TARP banks, compromised by government entanglements, hurt their non-government shareholders by ignoring their fiduciary obligations on how to vote their securities in bankruptcy. One unintended consequence of this will be that for businesses that want to borrow fresh capital, over time lenders will charge higher rates to compensate for the risk of unprecedented politically charged outcomes in bankruptcy. Eventually, non-government lenders may stop providing second chances when lending to union companies, particularly those approaching bankruptcy. Being on that bubble could be worse than 2008. And if that happens, the government, which has been loudly announcing its success in fighting deflation, will find out just how deflationary constantly changing the rules can be.
It got this crazy in part because of Federal mileage and other requirements that ignore what people really want in a car and in a fuel supply. As recently reported by the Insurance Institute for Highway Safety, the death rate per million vehicles was 44 for SUVs and 35 for large cars, while for small cars it was 96, or more than double!
If 15,000,000 clunkers are turned in over the life of this program (considering there are 100,000,000 vehicles at least 10 years old still on the road and that government programs take on a life of their own), and we all start driving Fiats and instead of Chevy Tahoes, we could roughly project 4,000 additional deaths over the life of the program in order to pay for our gasoline savings. This would about equal our total fatalities in the Iraq War so far, to which many Democrats chanted "No more blood for oil!" Why is this blood for oil any different? And at least 43.3% of these predictable fatalities are likely to be Democrats based on current party affiliation statistics.
What eludes our mandarins is that many people, on balance, would often prefer to survive a car crash, and sometimes would also prefer to have their kids survive crashes, and actually don't care so much what their mileage is compared to feeling that their family is safer and prepared for any kind of weather. Certainly, based on his convoy of SUVs used when visiting Congress, Noble Laureate Al Gore would seem to have made the same choice in favor of safety.
It got this crazy also because in a decades long fit of self sabotage, the Federal government banned off-shore drilling for most of our coast line and on land in Alaska. The ban has been critical in keeping the price of gas high. When the market realized that the ban might expire in September, 2008 creating more supply, the price of oil fell from a peak of $147 per barrel to a low of $32 per barrel, over a 75% drop. Now that the Administration and Congress have effectively re-instituted the ban, the price of oil has more than doubled again. The real point of the legislation is to goose car sales. But rather than create unsustainable phony demand that requires a voucher, wouldn't we all be better off with a lower gasoline price so the average American had more money to spend? And wouldn't it be better to get our own oil out of our own ground and our own seabed, collect taxes on it, create American jobs by so doing, support the dollar in the process, enhance our national security and lower the price of gas for every US citizen?
Once upon a time, when we still had some shame, like a year ago, this law would not have passed. Subsidizing the auto industry in the name of fuel efficiency by paying to scrap old cars is bribing people to drive lighter weight, more dangerous cars to mitigate the relative damage done to companies like Ford by resurrecting GM and Chrysler, who should not have been resurrected in the first place. While the bribe may temporarily offset the relative damage done to Ford and the other survivors, it's bad for America. This law will kill innocent Americans, do nothing about the price of gasoline, resurrect companies that deserved to die, substitute our mandarins' needs for our own, endanger our families, cost billions, add to our national debt, and further corrupt our car companies. Is this what Congress was hired to do?
