Thursday, December 4, 2008

Detroit Bailout: Many Questions Remain, Says Finance Expert

As the Big Three automakers defend their restructuring plans before Congress this week, finance professor Ray Hill of Emory's Goizueta Business School points out that many Americans remain skeptical that a Detroit bailout is anything more than rewarding a failed status quo.

The automakers are promising that with federal loan help, "they will have gotten out of their health care obligations to retirees, and that they will be able to realize compensation costs savings from new hires," says Hill. "But if you look at their data, it's not clear that, three years from now, they still won't be paying their workers more than the international auto companies operating in the U.S."

"The first question is a question of equity: Why are taxpayers being asked to fund the Big Three autoworkers and not other autoworkers in the U.S.?" asks Hill.

The Big Three project that with government help, "in four or five years they could make cars more or less competitively with other companies that make cars in the United States," says Hill. "The question is why should taxpayers finance four or five years of inefficiency, higher wages and benefits for one segment of the population? Carmakers can project future viability on paper, but is anyone going to want to buy those cars four or five years from now?"

Hill questions the efficacy of GM's proposal to eliminate some lines of business. "When they eliminated Oldsmobile, because of state franchise laws, they had huge financial obligations to franchisees when they tried to exit that line of production. Are we actually going to be putting up money to pay car dealers so that the Big Three can meet their obligations under an antiquated system of selling cars?"

Hill also is critical of the two-fleet system, in which American automakers are not allowed to import into the United States the more fuel-efficient cars they make overseas to help meet current U.S. fuel economy standards. "Are we going to continue to have a two-fleet rule, which makes U.S. auto companies unable to make their fuel economy standards, but does help preserve UAW jobs?"

Hill, who is assistant professor in the practice of finance, is a former investment banker who teaches managerial economics and finance.

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