President Obama and Automotive Bailout Term Paper

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Auto Bailout

In the years leading up to the auto industry bailout, all of the so-called Big Three automakers were struggling. They had been losing market share for many years as more import companies had entered the American market. Some of these companies, notably Honda and Toyota, were able to deliver better cars at lower prices, putting the Big Three at a significant competitive disadvantage. While the automakers had some good years, by the last 2000s they were losing money. They did not have competitive products, and were saddled with substantial retirement costs. These companies had tens of thousands of employees at one point and need to pay retirement benefits to those workers; the problem is that there are fewer workers today because of automation to cover those benefits. The automakers headed for bankruptcy, and successive contract restructurings with the unions had failed to reverse the trend. The federal government stepped in to orchestrate the bankruptcies and restructuring of General Motors and Chrysler, while Ford opted out of the program.

Political Pressures

There are a number of different stakeholder groups that were exerting political pressure on President Obama to save the automobile industry. The most important stakeholders were within the industry itself. These included the unions, the companies, the retirees, auto industry suppliers and of course consumers who would face a lack of choice should these companies have failed. The Bureau of Labor Statistics notes that the auto industry in the United States contributes some 3 million jobs from the automakers, suppliers and dealers. While Ford and some foreign automakers would still exist, the closure of General Motors and Chrysler would have resulted in the loss of hundreds of thousands of jobs. This was at a time when the unemployment rate was pushing on 10% and threatening to go above that barrier.

The loss of auto industry jobs would have been particularly catastrophic in so-called "Rust Belt" states like Michigan and Ohio, both of which happen to be swing states.

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So handling the automobile industry effectively is critical to winning those states in the Electoral College. All of these pressures would have emphasized the need to proceed with the bailouts. On the contrary side, free market economists and politicians would argue that that governments should not be bailing out failing businesses. To do so creates no incentive to improve or innovate. As these were the problems that got GM and Chrysler into that position in the first place, the bailout would not solve the problem in the long run. Indeed GM is at risk of failure again according to some observers (Woodhill, 2012).

The Bailouts

President Obama argued that the automobile bailouts were necessary in order to save hundreds of thousands of jobs at a time. Another objective was simply to save the companies -- not only for the jobs they represent but for their own sake, to ensure the strength and stability of the U.S. auto industry. The White House would preserve the pensions as well, which were at risk without a bailout (Reuters, 2009). Also cited was the need for leadership changes at the auto companies, something that was implemented quickly with the bailouts (Stolberg & Vlasic, 2009).

The bailouts included a dramatic restructuring of the companies. Equity was wiped out, and the bondholders received pennies to the dollar. The pensions were turned over to the unions to run and to finance. The American and Canadian governments took over ownership of these companies and sought to rebuild them. GM CEO Rick Waggoner was asked to step down and there were other leadership changes designed to bring these companies into the modern era (Stolberg & Vlasic, 2009). The Administration asked Chrysler to merge with Fiat as well, as part of the restructuring. Eventually, shares in GM were floated, with the….....

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