Tuesday, December 9, 2008

The Big Three Bailout

Congress is considering bailing out the "Big Three" automakers -- GM, Chrysler, and Ford. The amount is 35 Billion dollars. But no one, no newscaster, no politician, not even any talk radio hosts are bringing that down to what it really means. 35 billion dollars is $35,000,000,000 and would buy 1.75 million twenty-thousand dollar ($20,000) cars or nearly three million Saturns!

But that is only part of the story. "Would buy" means the gross amount, but that is not profit or even the net amount of profit and retained earnings that the companies would keep, which is the real equivalent. That is -- money which would go directly into the accounts of the automakers themselves. This amount is typically 8 to 10 percent of the cost to the dealers. But for simplicity, we will use 10% of gross which is far more than the actual amount and will make my estimate come out low. But using that 10% figure, this is the amount that is paid to the shareholders, the research and development expense, and management expense that would be banked selling 17.5 million $20,000 cars.

To give that some perspective, it has taken GM eleven years to sell three million "Certified Pre-Owned" cars"*. And in the first quarter of 2007, GM sold 2.26 million vehicles and reported net income of $62 million or only thirty dollars per vehicle.**

In any event, this is money removed from the pockets of the very people who would use this same money to buy cars from these companies. So we see what is in it for the "Big Three", what do we get for our money this way?


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