US Car Makers - Senate reject $14 billion bail-out

Last night the Senate rejected the $14 billion bail-out scheme passed by Congress. Overnight, stocks in Asia tumbled between 4% and 7% and oil fell by 5%. The Bush administration still has the option of tapping into the £700 billion pot approved earlier this year, for the financial industry.

The US motor industry has been in a terrible state for some years; in recent years they have been almost giving vehicles away -- almost anyone who wanted a new SUV had one, and on very, very easy terms. The market is saturated with new cars. Most US cars have much higher fuel consumption than their European counterparts and will oil prices surging to £140 this summer, people realised for the first time that the need for fuel economy is here and now. It will take the US manufacturers time to adapt, meanwhile they are poised to lose market share.

If they are going to spend $14 billion (which is surely just a first installment) then it might be better spent on welfare for those who will lose their livelihoods and force the companies to restructure, adapt and emerge in a new form. Let us not forget that it was only few weeks ago that the CEOs of these car firms arrived in Washington in several business jets, while begging for a handout of $14 billion! The shere nerve of these people is astonishing; they have no idea. Even after receiving a presidential rebuke for such conspicuous over-consumption by their executives they only agreed to cease using their biz-jets after January. If they were plane-makers you might understand but these are car makers.

My best guess is that Bush will tap into that $700 billion and use it as an excuse to go back to congress to re-fill that pot. Meanwhile, the uncertainty will cause a major rout on the world's stock exchanges, and a fall in the dollar. Bizarrely, Treasury notes are still rising with yields nudging from zero to negative. This is a panic reaction -- where else can people put their money? The public can put it under their mattresses but corporate, institutional and third-party investors (such as trustees) don't have that option.

Fortunately today is Friday and there will be time for a pause over the weekend but a rapidly falling stock market is going to re-open the liquidity issues in the banking sector. Banks could fail. If only for that reason, some kind of support for the car makers might be justified.