Awww 17.4 billion dollars? I wanted a peanut…
Despite a surprising effort by congress to resist it, the auto bailout seems more and more like an unstoppable force every day (especially today). The new plan put forward by the Bush administration includes some interesting language that offers us an opportunity to ponder what we’re really on the brink of doing here. The stated goal of this bailout is to make American auto manufacturers “financially viable” which the government defines as “having a positive net present value.” Net present value is the market’s assessment of the value of all the profits generated by an asset (such as a company) over it’s lifetime. Profits are a representation of how much the produce of a company is worth in excess of the costs of producing it. In other words the net present value is a measurement of what the company is expected to contribute to the economy in its lifetime.
Now we have to give the government credit for one thing. At least they have identified the appropriate benchmark for financial viability. But by stating their goal as achieving a positive net present value they are essentially conceding that right now the best guess that the markets can make about the total value of these companies for the rest of eternity is negative! (recall that earlier this year Deutsche Bank estimated the value of GM stock at $0.00). Now the government wants to put $17.4 billion dollars on the line (and this is really just to buy time for the government to put a real bailout plan together) to preserve a company that nobody believes will ever produce more than it uses up and the goal of this investment is to get a company with a positive net present value. So after throwing billions of dollars down the proverbial “money hole” if we end up with an auto industry valued at $1 they will declare it a rousing success.
In light of this I would like to throw my hat into the ring for the job of car czar. If I am appointed I will achieve this goal and then some before the end of the year. How could this be you ask? Simple, I will make all the car companies go into bankruptcy, shut down all of their operations, and take the 17.4 billion dollars and put it in the bank (but not government bonds). Just like that would have a company with a net present value of, drum roll please…..17.4 billion dollars! How’s that for positive?