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November 17th, 2008

Argument: Forget a Bailout, Just Buy’Em!

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Here’s an idea for argumentative purposes if nothing else: With the fair market value of Ford, GM, and Chrysler amounting to approximately $7 billion, why doesn’t the U.S. government just buy the Big Three and save close to $40 billion?

As of the close of business on Friday the market cap for General Motors was about $1.9 billion, Ford about 4.3 billion….Chrysler is privately held but it’s a safe bet that their FMV is less than $2 billion…probably a LOT less….so for approximately a lousy $7 billion….a rounding error for the federal budget…the government could simply BUY the entire U.S. auto “industry” — actually, of course, it’s just the U.S. nameplate manufacturers, but that’s another story — for what amounts to a pittance.

The numbers are literally absurd….Ford has $160 billion in debt!….with NEGATIVE book value of equity….GM has about $60 billion in debt…and a HUGE negative net worth on a book basis of $56 billion!….Essentially, the market is valuing the companies — well above their (negative) book values — but at what amounts to scrap value!…so $50 billion more from forced tax exactions should be thrown at them?….and that’s NOT absurd?

Is that absurd, or does it make sense somehow?

Sounds like it could possibly work right? Here’s the problem: like we mentioned in this morning’s post, Freddie Mac has been a money-eating machine. When the Federal Government took over the mortgage giant a couple months ago, the GSE became the sole responsibility of the U.S. Government. It’s like shoveling coal into the fire — the government has no choice but to burn cash in order to make the wheels turn.

If the U.S. were to buy the Big Three, they would be their financial problem for a long time. No lawmaker wants that responsibility.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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