GM (GM) And Ford (F): What Bailout?

Ford1Are the markets still unstable? Are they subject to sharp moves on a rumor or a whim?

Ford (F) and GM (GM) are both up about 30% today. The reason is astonishingly thin. In a research note, Deutsche Bank said that financiers and politicians are worried that if they do nothing to help Detroit, its fall will hurl the economy further into a hole.

According to Reuters, the analyst wrote, “The proximity of these bailout hearings to the Citigroup (NYSE:C – News) bailout may have also tipped the scales somewhat.”

There is very little logic here. A car company is not a bank and that goes beyond the most obvious surface differences. The failure of the global banking structure is systemic. It runs from Zurich to Tokyo to New York. There is at least some reasonable argument that if the largest bank in the US fails that the damage to depositors, shareholders, and customers would be terrific along the confidence it would destroy across the entire industry. The mortgage-related financial instruments which plagued one large bank plague all of them.

The troubles with the US car industry are American to their core. Toyota (TM) and VW may be having sales and earnings problems because of tough conditions in their domestic markets and many overseas. But, they do not have Detroit’s legacy problems of poor product quality, too many fuel-inefficient vehicles and decades of legacy labor costs.

No one has come up with a reasonable argument about what role the government could play in saving the US auto companies. Throwing money at them does very little. A Chapter 11 may be the only way to strip out labor and debt costs. If the Treasury plans to help file a bankruptcy petition, then it may have some role to play.

GM and Ford may be trading up today, but the potential causes are thin.

Douglas A. McIntyre

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