After watching President Obama's ultimatum to the automakers one couldn't help feeling bad for his cabinet. After all, with so many problems coming at them every day, it is natural that they miss a few solutions from the available set. Of course, as a taxpayer, it is in my interest to see the Obama Administration succeed in their attempt to rescue our economy even if a few trillion dollars are wasted along the way.
Thus, it is in the the best spirit of capitalist self-interest that would make Adam Smith proud that I offer the following plan to save our automakers.
The problem seems to be that GM and Chrysler have produced and keep producing more cars than people want to buy at prevailing prices. The automakers are convinced that the problem is psychological and temporary. Thus, the vehicles are really worth a lot more than the market is prepared to pay for them at this time. Our Treasury Secretary, a connoisseur of intrinsic value, agrees with this assessment.
So, for the purpose of this plan, we will designate GM and Chrysler's inventories as "toxic vehicles." Furthermore, since the new cars they produce and fail to sell increase their inventories, new unsold models will also be designated as "toxic vehicles" henceforth known by their new Washington official acronym: "TVs."
Thus, having defined "the problem" as clearing the TVs clogging our vehicle markets, we may proceed to our solution:
1) The US Treasury will pre-qualify suitable partners to buy all TVs currently in inventory including the new vehicles produced (defined as 51% finished) as of 3/31/09. The Treasury, at its sole discretion and without congressional interference may extend this date up to a decade or more if necessary.
2) Suitable partners may include large companies specialized in large purchases of US made vehicles such as the car rental companies and certain hedge funds incorporated specially for this purpose.
3) A special purpose vehicle (in the financial sense, not to be confused with the real vehicles) will be formed for the purchase of the TVs. The Treasury shall fund 50% of the special purpose vehicle (SPV) and the private partner the remainder 50%.
4) In order to encourage private participation, the SPV will be allowed to issue non-recourse debt guaranteed by the FDIC up to 85% of the final value of the leveraged entity or 11.33 times the value of the private partner's contribution.
5) The US Treasury shall make available $30 billion of the TARP still available for this plan which, by the magic of leverage, will make $400 billion available for the purchase of TVs.
6) Should the plan be successful, President Obama will invite Rick Wagoner for a nice chat in the White House such as the one he had with our most successful bankers last Friday.
Needless to say that this model maybe used for any other American industry that runs into a similar inventory indigestion.
Who knows, maybe if Larry Summers had been president of the University of Michigan...