Bailout bill’s failure hurts Detroit’s prospects

Detroit shared Wall Street’s dismay yesterday as Congress nixed the controversial $700 billion bailout of the financial industry. The bill would have allowed the U.S. Treasury to buy distressed auto loans as well as problem mortgages and automakers hoped the relief would have made the credit market more attractive to investors. Legislators were told failure to pass the package could cause the collapse of the auto finance market with dire consequences for the auto industry and the U.S. economy.

Ironically, a majority of the fifteen members of Michigan’s Congressional delegation voting were against the measure. Three Democrats joined six Republicans in opposing the bailout. Most explained their vote by saying the bill was rushed through and didn’t go far enough to protect taxpayers. Rep. Tim Wahlberg of Tipton was openly critical of the White House, saying he was, “extremely disappointed in President Bush for refusing to consider other options and for thrusting this legislation on the American people in a way that only created more uncertainty.”

Chrysler CEO Bob Nardelli, like his counterparts at other car companies, has said access to credit is the biggest problem they face right now. Even as gas prices have retreated from historic highs, sales have been constrained by tightened lending standards. This past summer, Chrysler came up short in its bid to renew $30 billion in financing resources and General Motors believes bankers’ reluctance to make auto loans is costing it an estimated 10,000 sales per month. Last week, CMW Marketing Research noted rejections are increasing even for customers with sterling credit. CMW reported that, through September 20, just 81 percent of applications for prime loans were approved, down from 91 percent a year earlier.

Credit rejections are one of the factors that leads analysts, both in and out of the industry, to project 2008 will be the worst sales year in more than a decade, with light vehicle sales dropping to levels not seen since the early 1990s. Projections for September sales, which will be reported tomorrow, yield a seasonally adjusted selling rate (SAAR) of 13 million light vehicles, down from the 16.23 million rate recorded in September 2007. It would also extend the industry’s losing streak to eleven months, the longest slump since December 1991.

According to a group of analysts polled by Bloomberg News, Chrysler sales are seen down anywhere from 30 to 37 percent with an average prediction of 34 percent. Ford sales are forecast to be down 22 percent, the average of projections ranging from 15 to 28 percent. Last month, Ford surprised the analysts by reporting sales significantly worse than estimated.

Analysts see GM sales down an average of 26 percent, with individual predictions ranging from 23 to 30 percent, but GM’s employee pricing promotion helped it post the best results of any Detroit automaker in August and the program has been continued through today.

The weakness is not limited to the U.S. auto companies; the analysts in the Bloomberg survey predict double-digit drops for Toyota, Honda and Nissan. Honda and Nissan are the only major automakers whose year-to-date sales are ahead of 2007 and the margins in both cases are very thin. Wachovia’s Richard Kwas says combined sales for the Asian manufacturers could be down 20 to 40 percent in September.

Analysts are equally pessimistic when it comes to the prospect of any short-term improvement. No one is seeing an uptick in light vehicle sales until mid-2009 and some believe the recovery might not begin until 2010. Even passage of a bailout measure won’t have an immediate effect, and probably would be too late to save the 2008 sales year, but it could stem the bleeding and, right now, any relief would be welcome.

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