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Pearlstein: Auto Bailout

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Steven Pearlstein
Washington Post Columnist
Wednesday, April 22, 2009; 11:00 AM

Washington Post business columnist Steven Pearlstein was online to discuss the auto bailout on Wednesday, April 22 at 11 a.m. ET.

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Pearlstein won a Pulitzer Prize in 2008 and is co-moderater of the On Leadership discussion site.

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Rochester, Minn.: Dear Steven,

Do you anticipate what you have laid out here for GM and Chrysler to be the blueprint for all those municipalities, counties, companies, etc., who have all made over-sized promises to retirees? I have a defined benefit pension plan I am supposed to begin collecting eventually and I don't really see it being as promised.

Steven Pearlstein: The public sector defined benefit plans are a different kettle of fish, since they are not pre-funded plans, for the most part, but pay as you go, and are not covered, I believe, by federal pension law. Hard to say. In many cases, the benefits are quite generous after 25 or 30 years and they will be a big burden on taxpayers. Surely the new benefits should be trimmed back. If there are examples of really gold plated plans, it is possible state legislatures might cut them back, or allow municipalities to cut them back.

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McLean, Va.: I absolutely agree that both companies need to use bankruptcy as part of their reorganizations. Quite simply, it's the only mechanism that allows them to cut ties with franchises and that gives them enough leverage to cull the labor/legacy costs down to where they need to be. But I will tell you this: all of the predictions that these will be short bankruptcy cases may be naive. Certainly, there is precedent for short prepackaged bankruptcy cases. But these aren't exactly pre-packs that are being contemplated. Once a company enters bankruptcy, there's a lot of ability for the case to go sideways. Best laid plans and all of that. The hope here is that they will have the major constituencies locked up before the filing, but you just never know. I wouldn't be shocked to see these companies in bankruptcy for much longer than what's planned. On the other hand, I don't think that matters much. I don't buy the spin that Americans won't buy cars from a bankrupt car maker. Give me a better deal than a comparable seller, and I certainly would.

Steven Pearlstein: I think the hope is for a quick sale under section 536 (??) of the code, that calls for an auction of certain assets. If there is only one bidder, that could do it. But a prepack is also possible if there is agreement among the major parties, and is probably a more elegant way to go.

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Boston, Mass.: This question is a little off-topic and a little unfair, but I hope you will take it on anyways. I saw you on Meet the Press on Sunday. The panel was asked whether we should investigate those people who broke United States laws against torture. The rest of the panel basically said "Bygones". You didn't participate, but I wonder do you think we should someone like Bernie Madoff get off the hook because his fraud took place in the past?

Steven Pearlstein: You talk about breaking the law as if it is a clear and obvious line. In this case, I think you can agree that the line is rather fuzzy. Certainly for lower level people who were given orders to do this or that, I really don't see the need for prosecutions. The President has said he'll leave it to Atty. Gen. Holder to determine if the policy makers broke the law, but I'd be very reluctant to allow differences over policy to be criminalized. Its not my area, obviously, but I think this is as much as political and moral question as a legal one.

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Vienna, Va.: Chrysler bondholders (JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs) say they are unwilling to accept 15 percent & threaten to move towards bankruptcy. What leverage does the administration have to hold them to the kind of deal you propose? Simon Johnson, among others, thinks that they still wield too much political power & have been getting favorable deals on TARP thus far.

Steven Pearlstein: I'm not sure Simon has focused on this particular case. The best estimate is that if Chrysler were liquidated, those secured bank creditors would get somewhere between a third and a half of their money back, so the ultimate settlement should reflect a present value of about $2.5 to $3.5 billion. The government will put a total of $10 billion into Chrysler. The union, by agreeing to take stock for its health fund and by making additional wage and benefit concessions, is probably putting in the $5 billion. And Fiat's management and technology contribution may be worth $1 billion. Which is why I figure the banks will eventually settle for 15 percent of the stock and maybe get to carry over maybe $1 billion in debt that carried over to the new company.

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Altoona, Pa.: Why is Uncle Sam trying to assist Chrysler? What is a private equity firm doing, asking for taxpayer to help when Cerebus owns Chrysler? Can't Cerebus help Chrysler and Uncle Sam help GM?

Steven Pearlstein: The private equity firm is out of it. They get nothing and lose the $300 or so million they put into it. The beneficiaries of this bailout are (1) all of us, (2) the workers and pensioners, (3) the suppliers and communities in which chrysler operates and (4) the creditors, all to varying degrees.

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Reston, Va.: Would like to ask three questions:

1. Was it the CEOs who initiated contact with the Government to request bailout funds, or did Congress require the automakers use the Treasury as lender of last resort since these firms also carry Federal contracts?

2. Have any foreign manufactures (Toyota, Honda) with plants in this country asked for US funds?

3. Has this abrupt financial hemorrhage in the industry separated the CEOs who are worth their incomes, from those CEOs who simply rode the gravy train?

Steven Pearlstein: Yes. No. Yes.

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Pittsburgh, Pa.: Steve, you state that "bankers and bondholders will kick and scream and call it unfair, but in the end they'll take it because, like everyone else in this adventure, they'll conclude that it's better than the alternative." In fact, for many bondholders isn't the alternative--bankruptcy and liquidation--better that reorganization due to credit default swaps and other hedges? Upon bankruptcy, the bondholders collect on their swaps and leave the wreckage behind, see the phenomenon of "empty creditors."

Steven Pearlstein: Could be they have hedged these bond positions, yes. Not sure if anyone has done a swap on secured bank lines or not. But remember, they paid for those hedges as well.

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District of Columbia: Steve, can you explain the very big difference in dollars between the auto bailout and the bank/Wall St. bailout, with the latter exceeding the former by an order of magnitude? (If "bailout" is not the right term, substitute another.) Is it that helping the banks is so much more important and/or simply requires that much more money? Or is it that the bank bailout is structured fundamentally differently than the auto bailout?

Steven Pearlstein: They really are different kettles of fish. The banks need capital to replace the capital they lost by making bad loans and investment. We should get most of that back. The auto bailout is a bit dicier -- we are really investors in that case, with a lot more risk because it remains an open question that the restructured companies will be able to survive and prosper to the extent that we will get our money back and make a profit. The government team is being very conservative and demanding that the companies really cut costs and wages and benefits, trim down to a management core of profitable brands and businesses and wipe most of their debt from their books. But in this economy, nothing is guaranteed.

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Alexandria, Va.: Any chance that the Government will take over the GM/Chrysler union members health care as a step toward nationalization? If it works, they might get other industries to buy in.

Steven Pearlstein: No, but the final deal might have the government "put" the companies' pensions funds to the Pension Benefit Guarantee Corp, along with the assets in the pension fund. They are trying to avoid that, but the funds have become underfunded on an actuarial basis in the last year, and if it is going to require lots of cash in the early years to get them back to full funding, then the car czars don't want that burden hanging over the companies. The best solution would be to find a way to declare the pension funds "fully funded" and adjust the future benefits downward to reflect that new level of funding. But I'm told that may not be possible, even under a bankruptcy reorganization.

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Bowie, Md.: Steven, I wonder whether a GM bankruptcy filing might present a grand opportunity for GM to introduce direct-from-the-manufacturer internet buying to its customers. I believe many consumers would be willing to buy direct from the manufacturer, presuming it is at reduced cost and without haggling. GM could set up some non-dealer locations for customers to "kick the tires" first and for vehicle deliveries. GM dealers would be the place to go if you need more hand-holding in the sales process and for service. This would probably also facilitate the desired decrease in the number of traditional dealers. Do you see any chance of something like this happening?

Steven Pearlstein: I've been a proponent of that idea for years now, but I don't think it necessarily has to be contrary to the interest of the local dealers. The dealers can still have showrooms so people can come in and see and test drive the cars. They can still prepare the new cars for delivery. They can still offer service contracts. And with your model, they don't have to tie up a lot of capital in inventory. Their profits on new cars has been so beaten down that at this point I'm not sure they wouldn't welcome a new business model. But you are right: when they get the new factories that can produce lots of different cars from the same line, this is the way things will go.

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Orlando, Fla.: Can't these thousands of cars - the unsold stock - be sold to returning vets at cost, with low interest? Be offered to non-profits on similar terms? How about the disabled, those in public service corps or schoolteachers in the first five years of their careers? Maybe Uncle Sam or state governments could buy them, using some of the stimulus money. I see Head Start kids and disabled 'ride-on' patrons in my community boarding some cruddy looking vehicles, sagging with age and use. How about some safer options for those who serve us well, and could use a (better) ride?

Steven Pearlstein: All good ideas. And it may require something that creative.

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Baltimore, Md.: Mr. Pearlstein, Thanks for the columns and chats. It seems that a large contributor to our current economic situation has been huge rewards for short time frame progress. Are there/will there be any adjustments to executive compensation to reward long term progress?

Steven Pearlstein: Yes.

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Reston, Va.: Chrysler Execs turn down aid due to limits on pay. Aren't we basically just allowing them to raid the piggy bank? I mean, Chrysler is going down anyway, may as well get what you can from it before that happens.

Steven Pearlstein: Its Chrysler Financial that is turning it down, for the moment. When push comes to shove, however, they'll take the money and the restrictions.

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District of Columbia: I noticed Bill Ford told Larry King last night they didn't need a bailout, they were just on the Hill to support their industry. If they're doing so well, why don't they tell the others how to do it? Shouldn't they just cut back on models no one is buying and get leaner and meaner?

Steven Pearlstein: Ford made some smart moves in recent years, and is now in a healthier position. But let me assure you that if the industry remains for any length of time at a level of 9 million cars sold on an annualized basis, Ford will be in the soup as well.

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Alexandria, Va.: Earth Day question for you Pearlstein: Are the auto companies involved with production of any new energy parts such as wind turbines? Does the infrastructure in place for these companies make it easy to switch production, and is the market large enough that it would help them generate a profit? Thank you for taking my question.

Steven Pearlstein: Don't think its a significant opportunity for them, no.

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Herndon, Va.: Could we ever see a auto business model without independent dealerships? It seems that the auto industry would be a good fit for a more just in time sales model, where you order the car and it is built for you. Inventory builds up in the system requiring deep price cuts to move it. Maybe the automakers have test drive and service locations.

Steven Pearlstein: Ah, we'll all thinking alike today.

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New York, N.Y.: Steven, Can you discuss whether you can envision that municipalities will follow GM and declare bankruptcy to shed labor contracts? Here in New York, we're paying very high state & city taxes and unless someone gets hold of costs of public employees, taxes are going to keep rising. I'm still waiting for some elected officials with some courage and foresight.

Steven Pearlstein: We're still waiting for them down here in Washington, as well.

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Austin, Texas: Roughly, with regard to GM only, how much money is owed to the union workers in the VEBA and the pension? And how much is owed to unsecured bondholders? I guess what I am asking is what is the arithmetic that you used to come up with the bondholders only getting 10 to 15 percent of the surviving GM? It seems like the bondholders are getting nailed.

Steven Pearlstein: GM is on the hook to provide the VEBA with about $20 billion over the next several years and the bondholders have unsecured debt of about $27 billion. So why, you might ask, should the VEBA get more of the company than the bondholders, since they are both unsecured creditors. Severl reasons. First, the unions will be forced to make additional concessions on present wages and benefits, as well as retiree health care benefits, all of which have a net present value that can be factored in. Second, and perhaps more important, the company needs its workers to continue in business, and to have them sufficiently motivated and committed to make this turnaround work. So there is only so much you can ask them to sacrifice before you start to undermine the operation. The bondholders, by comparison, are really not part of the story going forward, they aren't required to be part of the solution.

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Clifton, Va.: Problem with Rattner and his posse is they are not car guys. Financial types are the reason Chrysler and GM are facing the problems that got them into this mess. Ford had a car guy who sought the advice of his finance guys but Ford isn't out of the woods yet. Obama and auto czar need to realize if they save GM and Fiat takes over Chrysler it doesn't matter if neither company can produce cars the American public wants to buy. And both companies will face problems in near term when they have to consult with their Federal sugar daddy before acting or reacting to the market. Sorry not everyone wants a Cinquecento or other other small car. Many of need a small or medium size CUV or SUv and some of us need a full size pick up or SUV. The government can not decide the vehicle mix the market has to. Sorry I don't want a Smart size coffin, I need a vehicle that can haul three herding dogs in their crate. And I want just one vehicle to do this. If I want a second car I will restore an old round taillight BMW 2002 with dual Webers and make my contribution to global warming. A need a vehicle that can go 600 plus miles in a day in 10 hours and not take hours to recharge. Diesel, hybrid, hydrogen or diesel/gas hybrid work for me.

Steven Pearlstein: Not sure exactly what your point is. Trust me, Rattner & Co. know they aren't car guys and don't want to be making operating decisions. But this is a financial workout we are talking about, and it can't be done by guys with degrees in automotive engineering. Obviously, they have to make assumptions about strategy in order to come up with a vision of what is a sustainable company, and then work back from there to a new structure and a new balance sheet. But nobody on the government team wants to dictate what cars are produced, beyond noting which nameplates and vehicles are selling and profitable now and which ones aren't.

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Bowie, Md.: Is anyone asking how many new cars the U.S. market needs, and hence now many and how large do the manufacturers need to be? A lot of cars are thrown away long before their time.

Steven Pearlstein: Yes, that was the starting point for the government team. And they concluded that sales could be depressed for a couple of years, and even then would only rise to 13 or 14 million annually, well below the 16-17 million peak of 2007.

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District of Columbia: How do you reconcile the fate of the GM bondholder who must settle for much less than par with Bear Stearns bondholders who will receive full payment. Similar issue with the AIG counter parties who were paid in full.

Steven Pearlstein: Because there was a public policy reason not to protect the Bear bondholders, to wit that if Bear defaulted, then it would be hard for every other financial institution to raise debt and the system would crash. That's not the case if GM or Chrysler creditors have to take less than they are owed -- corporate defaults happen all the time without freezing up the credit for all companies. That's just the different realities of the two markets.

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Detroit, Mich.: 1. Do you think that the firing of Rick Wagoner will lead to tougher treatment of executives on Wall Street?

2. Do you think a Cash for Clunkers Bill in Congress or other moves will spur demand for new cars?

Steven Pearlstein: Wall Street executives, for the most part, were fired long ago if they were responsible for the debacle. And the ones now in office remain vulnerable not only to pressure from the market, but pressure from regulators, if things get worse.

Cash for Clunkers could well spur new car sales.

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Arlington, Va.: Let's remember that Toyota, Honda, Nissan, BMW, Mercedes etc. all received big time incentives from the states they are located in to locate their. They received big time tax breaks and they are all receiving help from their own governments back home with loans etc.

Steven Pearlstein: Yes, but in the scheme of things, it really wasn't that much money when you spread it over a decade. All it did was alter locational decisions. It didn't fundamentally change the economics of the business.

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Dover, Del.: Two companies; AIG and GM. Both have large assets, large losses and debts. Why are their creditors and labor treated differently ?

Steven Pearlstein: In the case of creditors, it was as I said just before, that stiffing the AIG creditors would have set in motion a set of dangerous dominoes.

As for labor, labor/retiree costs are a reason why the auto companies are not competitive and are on the verge of bankruptcy. That is not the problem with AIG. In fact, there is no evidence that AIG paid above-market wages for most of its people. So if you want to insure the longterm viability of GM and Chrysler, you need to fix the labor cost problem. If you want to assure the longterm viability of AIG, there are other problems to fix, but wage and benefit levels are not high on the list.

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Detroit, Mich.: Any chance that Pontiac could survive as a niche sports car brand? Is Buick going to survive? Is the auto task force aware of Buick's tremendous popularity in China?

Steven Pearlstein: No. Yes. Yes.

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North Potomac, Md.: I just recently was separated from my job with Ford Motor Credit Company. Previously I spent 10 years in retail automotive sales. I can tell you the dealers of the manufacturers that are not in any kind of bankruptcy jeopardy will have a field day if GM and Chrysler declare a BK. It may be the only way. However, I shutter to think of the impact this will have on the retail side as the dealers of Honda, Ford, Toyota fill customers heads with fears about buying from a bankrupt company. The auto task force must work hard in getting the government and the companies to assure the buyers that the ownership experience will not be compromised and the warranties are secure.

Steven Pearlstein: It's a problem, the B word, but not an insurmountable problem. I think people realize the government is standing behind the customers and suppliers of these companies, even as they are wringing concessions out of creditors and employees.

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El Paso, Texas: Gosh, what a well-written article today on the three automakers -- concise, educational. If you got it all right, I'll be even more impressed! Thanks for your columns and chats.

Steven Pearlstein: Well, thank you. We'll see soon how prescient I have been.

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Arlington, Va.: Wall Street types and government lawyers don't have a clue about the car industry. They aren't car guys. If GM can't produce cars the public wants then they will be in trouble. The government forcing GM to produce certain cars will not work either. GM produces more cars that get 30mpg then Toyota. GM's problems are not product related but financial. It has a dealer network that is too large. Let the marketplace work!

Steven Pearlstein: The government is not forcing GM to produce certain cars. That's not correct. GM will continue to produce big trucks and Cadillac Escalantes as long as there are people who want to buy them at prices higher than what it costs to make them. And GM won't produce green cars that lose money. This is a business deal, folks, not an environmental crusade.

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Woodbridge,Va.: Comment--Unless Chrysler, GM and ford can compete on an equal basis any govt money will only delay the end of the American auto makers. The inroads of foreign auto makers were gained by cheaper prices and advertising that preyed on the publics feeling that we were inferior--remember the ads for British woolens, Italian shoes, French wines etc? China's cheap prices were instrumental in destroying many of our industries by the false idea that our poor otherwise would not be able to afford _______(you fill in the blanks).

Steven Pearlstein: Your initial statement is correct, but there is no reason the Big Three can't compete with foreign transplants. They can if they and their employees want to.

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Chicago, Ill.: What are the chances, as a percentage, that we will have a final agreement for Chrysler as directed by Treasury without bankruptcy on May 1?

Steven Pearlstein: Without bankruptcy, very little. But a quickie bankruptcy, better than 50-50.

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Goldman conspiracy theory: I wouldn't call it that. It is mostly "cognitive regulatory capture". However Hank Paulson went around for a year saying things were contained and the issue was one of liquidity and confidence not solvency. Once Goldman was in the cross hairs he got religion. Call it a conspiracy or a coincident but Paulson drastically misread the situation until Goldman was at risk. At that point he brought in his successor and arranged a massive open ended bailout of Goldman's chief counter party two days after letting one of its chief competitors go bust. Go figure.

Steven Pearlstein: Its a pretty neat picture. Maybe too neat, though.

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District of Columbia: The UAW and its defenders keep talking like their contracts are sacrosanct. I know a portion of their pension would be covered by the PBGC if GM and Chrysler go TU. I wonder if there is any move by pro-union types to have the taxpayers pick up the tab to keep the UAW's (quite generous relative to the rest of us) retiree health benefits intact.

Steven Pearlstein: The pension funds are pretty well funded, so if the plans are terminated, and the assets and obligations transferred to the government, two things will happen: (1) the outstanding obligations will be reduced because the PBGC has limits on how much any retiree can receive and these limits are below what many GM retirees are expecting; and (2) if the pension assets of the companies are not enough to cover that smaller obligation, then the government will have to make up the difference over the next 25 years, but its not going to be an astronomical number.

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Alger, Mich.: The GM-UAW defined benefit pension plan covering over 425,000 retirees and surviving spouses is governed by ERISA and the 1996 Pension Protection Act, as you know. That plan is NOT a pay as you go plan, though GM and the UAW (with a six person joint pension administration committee) have let it become pay as you go, and not pay as you go with the implicit permission of the government. You and your colleagues would do us (vilified GM/UAW retirees) a big favor if when you talk about the UAW pension legacy cost, you would distinguish retired ERISA funding requirements and actual underfunding should the plan go to the Pension Guarantee board. For example, the media says the fund is $14 billion or so underfunded, when the media knows full well in real money it is currently nothing less than $25 billion and probably more like $30 billion plus. Thanks.

Steven Pearlstein: Actually, we in the media don't know anything of the sort. It may be true, but this is really beyond our knowledge or expertise. Obviously, when you talk about pension accounting, you are talking about net present value calculations. So if there is $25 billion in the pot now, and you assume historical average appreciation over the next 25 years, then that may be enough to cover payouts of $75 billion over that period. It's complicated, which is why those of us in the media have to rely on more expert people to explain it to us and help us sort it out.

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Dover, Del.: Your Feb 18th article said: "just as the unionized autoworkers were the aristocrats of the blue-collar world, Wall Street traders and investment bankers were the aristocrats of the white-collar world. Both came to look on their above-market pay not just as the result of hard work and good fortune, but as an entitlement. In time, this sense of entitlement led firms to pursue strategies that drained the companies of financial strength and led them to the brink of a collapse that now requires a massive government rescue." In other words, labor problems for both situations.

Steven Pearlstein: Yes, that's true of some on Wall Street. Not really true about AIG, however, which is an insurance company with a lot of workaday employees earning workaday pay.

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Olney, Md.: Isn't that 16-17 million peak of 2007 for domestic car sales part of the problem? This is only 2009, and most of those vehicles on the road now purchased in 2007 have at least a seven year life expectancy, even longer, if the recession worsens. Of course, this assessment wouldn't include three year leased vehicles that are turned in. This is the lean part of the boom-bust auto cycle. For Americans to buy American and nudged into trading in their vehicles earlier, doesn't this demand new technology from car people, and not finance people? I helped my Dad buy his Chevy from Gbuypower.com several years ago. While the process wasn't perfect since it eventually involved the hagging hassle at the dealership, I, for one, would really welcome a direct way to buy from the factory assembly line. I definitely agree that a new business model for selling vehicles is in order.

Steven Pearlstein: Indeed.

That's all for today folks. I'll be in Europe next week so let's pick up the week after that.

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