The Treasury Should Have Invested In Toyota (TM)

There are enough smart financiers and former Wall St. veterans in the Treasury Department so that the staff there should know how to hedge a bet. The Administration has taken the extremely risky position of holding stakes  in and loaning money to bankrupt American car companies GM (GM) and Chrysler. The taxpayers will never see a dime of that money back if the two companies cannot keep their costs down and produce cars that can compete with successful vehicles made by firms based outside the US.

GM and Chrysler also have to pray that oil prices will not continue to rise throughout the year, undercutting the ability of consumers and businesses to drive more than they absolutely have to.

It was always nearly certain that the car companies in Japan, Korea, and Europe would jump at the chance to take advantage of the weak US automakers to pick up market share in America. Toyota (TM), Honda (HMC), and VW have such strong balance sheets that they have been able to continue product development uninterrupted and keep their manufacturing facilities and dealer networks intact. Those companies have a remarkably good chance of taking away portion of GM’s 19% domestic market share. Chrysler’s sales have been off over 40% this year, so it may be even easier to convince its customers that buying vehicles from the No.3 US car company is risky.

The Treasury decided to make long-shot bets on US car companies and did not elect to put money into the large foreign car companies at the same time. While the move may have seem unpatriotic, it would have been a nearly perfect hedge on behalf of the American taxpayer. If Detroit continues to lose, firms like Toyota will continue to win, which should push up their stock prices as global vehicles sales improve with the economic rebound.

American are willing to by foreign cars, without qualms, in greater and greater numbers. That should be a signal to the Treasury that it would have been a good idea to spread around its investment in the global car industry. It would have virtually guaranteed itself a good return.

Douglas A. McIntyre