As representatives from the American auto industry plead for a multibillion-dollar federal bailout, some financial advisers are already bracing for worst-case scenarios that could leave thousands of autoworkers, retirees and those working in related industries scrambling to fill retirement and health care funding gaps.
As representatives from the American auto industry plead for a multibillion-dollar federal bailout, some financial advisers are already bracing for worst-case scenarios that could leave thousands of autoworkers, retirees and those working in related industries scrambling to fill retirement and health care funding gaps.
Nowhere is the issue more pressing than in Michigan — home to not only General Motors, Ford and Chrysler but also the worst economy in the nation.
"Right now we're looking for fixed-income streams that will be able to replace GM pension income, because we're all very nervous and uncomfortable," said Kathy Colby, president of Financial Independents Inc. in Lansing, Mich.
For example, Ms. Colby said she is turning to various annuity products, including fixed indexed annuities, for her clients because "it's the only thing that will give you a guaranteed income stream."
Ms. Colby, whose firm has $85 million under advisement, has spent the past 13 years specializing in pre-retirement planning, primarily for rank-and-file unionized autoworkers.
She estimates that 70% of her 800 clients are directly or indirectly tied to the auto industry.
Financial advisers see the biggest impact of a severe auto industry slowdown hitting working-class career autoworkers and retirees who might not have set enough aside for retirement without the support of auto industry pensions.
OUTLOOK BLEAK
Currently, a total collapse of the Big Three automakers is not considered an imminent threat — despite Washington's frosty initial response to Detroit's plea for a $25 billion capital infusion. On Thursday, congressional Democrats announced plans to put off any attempt to pass legislation until early December and said any government help would depend on the automakers' presenting a plan to show that a bailout would help them establish economic viability.
The outlook for the U.S. auto industry has never been so bleak, according to financial advisers living and working in the heart of the nation's rust belt.
"Living in the Detroit area, I'm inclined to favor the bailout, but logically I know it won't fix the problem," said Bert Whitehead, president of Cambridge Connection Inc. in Franklin, Mich.
"I'm telling my [autoworker] clients to save up some money," he added. "And some of the people who are retired from the auto industry are really stuck between a rock and a hard place."
In testimony before Congress last week, auto industry executives laid out their respective economic scenarios, along with how much of the requested $25 billion bailout they would need to survive. If the bailout were approved, Detroit-based General Motors Corp. would seek be-tween $10 billion and $12 billion, Dearborn, Mich.-based Ford Motor Co. wants between $7 billion and $8 billion, and Auburn Hills, Mich.-based Chrysler LLC wants $7 billion.
The U.S. auto industry — once a world leader — has seen its share of the domestic car market drop from 73% in 1996 to about 50% today.
The challenges facing the domestic auto industry are evident throughout Michigan, which is leading the nation with an 8.7% unemployment rate.
According to industry analysts, the legacy costs associated with union contracts and retiree benefits mean that more than half the cost of a new car goes to fund commitments to people who no longer work in the auto industry.
NEED TO DIVERSIFY
Mr. Whitehead, who advises clients on a retainer and flat-fee basis, echoed sentiments of many Michigan-based financial planners regarding the challenges of encouraging investors to diversify beyond the auto industry.
"Some of these people here are so fiercely loyal that it obscures the rationale of owning Ford or GM stock," he said.
Through the middle of last week, the price of GM's stock had fallen more than 88% from the start of the year, while Ford stock was down more than 81%.
Over the same period, the Standard & Poor's 500 stock index was down 45%.
Chrysler, which is now 80% owned by New York-based private-equity firm Cerberus Capital Management LP, no longer has publicly traded stock.
Part of the challenge for advisers is addressing clients who remember the $1 billion federal rescue loan made to Chrysler in 1979.
By the time the loan was paid off in 1983, the federal government had made a $350 million profit and shareholders who stuck with the company were also sitting pretty.
"There seems to be two distinct sides to this," Ms. Colby said. "People either want to know if they should be buying GM stock now, or they want to know if they're going to have a job next week."
An online poll of InvestmentNews readers last week found that 81% of more than 500 respondents did not believe the federal government should bail out the U.S. auto industry at this time.
"Detroit seems to want to go back to 1957 when life was good and everybody could graduate from high school and get a job on the assembly line," said Clinton Struthers, owner of Struthers Financial Services in Midland, Mich.
Mr. Struthers, who has $100 million under advisement, said a government bailout will only postpone a necessary and inevitable retooling of the American auto industry.
"Whether it's a bailout or a well-run bankruptcy, the net result will be smaller, leaner companies," he said. "In the short term, Michigan will suffer and we'll probably see some significant changes in labor contracts, but I'm not sure a guy with a high school diploma working on an assembly line is worth $35 or $40 per hour."
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
