The Big 3 are about to make a return trip to Congress this week to explain how having access to public funds would enable them to not only avoid bankruptcy but turn their businesses around in an extremely challenging economic environment. After consulting with their boards over the weekend, it now seems likely that the Big 3 will offer up as many assets as it will take to pry a multi-billion dollar bailout package out of Congress.

To its credit, Congress has insisted that the Big 3's business models are unworkable in the current environment and that things need to change in order to secure any additional funding from the American taxpayer. While this strategy appears to be working to some extent, Congress knows that with nearly 3 million jobs at stake, it will be very difficult to simply step away from the table and allow the Big 3 to become another casualty of the credit crisis.

Given that Congress is looking to agree to some form of a bailout or bridge loan for the auto industry, Congress should insist that the Big 3 make better use of taxpayer dollars than simply putting the money into the same business strategies that have gotten them to the brink of bankruptcy in the first place.

Auto Bailout Part 1 - Running on Empty

Indeed, from an investor's point of view, a no strings attached bailout for the auto industry, requiring as much as $25bln to see the autos through the next several years, looks like a pretty poor investment. Business-as-usual solutions put forth by the Big 3 should not be considered. Such plans clearly fail to take into account the current economic climate faced by the industry today. Such solutions would not offer a stand-alone solution but merely the first of a series of bailouts over the coming years to keep the lights on in Detroit. Indeed with auto sales expected to fall in the US to 12mln units in 2009, the sequel to the bailout could be coming to a theater near us as early as next Christmas. 

Of course, the sequel, (working title: "Auto Bailout Part 2- Oops We did it Again") would have an even bigger budget than part one. And while the sequel would probably offer more of the same apologies and more or less the same razor-thin plotline as the first one, this time we would be asked to believe that the Big 3 will somehow be able to catch up with their even cleaner, high fuel economy rivals despite years of stalling and dragging their feet.

Taxpayers Can Get Dividends that would make Exxon Blush

The American taxpayer need not go down this route. We can demand that any deal struck to keep the autos afloat comes with a mandate for higher corporate average fuel economy standards (CAFÉ). By getting Congress to raise CAFÉ standards beyond the 35mpg target mandated last year by the Energy Independence and Security Act (EISA) to 40mpg by 2020, the terms for the American taxpayer change significantly. This changes an uneconomic investment in "Auto Bailout Part 1 - Running on Empty" and a likely straight to video sequel, into the best taxpayer investment made over the next several years.

To explain the benefits of this idea, let's look at the numbers compiled by my colleague Luke Tonachel. Assuming that in addition to the $25bln already authorized for clean car re-tooling, Congress was to provide an additional $25bln in bailout funds to the Big 3 in exchange for accepting a 40mpg CAFE standard for their vehicles by 2020. If such an approach was approved by both Congress and the Big 3, the acclerated improvements in fuel efficiency would allow the American taxpayer to benefit to the tune of $176bln in lower fuel costs over the next eleven years (see table below):

FUEL SAVINGS FROM RAISING CAFE STANDARDS FROM 35MGP TO 40MPG IN 2020

After generously subtracting 50% of these dividends for the technology needed to manufacture these vehicles, we are still looking at a $8bln a year net savings to the consumer. This would translate into a 32% annual dividend to the American taxpayer on their $25bln investment in the long term viability of the US auto sector and is hands down the most effective investment we can make to re-build our automotive sector on several fronts; 1) it will help revitalize our domestic manufacturing base over the long term by ensuring that they build the higher fuel economy cars their customers want, 2) it will significantly improve our energy security by reducing our demand for foreign oil, and 3) it will work to strengthen our climate security in terms of reduced green house gas emissions.

Congress and President-elect Obama have many difficult decisions to make about the economy over the next several months, bailing out the autos by raising CAFÉ standards should not be one of them. Using higher CAFÉ standards to drive a bailout for the autos is good for the taxpayer, good for our energy security, and even good for the autos over the long term as they make the transition to a higher fuel efficiency model for production.  

(Note: this version has been edited from the original to reflect some additional thoughts from my colleagues)