Why a Reorg is Better for GM than a Bailout
I meant to get to this fantastic article on GM yesterday in the NYT by Andrew Ross Sorkin. I’ve already written the chapter on the 1980 Chrysler bailout, and was working on the moving target of GM, Ford and Chrysler bailouts circa 2008.
Sorkin perfectly summarized the GM situation, and what needs to be done:
First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.
Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.
So, first, the government would force G.M into a prepackaged bankruptcy now — even before policy makers may think it needs to be. As an inducement, the government would allow the merger with Chrysler to go forward. (There’s a lot of resistance to saving Chrysler too, but we need to look at the industry as a whole. And don’t worry: Cerberus, the private equity firm that owns Chrysler, would have its equity wiped out too.) . . .
The automobile industry has argued that bankruptcy will be a disaster for the industry; that people won’t buy vehicles while they’re in bankruptcy for fear that the warranty won’t mean anything. There’s a fix for that too. The government should establish a warranty insurance fund that would insure the warranties of all G.M. and Chrysler vehicles bought while the combined company is still operating under bankruptcy protection. The cost to taxpayers should be next to nothing, assuming the company survives and can takeover the warranty obligations.
I should just excerpt his column and call it a day. I am looking forward to reading his book (next Summer?) titled, Too Big to Fail: Inside The Battle to Save Wall Street.
>
Source:
A Bridge Loan? U.S. Should Guide G.M. in a Chapter 11
ANDREW ROSS SORKIN
NYT, November 17, 2008
http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html
See Also:
A British Lesson on Auto Bailouts
NELSON D. SCHWARTZ
NYT, November 17, 2008
http://www.nytimes.com/2008/11/18/business/economy/18car.html
Facing a Slowdown, China’s Auto Industry Presses for a Bailout From Beijing
KEITH BRADSHER
NYT, November 18, 2008
http://www.nytimes.com/2008/11/19/business/worldbusiness/19chinaauto.html
November 19th, 2008 at 7:44 am
All of this makes good banter and discussion but is a complete waste of time. The Democrats are now in charge and are beholden to big labor - as is Obama. The requests for Uncle Sugar’s money is not just for GM, et al, but for the UAW as well.
Like it or not, business leaders must get used to a new and invigorated American Labor movement. To that end, I predict after the new Congress comes in, that we will see not only all the money GM & Crew want, but with minimal strings (and no Chapter 11). We will also see card check pass - which will be the end of a state to claim itself a “right to work” state. Remember, you got to dance with who brought ‘ya. And with the Democrats and Obama, it’s Big Labor.
November 19th, 2008 at 7:47 am
And maybe then they will make cars that the world wants to drive, remembering that the US market is a shrinking share of the global total?
Having driven S Class Mercs and 7 series BMW’s, I’m not sure that the profitable end of the market will ever be available?
November 19th, 2008 at 8:25 am
Too clean, simple and obvious.
No room for politicians with pom poms pretending to have done something. Not to mention the votes left behind. That said, if and it is a big if, GM stumbles into chapter 11 it would greatly increase the chance that common sense is actually returning to the financial world.
These trillion dollar giveaways are a bad genie escaped from the bottle. They don’t go back in after the wish.
November 19th, 2008 at 8:31 am
As a registered Republican, my proposal to save the US automakers is to lower taxes on the rich.
Sorry, I just cannot resist my precious “Registered Republican Series”, but on a serious note, I personally would prefer to just let the US automakers go into bankruptcy and give a little help (actually, NO help) to whatever emerges. The US auto industry would be a fraction of its former self but hopefully more competitive and viable.
That is NOT political reality, however, and if you blame the Democratic Party for wanting…needing…to protect the UAW and other unions, then you better be prepared to also blame the former Confederate States of America for continuing to fight the Civil War against the rest of us in the way they vote. Michigan and Ohio and any other states that rely on the auto industry and are heavily unionized are electorally precious to the Democratic Party, which starts out in the hole every four years since 1968 because Lyndon Baines Johnson did the right thing and the racist South went red ever since. Whether you like it or not, or accept it or not, the Democrats absolutely need Michigan and Ohio - even with Virginia and North Carolina going blue this year - and MUST and will do everything politically to protect the working class in those states, even if they know that means pissing away good money after bad. No matter what, the Democrats must demonstrate full-faith effort to support the unions’ interests.
Yeah, political calculus matters. Thinking or even hoping that politicians will make decisions based on enlightened thought while fellow American voters continue to refuse the same is just plain unenlightened.
November 19th, 2008 at 8:35 am
A reasonable plan, but the presentation is everything.
It cannot be called ‘bankruptcy’, as that will never fly with the UAW. And Obama has to be the one to propose it, because the UAW (and management) will never trust Paulson or the republicans on and deal other than “give me the money”, which clearly cannot happen, as the auto industry’s needs are so great. But Bush & company can hold their feet to the fire so that when Obama does offer a “rescue” plan (a nice, friendly term, “rescue”), they will take it without too much of a struggle.
November 19th, 2008 at 8:43 am
Chap 11 reorganization with Treasury DIP loans is what I wrote to my Senators this week; more should contact their representatives NOW.
If the Obama crowd would get behind this type of DIP structured loan, it would show that they’re helping the auto industry, but at the same time, not giving them a bailout or reward for incompetency.
I was employed by a company that went into Chap.11 reorg, and we were able to sell product just fine. The only hurdle was to inform potential customers that ‘bankrupt’ didn’t mean we were out of business, that we were reorganizing and would come back. (BTW, we came out of Chap.11)
November 19th, 2008 at 8:53 am
Gm won’t sell OPEL but they need a handout? No way.
November 19th, 2008 at 8:56 am
The solution in my mind is right in front of congress. The TARP money that they have already approved was to go to the banks with the implicit mandate to then loan money to consumers. That has not happened. Congress needs to make certain that if the second $350 billion is to be accessed by any of the major investment firms it comes with the caveat that banks must lend proportionately to the big 3. Of course the big 3 must in return provide a viable business plan in . In my mind the banks were complicit in the automakers fate by loaning free money on cars that were not otherwise sustainable products hence they should also play a part in getting the big 3 out of this mess.
November 19th, 2008 at 8:57 am
Fuggedaboudit as far as debating this, it is going to get done. This is all going to be very expensive. When Barry coined the phrase Bailout Nation, I am not sure even he could see how far this would go. The $ is toast. I am calling a top here at 87. This is it. From here on we will see a whole different set of horrors start to be revealed.
I recommend everyone view the Jim Rogers video that Barry posted. You don’t have to be correct about the exact timing of these events to see what is going to happen, but Rogers seems to have put all the pieces in place in front of us to draw a reasonable picture of the future. If you look carefully at the details of the CPI today, inflation isn’t dead. In fact, it isn’t even sleeping. Strip out the oil and cars and there is inflation in things we need (food) and that is only going to get worse when the $ inevitably turns downward again.
November 19th, 2008 at 8:58 am
There’s a reason loans won’t go out. The people with good credit don’t need it. You can’t force people with good finance skills to borrow money. Therefore, they are just wasting money with all these programs, repeating the great depression era. They need to just print money to eliminate peoples debt. It’s the only way out. Do another consumer stimulous, much larger this time, I would figure 3 times as big. Let people pay their debt.
November 19th, 2008 at 9:09 am
The UAW and their ilk will be getting what they deserve, regardless of how this plays out. The corpse they have their fangs in is simply empty of blood. It is very hard for me not to take delight in this circumstance, especially since I live among a great many of these ignorant, arrogant parasites, and even have to put up with a few of them at family functions. How sorry can I feel for the burglar who trips and breaks his leg on his way out of my house? Not very. I’m just not as saintly as I might like to be.
November 19th, 2008 at 9:32 am
Obama on 60 Minutes:
“We need to provide assistance to the auto industry. But I think that it can’t be a blank check. So my hope is that, over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance, but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan — what does a sustainable U.S. auto industry look like? — so that we are creating a bridge loan to somewhere, as opposed to a bridge loan to nowhere.”
Sure sounds like Chapter 11 to me…
November 19th, 2008 at 9:42 am
Warranty fears, Oh Please:
How many high-end electronic and computer products have meaningless product warranties even when the companies are solvent! How many automobile companies the ARE solvent have warranties that are, for all practical purposes void, because the dealers are shitheads.
November 19th, 2008 at 9:45 am
History has shown that when a country replaces its manufacturing base with money changing as the basis of its economy, that country’s standing in the world declines. Allowing G.M. to fail (Chapter 7) or to re-organize with bureaucrats in top operating positions within the company (Chapter 11) will hasten that scenario per our economy.
If they are allowed to fail, do we really want the void filled by a company headquartered in Nagano or Munich?
Disclosure: I work for a Japanese-owned tier one auto supplier in Michigan and drive a ’97 Sable, not a 7-series BMW.
Sure, G.M. (and Ford) needs to make concessions to get the 25 billion dollar loan they
are asking for. Get rid of Rick Wagoner and some of their overlapping offerings (Pontiac, GMC trucks). And require their severely outdated business model be changed from selling SUV’s to smaller, less gas consuming cars. But 25 billion dollars now would be much cheaper than loosing a million or more jobs that are associated with the auto industry, especially during this recession.
It’s all just politics anyway, which is why AIG gets a bailout or AMEX gets to be
a bank holding company. And maybe, just maybe G.M. is allowed to fail. Class
warfare anyone?
November 19th, 2008 at 9:45 am
No politician R or D with any brains will let GM go under. It’s easy to be profound in a comment but face the real decision of possibly losing 1 million jobs and you know your decision. Incidentally, everyone blames the unions while management has more responsibility for this mess.
November 19th, 2008 at 9:48 am
An unintended consequence of forcing GM into bankruptcy could very well be a depression. It may be better for GM, of that I have no doubt. But it would be very bad for the overall economy, IMO.
“The only thing we have to fear is fear itself.” People seeing GM in bankruptcy is going to hurt confidence not help it. It would be another colossal mistake like letting Lehman fail. And if we are to avoid a depression we can’t make any more mistakes like that.
November 19th, 2008 at 10:07 am
larster:
Thank you!! Besides, didn’t the Big Three set up a trust where by the unions are now in control of the health care costs? Whether the Big Three have made the required payments yet is another story. It is sad that so many people first scream “bust the UAW” but don’t say anything about management. Where is the outrage aimed towards Wagoner and the other CEO’s? The people who scream “Bust the UAW!!” probably have not been paying attention the past five years at what has been going on and the kind of givebacks the UAW has made.
November 19th, 2008 at 10:11 am
The scare tactics will be successful in getting the leaches properly fed. The corruption level is too big to fail. The free ride is available. There will be some drama to appease the public as if some people are being admonished for their wrong-doing, but then the slap on the wrist, and everybody is back in the business as usual. So, now that as a taxpayer I am fucked, the question is: How Can I Make Money In This Process?
November 19th, 2008 at 10:31 am
No love here for the never-ending looting and capital destruction perpetrated by GM’s mis-managers. An atmosphere of thievery breeds more thievery. (Not the least bit surprising.) A pox on them all. Boy, I am in a most uncharitable mood this morning! I’ve really just had it with these blockheads… years of grumbling into my beer while sitting across the bar from these jokers.
November 19th, 2008 at 10:43 am
I really don’t know whether the UAW or management is more incompetent and I quite honestly don’t care. All I know is that as an ordinary taxpayer, its not my fault that the automakers are in the shape they are and I don’t take kindly to anyone who insists that I pay for anything to do with this mess. It makes me sick that both sides think that digging into my pocket is their right. Get away from me, leeches!
The fact of the matter is that these companies are on life support and its management’s and labor’s to fix it and stop pointing fingers at each other. If they can’t get it done, screw ‘em.
I have no problems driving a car made by a manufacturer that fills the void they create when they go buh-bye.
November 19th, 2008 at 10:46 am
“kind of givebacks the UAW has made.”
Whatever. It’s not about what you’ve given up, it’s what reality is today. And today’s reality is that the UAW still enforces inefficient and stagnated processes and an overpriced workforce.
November 19th, 2008 at 10:50 am
In the current credit market the government would need to finance the GM DIP and the term loan coming out of bankrutcy. GE Capital is number one in the market for providing DIP loans and they have backed away in a major way in the last month. If the parts suppliers are not already charging cash up front, they would go into bankruptcy right after GM, leading to a Ford and Chrysler bankruptcy and tough times for Toyota and Honda.
November 19th, 2008 at 10:57 am
The primary reason GM is not competitive is that they build unsafe, unreliable and unsuitable cars. In 2005 I heard Wagoner on the radio raving about the great new lineup of products- they were all sport utes and trucks. When you look at their passenger car performance, they have a reputation for inferior performance in many areas- especially reliability. Anybody remember the Citation, or the Celebrity? Over the last forty years GM has built a reputation for building junk and that’s why their on the brink of bankruptcy.
November 19th, 2008 at 10:58 am
Pro GM bailoutters all proclaim that if they weren’t bailed out, they would lose millions of jobs, assuming that a bailout would keep that from happening. Well, that is one BIG assumption.
They also assume that the money would be spent to save jobs, and not be used to expand or build factories in non-US locations, hence costing US jobs. Any assurances otherwise is propaganda. Money is fungible… look what happens to SS/FICA money deducted from paychecks; is it saved for just Social Security, or is it immediately spent for whatever the government needs?
Who do we bail out next, the service companies who hire people in other countries to answer their phones?
Use any monies to put people to work, in THIS country!
November 19th, 2008 at 11:00 am
I love the way GM’s Wagoner presents their bailout request as a public service announcement. I also love their Chicken Little storyline that if one automaker fails, then they all fail and then all their suppliers fail, the number of jobs involved keeps climbing - from 2 million to 3 million and today I heard 13 million, GM has 190,000 employees! And, of course, they won’t be reorganized in Chap 11, they’ll be liquidated in Chap7.
If Congress wisely says we’ll provide financing for a Chap 11 reorganization then Ford will depart the Alms alliance and Chrysler will return to their plan to liquidate the company, sell off Jeep and shop around their other nameplates to Asian manufacturers, and maybe sell their plants when the economy improves. Only GM will remain to argue their bankruptcy will be the end of civilization as we know it.
November 19th, 2008 at 11:03 am
These tales of woe by the Big 3, Alms Alliance, must really be helping sales.
November 19th, 2008 at 11:29 am
“The cost to taxpayers should be next to nothing…”
That is one of the costliest statements in human discourse. That phrase alone makes me say this is a horrible idea. It would still dump one groups (the U.S. car makers) obligations on another group (the U.S. taxpayer) against there will and is objectionable. Let the automakers go bankrupt, they have been eating at government troughs long enough.
Regards,
TDL
November 19th, 2008 at 11:33 am
The of you anti’s out there are just proving my point. Thumbs up for the financials, off with their heads for the autos and unions. Class warfare, indeed.
November 19th, 2008 at 11:36 am
This is what they get for screwing over Tucker! :).
November 19th, 2008 at 11:46 am
I consistently oppose all bailouts. Unless someone wants to bail me out of my busted short in the Formerly Great British Pound from this morning.
November 19th, 2008 at 11:49 am
Bugly - did you really just try and trot out Citation, or the Celebrity - two cars made over 20 years ago as some kind of “proof” that GM makes shitty cars? That’s.. interesting I suppose, but completely irrelevant.
And to all those who are bagging on management - I say they didn’t have a whole lot of choice. When you’re $2k in the hole before you even put two parts together, you’ve got a hell of a job in front of you.
Of COURSE they pushed the $40-50-60k SUVs - they had NO chance to recoup the $2k losses on a $16k car. And they couldn’t get rid of their pension/union obligations, so what they hell were they supposed to do?
Now lest any of you think I’m an apologist for the auto industry, I’m not. Both union and management practiced ostrichism, hoping these problems would go away (the same problem that the i-banks had incidently, and the residential real estate market, and the commercial real estate market, etc, etc, etc).
It’s possible their business model has been fucked this whole time - just put on life support by fancy financing.. but I sure as hell know that the two things that Toyota/Honda have shown to be required (innovation and low labor costs) aren’t going to result from bailing them out.
November 19th, 2008 at 12:04 pm
Why not force the CEO’s of Exxon and Chevron to just write a check for $25B to the auto companies? That would kill two birds with one stone.
(LOL).
November 19th, 2008 at 12:05 pm
I agree about putting GM into bankruptcy. The problem is that Barack Obama is a wholly owned subsidiary of the UAW. GM is going to get whatever it wants after January 20th.
November 19th, 2008 at 12:10 pm
Where is the Businessplan based on a 10 million market size?
And the cash flow analysis for the period of the loan?
Why are nobody asking these Questions?
And how will you be paying for it, SIR?
November 19th, 2008 at 12:22 pm
Naz could soon make a new low below 1428.54; 1430.67 now.
November 19th, 2008 at 12:31 pm
I’m not for bailouts of any kind. But I can’t help being repulsed by comments here. $350B has gone to banks, insurance companies and who knows who because their CEO’s were incompetent, corrupt and otherwise clueless. That money is supposed to be used to lend out, but the banks are squaring up their balance sheets. Now, the Big 3 wants $50B or 1/7th of what’s gone out through the TARP. And it’s let them fail or go into bankruptcy. Let’s not concern ourselves with the loss of 3 million American manufacturing jobs or the ripple effects that would have on our economy. No, give more money to the banks because they are more important regardless of the fact that collectively they do not employ as many people as does the Big 3. So why is it that people continue to advocate that American workers take it in the shorts not only through taxpayer funded bailouts but a loss of jobs as well? Credit card companies are now looking to buy banks so that they can get a piece of the TARP. In other words, these clowns are positioning their companies to be eligible for assistance. Is the Big 3 doing that? Wake up!!
November 19th, 2008 at 12:53 pm
Check the recall list for the Venture, S10, Malibu or any other GM product, they’re alot longer than the list for any Honda or Toyota. And twenty years old is exactly the point- the reputation you make lasts much longer than the car. I’ve had friends that had nothing but problems with their GM products for years- they all drive Toyotas and Hondas now. Maybe they can find a new generation of suckers, but it won’t be me, or my kids, or my friends.
November 19th, 2008 at 1:04 pm
Pat G, I’m sure if you took a poll not many here would support giving money away to the banks either. Your repulsion is wasted on us.
And do you really think keeping people employed making a product consumers aren’t buying is a productive use of tax dollars? Are auto workers actual victims here? Shouldn’t they have foreseen that the auto industry was due for a fall and got into something else? My homebuilding position went away and you don’t see me begging for tax dollars.
November 19th, 2008 at 1:12 pm
Pat G. @ 12:31
The argument that you’ve given is all the more reason that we have to stop the bailouts now. People say that since we bailed out the banks, we therefor have to bail out the autos. But if we bail out the autos, then it’ll be the steel companies. If we bail out the steel companies, then we’ll have to bail out the textile companies. Then it’ll be the airlines. Then the retail sector. Then the pension funds will line up. Then the cities, then the states.
The more bailouts we give, the greater the political pressure for ever more bailouts. This has to stop.
November 19th, 2008 at 2:24 pm
>>gold-plated benefits are one reason G.M. is no longer competitive
When the people at the top give up their golden parachutes, perhaps the people down below might be more receptive to giving up some ‘gold plating.’
November 19th, 2008 at 2:32 pm
Disclosure: I am a quasi-supporter of unions. Back in the day when I was a carpenter I witnessed first hand the union busting in DC. One of the net results was a measurable decline in the quality of workmanship due to the shutting down of the union sponsored trade schools and the apprentice-journeyman-master system. I worked for a non-union high-end shop and the quality of work that union shops produced set a standard which we had to beat. The general decline in quality as a result of union busting negatively affected the quality up and down the line. I certainly didn’t, and don’t, support the feather-bedding and the obtuse work rules, but it is a baby-with-the-bathwater situation.
There’s two issues of cost of labor that seem germane. First, the lower labor costs at Japanese automakers is not just at the assembly-line level. It permeates their entire wage/salary structure. It seems completely unfair to expect the assembly line to take a 30% package decrease while management only forgoes bonuses. And a question: how much of the state-sponsored benefits, such as health care, are factored into the Japanese labor calculations?
Which leads to the second point: there was a time when the glory of the US was its strong industrial base and the high wages that ensued. This was another of the benefits of the union movement. Remember the bad old days when labor was treated solely as a commodity, with child labor and 6 day/12 hour work weeks at subsistence wages. The labor movement is what turned commodities into consumers who could buy the products of our innovation economy.
Many of the union members are good, decent, hard working people who were promised something, upheld their end of the bargain, and now, as a group, are being blamed for a) agreeing to the deal and b) expecting that the deal be honored. Sure, there are plenty of corrupt, malingering a-holes in the unions; and there are just as many, some would argue more, in management. To blame one without equally blaming the other is specious reasoning.
Look at the outcome of the UA bankruptcy. Sure, the company was salvaged, but the buying power and benefit protection of the workforce was reduced markedly (without top management taking a real hit, btw). With the reduced buying power, that workforce is consuming less which lowers demand which puts downward pressure on buying power, etc. etc. It leads to a deflationary spiral, either in a classical sense or in the backhanded sense of price inflation.
If this is the new reality of our economy, that we need to deflate the definition of the “good life” for the majority of our citizens, then so be it. But to portray working folk as rapacious thieves is misguided and unhelpful to the dialog. If we are in a redefining process, then it’s got to be top to bottom. If the top expects that it can keep its 6,000sf homes for a family of four while the rest downsize, then yes, it’s gonna be class warfare because that kind of thinking is uncivil and, shall I dare say it, unAmerican.
Most of the readers of this blog fall into the category of self-directed entrepreneurs. Just remember that most people aren’t like that, and that’s not their fault nor is it wrong. It reminds me of the story, perhaps better called an urban legend, told by the president of Herman Miller. At the wake he expressed his condolences to the widow, going on about how her husband was such a good friend and went on about what a great woodworker he was. She replied that if president and her husband were indeed such good friends, he would have known that her husband was really a poet who happened to be good with his hands.
November 19th, 2008 at 3:14 pm
(sigh) I still just don’t think you guys “get it”.
Obama and the Democrats won the election - hello!! In January they will be in complete control. Both Obama and the Democratic congressional leaders have said they support aid to the car makers. In addition (for those reading the WSJ this morning), they also support union card check, the elimination of right-to-work states, employer mandatory paid sick pay for all employees and mandatory 12 week paid-leave under the Family and Medical Leave Act - again for all employees of companies over 25 employees. They are also very large supporters of labor unions and the “middle-class”. Get it?
Come January, labor and the “workers” will be in charge - not buisness. We lost.
November 19th, 2008 at 4:58 pm
Why not force a sale of GM to UAW? At this stock price, the cost per union member is extremely low. Then the union can fire management and figure out how they’ll make money by selling lousy cars made by overpaid workers for a company with outrageous legacy and future benefit costs.
November 19th, 2008 at 5:55 pm
@lunatic
As I have stated before, strings need to be attached to any money given to anyone. In the Big 3’s case money should not be used to pay old debts or to make 0% financing available. The issue is, that we do not need another few million laid off. All they will do is compound the problems our economy is now experiencing. It will cost us (taxpayers) alot more to go down that road. You’re right; most of the posts here were not in favor of giving away money to banks either. My bad for drawing that inference. making that connection. Sorry to hear about losing your homebuilding position. Hopefully, you have a better job or as good a one now.
November 19th, 2008 at 7:15 pm
Unfortunately, the 25 Billion is just the first of many bailouts. Let’s assume GM gets half of it. With a cash burn rate of 7 Billion a Quarter, that means they should be back again around the middle of next year.
There MUST be a radical business plan which should be reviewed and approved by persons who know something about business, ie NOT Congress.
GM CANNOT layoff workers under its UAW contract yet needs to shrink to about half its current size. So Chapter 11 will probably have to be used at some stage anyway. So why not now?
November 19th, 2008 at 7:50 pm
Wildly wrong, Barry.
You are missing the forest for the trees.
We cannot have GM failing its bond obligations right now and “restructuring” to put thousands out of work. What’s good for GM on its own is not good for the system as a whole at this time; a pro-active government might have forced this sort of approach three years ago, when it was plenty clear that the automakers could implode under stress and had outsized costs, including some imposed by the govt (see dealership laws).
Forcing the autos into Ch 11 now is a fundamentalist approach. Instead we need to create an orderly unwind to our credit issues. Auto company failures now will put incredible pressure on the supply chain and create mass unemployment; even worse, systemically, it will even further impair creditors, who don’t want equity, and deepen the credit crisis–which is still possible, and then impair totally unrelated businesses. We need creditor relief now. Moreover, with bankrupt consumers and creditors, where will the money come from for recovery?
Barry, having everyone fail at once is a horrible mistake, similar to Rumsfeld’s chaos approach in Baghdad during the looting period. We don’t need to feed the auto guys 25B; we need to give them 50B, while using the tax code to penalize outsized wages rather than wage controls. It may prove to be wasted money in a few years–fine. Let’s deal with that when our credit system is healthier and the mortgage issue in the past.
We need to flood our system with money, which is fast being destroyed. We need to help our creditors. We need to keep people employed. And we need a massive fiscal stimulus for households–$20,000 per adult citizen over two years, against future tax obligations on gas, electricity, net worth, and high incomes. We need to risk money creation–now is no time to worry about inflation.
Now is the time to go big. Whether the autos can survive long term begs the real question, which is: can we get money into our economy and how fast and how relentlessly. We are the spender of last resort; the rush into dollars reflects this reality. We’ve got to start spending.
Remember–it wasn’t until the big spending for WWII that we really came out of the GD. We’re in the same situation. We’ve got to get wild and show some irresponsibility–we need people to believe in higher prices again down the way.
November 19th, 2008 at 9:14 pm
It wasn’t the UAW what brung Barack Obama to the White House. Compared to past candidates the way BO organized and financed his campaign means he doesn’t owe anyone - not even the national Democratic Party. Read up. Of course that’s no indication about what he’ll do, but it’s a misapprehension to think he’s an “owned subsidiary” of Big Labor (oooh! And I thought Halloween was over).
I’m kind of astonished at how easily so many here are ready to write off such a gigantic number of families who signed contracts in good faith. But hey, I guess it’s a sacrifice they’ll have to make. So that we all may be reminded of the law of the jungle. The carrot of pecuniary reward and the stick of personal economic disaster! If it worked for Ricardo 200 years ago it’ll work for them too!
I agree that these companies are truly screwed up. There’s no doubt they have to change radically. But our expert fabricators and their families aren’t responsible for that. They do a difficult, specialized job and I’m glad they get paid well and taken care of.
November 19th, 2008 at 9:27 pm
Well, then here is the question or two…
If unions are the reason for high quality, then how do the foreign manufacturers make such a good car in the southern USA without union membership?
When Obama comes into power in January, what will be the reason the big 3 change to make a more competitive product if they’ve already been guaranteed a financial backstop by him in the run up to the election?
The UAW contract as described tonight on CNBC, is better than every other private labor contract in the US…why should we contribute to that, as taxpayers? Taxpayers should bail out workers who are getting a much better deal than they themselves have at their place of employment?
Of course management should be replaced. Is anyone but Wagoner against that?
Lot of emotional response tonight..
November 19th, 2008 at 9:42 pm
And Ed..I think your idea of the UAW owning GM is sound…certainly the airlines have shown this can be done. And if the workers owned the business what a wonderful way to guarantee innovation…frankly I think it is brilliant.
November 20th, 2008 at 9:08 am
It seems to me that the auto industry is facing 2 problems and while the discussion surrounding the long term issues (product mix, pension obligations, etc) has gotten plenty of attention, isn’t the immediate problem of low sales in recent months resulting from the credit situation really the one that is causing the current cash flow issue?
My solution to the immediate problem of low sales is a coordinated sales tax holiday for the purchase of new cars.
Seems to me that this type of action would follow the Bernanke approach to stimulus of being timely, targeted, and temporary. It’s still the government’s balance sheet that takes the hit in lost tax revenue, but it allows a boost to the entire chain of businesses involved, from dealers to lenders, to manufacturers.
It’s a risk for consumers to commit to a new car purchase and the only way to reduce the risk is to reduce the amount of money on the line. Sure, the sticker price could be lowered, but that doen’t help the dealer/manufacturers. A sales tax holiday reduces the total cost, but allows the dealers and manufacturers to get a better price. It also avoids the moral hazard of singling out US auto makers which would be a protectionist mistake considering the amount of business foreign auto makers do in the this country now.
November 20th, 2008 at 10:27 am
Since we obviously have so many experts on the auto industry commenting I hesitate to advance an opinion although I spent around 30 years in and around the industry. Leaving aside for the moment where the DIP financing for this maneuver is going to come from, the central flaw with the whole idea of putting these companies in chapter 11 is the resultant collapse in market share that will result. Automobiles are not commodities unlike airline tickets and steel which are the most often mentioned examples of where reorganization has occurred in bankruptcy. This difference is so fundamental that whenever any proponent of throwing the big three under a bus mentions it I immediately assume they have no grasp of the issue. In a so so year the US auto market is around 15 million units of which the D3 have a third. If you put them in chapter 11 they are going to conservatively loose 50-70% of that SOM as a flight to quality takes place. Who is going to buy a $30,000 Dodge or Chevy when they think the dealership is not going to be there in a year. The resultant loss of revenue generation that arises from this will be devastating not only to the car companies themselves where it makes it likely that few if any will emerge from bankruptcy but also to the D3 distribution chain of around 12,000 dealers who are dependant not just on the sale of the original equipment, the car, but also the huge aftermarket for part/service, and the remarketing of used vehicles. This is going to incinerate billions of dollars of economic activity at towns and cities across America.
November 20th, 2008 at 2:51 pm
GM is only a hundred years old. It was borne out of the creative impulse to make profit by making life better–the basis for the pinnacle upon which American society now sits. Have we completely forgotten how much destruction has to go along w/ every act of creation? That GM would not be here today had the horse and buggy makers had something like the UAW to protect their interests?
Stasis is death for any economic system. A relentless drive towards efficiency is the only hope for survival. Inefficient actors must give way to more efficient ones. Propping up domestic automakers throws good money after bad, and if we keep doing that enough, there will be no more good money to throw.
All that said, the US can still make very good automobiles. Mercedes, Honda, Hyundai and Toyota in my state alone. Droves of people line up for jobs at their factories, but none of their plants have the UAW. You can not pay people not to work and expect to be able to compete.
November 20th, 2008 at 4:03 pm
Why not just bailout the bad consequences of chapter 11. Cover the workers benefits (I think we have to do that anyway by another law). Give them a government line of credit to pay their supplies with cash during the restructuring (first in line to be payed back when they get out of chapter 11). Also make a specific governement underwriting of the guarantees and service contract on all new vehicles sold.