Background: Weeks after floating the notion of buying Chrysler and getting a Federal bailout, GM put the deal on hold--but not the bailout. The bottom line is sinking: on Thursday, "Goldman Sachs suspended its rating on General Motors Corp" and Chrysler said it would be "very difficult to survive" without government support. Ford said it could last through 2009 by borrowing money. Although GM warns it will run out of cash by year's end, it insists bankruptcy is not an option (and has the MSM parroting the point).
So the automakers have launched a massive crusade, with arms being twisted in Congress, proposals for the President-elect, hand-wringing from Michigan's (Democrat) governor (an Obama economic adviser), a media campaign masquerading as news analysis (especially in the automotive house-organ ironically known as the Detroit Free-Press), with a background chorus of pleading car dealers. Just don't call it "lobbying."
However labeled, it may be working: Nancy Pelosi and Harry Reid claim a big-3 bailout can be accomplished under current law; President Bush is wary but open to the idea (though possibly tying funding to concessions on free trade); Obama's asked Bush to take the cup from his lips and bailout before January 20th; and, says The Truth About Cars, "House Financial Services Committee Chairman Barney Frank, D-Mass, will introduce legislation that will change the rules on the previously approved $700b financial rescue package so that America’s ailing automakers can stick their snouts into the federal trough." Looks like Tom Paxton was prescient again.
Analysis: Don't buy the hype. The better alternative is bankruptcy (reorganization or possibly liquidation for Chrysler). This would dump current controlling ownership, wipe out remaining shareholder equity and, like the airlines, allow the companies to shed part of their pension obligations.
But bankruptcy wouldn't doom the American auto industry, as The Corner's Jim Manzi explains:
The factories, computers, office space, intellectual property and so forth that are now owned by GM would not disappear; they would basically become the property of GM’s creditors. These creditors would sell the assets to the highest bidder. Assuming there is economic value to be created by continuing to operate the company as a business, private equity or strategic investors would buy the assets, shut down some plants, fire some union and exempt workers, and probably use the leverage of bankruptcy court to get a better deal from the unions. . .In other words, bankruptcy provides a tested and supervised approach to ensuring the continuation of productive assets. Yes there are costs--public (mainly unemployment insurance/retraining and, if necessary, topping-off funding for the Pension Benefit Guarantee Corporation or the worker health-care fund) and private (jobs and supplier companies, earnings, lower car resale value)--but likely demanding less public funding than a bailout. (Remember, the big-3 already are in line to get $25 billion in government loans.) And as Investor's Business Daily notes, "if GM had better management, it would decidedly not need the federal funds it presently seeks."
Is this fair to the people who work at GM and will now have a deal changed after the fact? Well, when people sold parts to GM on credit, or employees (individually or via union negotiations) entered into labor contracts with GM, they undertook counterparty risk. That is, they were taking, in part, a bet about whether GM would actually be able to pay them what they are owed. This is also true for pension payments, which are simply deferred compensation, as much as it is for deferred payments on credit terms for parts. To act now as if they should be protected from this risk is to treat them as children. . .
Isn’t it important that we maintain an industrial base as a matter of national security? Yes, but that is not the same thing as saying that the current management of GM needs to continue to have operational control of these assets, or that current employment levels are appropriate, or that current union contracts need to be maintained.
Moreover, the existing bailout law is a particularly poor fit: it was a financial, not corporate, measure. And its rationale doesn't cover auto companies:
The Tarp was intended to save the financial system from collapse, not to be a honey pot for any industry running short of cash. The financial panic has hit Detroit hard, but its problems go back decades and are far deeper than reduced access to credit among car buyers. As a political matter, the Bush Administration is also long past the point where it might get any credit for helping Detroit. But it will earn the scorn of taxpayers if it refuses to set some limits on access to the Tarp. If Democrats want to change the rules next year, let them do it on their own political dime.Or over a veto next month.
OK, what if a bailout is inevitable next year? Congress and the President should insist on a pre-packaged bankruptcy before bailout. Bankruptcy is the simplest way to force renegotiation of union contracts, where total compensation is comparatively high (as Professor Mark Perry demonstrated Monday) and supplier contracts. And bankruptcy best ensures that taxpayers assist the company, not current owners, not managers who kept unprofitable vehicle lines selling at historically low prices, not Michigan politicians who shielded the companies from the competition that could have forced them to adapt, nor the absurdly powerful car dealers, nor owners and unions who made informed predictions about the company's future. As the Wall Street Journal explains:
A thorough housecleaning at GM is the only way to give the company a fresh start. . . . As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.That's why, as Indiana governor Mitch Daniels observes, merely throwing money towards Detroit won't fix it.
Conclusion: Plenty of informed opinion argues against bailouts. Many have addressed the case for or against nationalization. And there are legitimate disputes over the politics and economics of intervening in the auto manufacturing market, reflected even in the New York Times:
As the auto industry reels, rarely has an issue so quickly illustrated the differences from one White House occupant to the next. How Mr. Obama responds to the industry’s dire straits will indicate how much government intervention in the private sector he is willing to tolerate. It will also offer hints of how he will approach his job under pressure, testing the limits of his conciliation toward the opposition party and his willingness to stand up to the interest groups in his own.Yet, regardless of how current and future leaders resolve these policy disputes, my point is more narrow. Simply put, bankruptcy first and bankruptcy as a condition precedent for Federal help. Hear the Wall Street Journal:
A bailout might avoid any near-term bankruptcy filing, but it won't address Detroit's fundamental problems of making cars that Americans won't buy and labor contracts that are too rich and inflexible to make them competitive. . . While GM has spent billions of dollars on labor buyouts in recent years, they are still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.Meaning that excluding bankruptcy from any Detroit rescue would be unwarranted corporate and union welfare extracted from middle-class wallets.
Rest assured that the politicians don't want to do a thing about those labor contracts or mileage standards. In their letter, Ms. Pelosi and Mr. Reid recommend such "taxpayer protections" as "limits on executive compensation and equity stakes" that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin. In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. . .
If our politicians can't avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a [bankruptcy] receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies.
Question for Obama supporters: how is that progressive?
Larry Kudlow on TCS:
Total compensation per hour for the big-three carmakers is $73.20. That's a 52 percent differential from Toyota's (Detroit South) $48 compensation (wages + health and retirement benefits). In fact, the oversized UAW-driven pay package for Detroit is 132 percent higher than that of the entire manufacturing sector of the U.S., which comes in at $31.59.
I don't care how much money Congress throws at GM. With that kind of oversized comp-package they are not gonna be competitive. It's throwin' bad money after a bad cause. What a way to start the new Obama era.