Taxpayers Between “Like a Rock” and a Hard Place on GM Bailout

November 12, 2008 by  
Filed under Economics

Mr. ToughMoneyLove doesn’t particularly want to add to all of the noise being generated about another proposed bailout plan in favor of General Motors and other car companies.   On the other hand, I have opinions and feel compelled to express them before one of the plans becomes reality.  So, these are my hard truth thoughts, in no particular order.

First, a bailout of U.S. car companies is premature.   Yes I know time is of the essence because GM, Ford and Chrysler are hemorrhaging cash.   The problem is that I have not heard anything resembling a workable plan to stop the bleeding.  All the government can do is throw more cash into the fire as a capital injection or loan.  Who will be buying the cars and trucks?  Right now, there aren’t anywhere near enough buyers to generate enough revenue. 

All I’ve heard is that U.S. car companies are in the process of reinventing themselves into builders and sellers of alternative energy vehicles.  Really?  Where are these vehicles and how fast are they selling?  Such a re-invention will take years.  GM’s first savior product is the Chevy Volt, a fully electric vehicle.  Even GM acknowledges that the Volt won’t hit the market until late 2010.  The U.S. car companies don’t have years to re-invent themselves.  Moreover, there already is a $25 billion government loan program in place to aid that process.

Let’s pretend that U.S. car makers had a full line of alternative energy vehicles available for sale now.  Who would be buying them?  Credit addicted consumers have pulled back into their shells (finally) and are actually spending less and saving more.  There are not enough new car buyers.  The government would not only have to hand billions to car makers to fund their operations but pass out yet more billions in incentives and rebates to persuade consumers to buy new cars. 

Second, U.S. car makers are not fully price competitive with Japanese auto makers, which is a big reason why U.S. auto companies have steadily lost market share over the last 25 years.  Build quality has improved relative to Japanese competitors but the disparity in labor costs has not.   For example, in 2007, GM’s labor costs were $26/hour greater than Toyota’s, representing an annual labor cost differential of $7.5 billion!  It is absurd to think that GM, Ford, and Chrysler can suddenly become competitive while still dragging that labor-cost ball and chain around.  The only cure for that is for the unions to agree to massive contract concessions.  Has anyone heard calls for that to happen from the Democrat bailout proponents in Congress?  No – and you won’t.

Third, bankruptcy will not help U.S. car companies.   I had the unfortunate experience of having worked on some Chapter 11 and Chapter 7 business bankruptcy cases early in my legal career.  Chapter 11 reorganization only works in cases where the business is in distress due to a remediable business condition, such as a large, non-recurring tort liability or oppressive contractual liability that can be rejected.  Experienced business managers and bankruptcy lawyers know that it is much better to do a negotiated workout, including for example having the key creditors agree to a reorganization plan before the bankruptcy is even filed.  We have heard nothing about a workout plan for any U.S. car company, one reason being – again- that a key component of any “workout” would have to be concessions by labor.  Otherwise, a bankruptcy filing by GM, Ford, or Chrysler will end up being a slow bleed towards liquidation.  Recall that a large auto industry supplier – Delphi – filed Chapter 11 bankruptcy in 2005 and no plan of reorganization has yet been approved.

So the foregoing summarizes my thoughts on the “like a rock” part of the scenario.  The “hard place” is that a bankruptcy liquidation of any U.S. car company would not just ripple through our economy.  It would be more like a tidal wave.   GM alone has around 300,000 employees, most of whom would be would be out of work if GM failed completely.  Added to those losses would be the resulting failures and layoffs at dealers and at hundreds of businesses who supply goods and services to GM.  The consequences would be devastating. 

All of us would pay for a GM failure in the form of increased taxes that would be needed, starting with a surge in unemployment benefits and a takeover of the GM pension plan.  GM’s many retirees would also suffer and the government would be asked to come in and help them out.  State and local governments that would lose large chunks of tax revenues from closed car plants and their out of work employees would also have their hands out.  On and on it would go.

So, now that Mr. ToughMoneyLove has defined his views of the rock and hard place, what do I think we should do?  First, before any taxpayer dollars are committed to a bailout, I want to see a comprehensive workout plan presented by GM and scrutinized by objective industry experts.  There must be a consensus that it would work.  Don’t expect Congress to apply any such expertise. 

Second, I want committments from union and Congressional leaders to substantial concessions in labor contracts so that U.S. car makers can assume a more competitive position with Toyota, Nissan, and Honda.  Hey – if a bailout plan busts UAW in the chops, you won’t see any tears shed here.  Top GM executives also need to take a hit in the compensation department.  Let them whine.  Where else are they going to work with their sad record of non-achievement?

Finally, if no workable plan is presented and/or labor won’t cooperate, then put GM in bankruptcy and let the trustee start selling pieces off to the highest bidders.  Some of GM will survive in the hands of other car companies who can continue to re-invent themselves in a manner that will reduce our dependence on foreign oil.  The worthless stuff – and I am afraid there will be a lot of it – can be featured in a car museum.  It will be in good company there.  Some of you may not recall that the “Big Three” U.S. automakers used to be the “Big Four.”  Remember American Motors?  

Mr. ToughMoneyLove is obviously no work-out genius.  What are your ideas?

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7 Responses to “Taxpayers Between “Like a Rock” and a Hard Place on GM Bailout”
  1. Ted Murphy says:

    I agree with much of the sentiment here. I did a post on the same subject earlier this morning.

    I am happy that some people still have their senses. Bailing out the auto makers is a terrible idea.

  2. CJ says:

    You hit the nail on the head. The auto industry’s problems are being caused by red flags that have been waving for years. The only real business solution is for them to go into a dormant mode by reducing production and sales staff. While pushing efforts towards R&D.

    In the meantime the government can protect the people who will eventually lose their jobs by pushing the growth of new industries (solar, wind, etc) and infrastructure development (trains anyone) that have a greater potential of success right now than your grandfather’s car manufacturer.

    In 2-3 years, the auto industry will be back with a vengeance and ready to ride the rising economy back to the top.

    Bailing them out is a waste of resources that can only prolong this crisis.

  3. Miranda says:

    I’m pretty much right with you on this one. Especially with regard to demanding that these companies come up with a sustainable business model. Part of the issue here is that Congress for years has been allowing the auto industry to maintain the status quo and supporting its sillier business practices. And now the transition is going to be painful. But it needs to happen. Otherwise we’ll be right back here again.

  4. I have mixed feelings about this as well. While I am not in favor of bailing out car compaines for their lack of foresight and bad planning-like depending on trucks and SUV’s for way too long, they have also been hamstrung by unions for many, many years-to the point that it will be extremely difficult for them to meet the pension and health benefits of retirees’ obligations even if they survive. Without a reasonable plan with concessions from everyone involved, I am not sure if a bailout would work either.

  5. Yesterday, I basically wrote about the same exact points you highlighted in this article. I’m not against giving the Big 3 automakers a bailout, however I think that we as taxpayers need to see some upside to this deal. Furthermore I haven’t seen anything that suggests the Big 3 aren’t going to be on the doorstep of Congress in 6 months again looking for more money!

  6. @Ted – It’s gonna happen so hold your nose.

    @CJ – Agreed- If you take the time machine back to financial news in 2005, the car companies were reporting the same severe problems then. Three years later – still no plan.

    @Miranda – There is a workable business model – it’s called Toyota – lower labor costs, less reliance on trucks and SUV’s for most of the profit.

    @RC – Some of the retirees need to take a hit as well, particularly those that retired at age 45 with a generous pension and health benefits that are bleeding cash flow.

    @Justin – Can you imagine if the Treasury ended up owning part of GM as part of a bailout? They would never get rid of the stink.

  7. Melissa says:

    I’m no expert on anything… but I was just thinking… might we not solve a lot of problems letting failures fail? Obviously, what’s going on at the Big Three isn’t working. And we KNOW that Big Labor will never concede a cent. So… let them fail. YES, there would be consequences. Big, huge consequences that will touch everyone. What ISN’T big, huge, and affecting everyone right now?? Mortgage failures? Stock market? Everyone said we couldn’t let those happen – and despite the Bailout, folks, they’re happening. There are all sorts of consequences going on out there right now, and most of them are happening to the “little people” like me. My home lost HALF it’s value- I’m taking it up the tailpipe because we have to sell to be near ailing parents, and no one is going to bail ME out when my short-sell DOESN’T sell and I get converted to a foreclosure. I’m fine taking my knocks. I’d like to see the “big guys” take their knocks, too. On a tangent, I do think it’s funny to see massively stupid generalizations like “republicans are always in bed with big business” but I don’t see any R’s crawling under the sheets with Big Three right now, and an oddly large number of D’s who are… In fact, I hear a lot of the R leadership screaming “no!” on behalf of their fed-up, dead-broke, no-one’s-bailing-US-out constituents. (remember when no meant no?)

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