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