Why the Detroit Bailout Should Include Bankruptcy

With Deutsche Bank saying that GM is worthless, and some kind of government bailout of Detroit now a certainty, the battle lines are being drawn:Is bankruptcy an option? Justin Hyde says it isn't, and he might well be right, politically. But it certainly should be an option, and Joseph White has an excellent column today explaining why.

If there is to be a government bailout of Detroit, a large sum should go towards funding the union retiree health obligations set up by the three big automakers in 2007. There should also be a scheme to backstop the automakers' warranties, so that consumers don't balk at buying a new GM car for fear the automaker won't be around any more to make good on its obligations. But I see no reason why GM in particular, and US automakers in general, shouldn't take advantage of the perfectly-good bankruptcy system if they're insolvent. Yes, the government might be the entity extending the debtor-in-possession financing. But GM bondholders should absolutely share in the pain here.

Comments

[Pipo:]

These companies should have gone out of business years ago. They are not competitive, so close them out. Jim Rogers as been saying that for years. They are the new zoobie companies like the japanese had in the nineties.

jimrogers-investments....

2008 Nov 10 01:55 PM

[elroy:]

It's been an unfair playing field for years and the Big 3 haven't enjoyed the support that Japanese and Korean automakers get from their governments.

It isn't just the automakers that you're talking about -- its the millions of other jobs associated with the industry in the steel industry and parts industry, Yeah, the assembly jobs may go to Honda or Toyota ... largely with imported parts and the US is still a net loser.

Do really think that the US economy is stronger losing all it's manufacturing jobs? How many dollar stores selling Chinese goods do we need? What do those jobs pay?

In bankruptcy, companies can cut wages and benefits for retirees to get healthy -- all American of course. Obviously you're not one of them!!!!!

2008 Nov 10 02:08 PM

[Slowboat:]

Why are government/citizens required to bail out union management and their members who have lived on greed and intimidation to get what they want. Other car companies will and can pick up the absence of a GM or Ford. Why are taxpayers required to bail out manufacturers who put out products fewer and fewer want or need? Why doesn't government step in a prop up other dying industries such as the mechanical calculator industry or typewriter industry...citizens don't need expensive and poorly built auto's. It only benefits the politicians and union members who vote for them at my expense.

2008 Nov 10 02:45 PM

[Duke5125:]

While I personally do believe it's important to have manufacturing capacity in the U.S., I worry about sinking billions into GM and Ford (Chrysler has no reason to exist, I'm afraid). At their current burn rate they'll simply blow through another $30 billion in less than a year. Without some serious restructuring this is just throwing more money after bad.

The market for new cars will continue to be slow for at least another year. The new technology vehicles GM (in particular) has been portraying as their future are at least 18 months away and unlikely to be available in enough volume to turn their fortunes around. At the same time the imports are continuing to move forward with new products and will likely trump GM to market with their plug-in hybrids. All of this at a time that GM is still too large for the market we had last year, much less the current <15 million new car market.

GM leaders have been unable or unwilling to take the drastic action needed to restructure the company but short of Chapter 11 there are good uses for Government money:

1- Sizeable one-time sererance packages for union employees who are currently getting pad their salaries for doing NOTHING.

2- Billions to disolve franchise agreements with dealers for brands they can no longer aford to support. Thus simplifying their product lineup (many of which simply compete against themselves) and reducing development and marketing costs long-term.

3- Money to keep product development moving forward so that they have something to sell in two years when the market picks up again.

Needless to say, I think a lot of the current leaders (many of whom have been at the help of these companies while they dug their own graves) need to go as well, but it seems that they already have their own retirement accounts fully funded.

2008 Nov 10 03:01 PM

[sashe:]

My email to President Bush... I disagree with anyone who says let GM or any of the Big Three go BK and so should you. Our country would take a financial hit like it has never seen before... this is how stronly I feel about it...

President Bush,

Emotions are taking over... Canada seems to be more interested in helping the Auto Industry than the United States of America.

Sir, I am a veteran of the Persian Gulf War and with all due respect, I am going to ask again.

Please help our auto industry. It is the backbone of our country. Without it... many will feel defeated, lost and scared. Please help us President Bush... The country could use some good news ASAP.

I served on board the USS Reuben James FFG-57, 1990-1994. I would have gladly given my life for this country and was prepared to do and at the age of 40 I would gladly enlist again if the country needed me. I left my mother and father in 1991 thinking this will be the last time I will ever see them... and I was accepted my position with the understanding that I will always fight for my country no matter what the sacrafice.

I offer the same sacrifice in regard to the auto industry. In my opinion, this is a matter of National Security. Our country can not afford to fail in this arena. We must move forward; supporting the "Big Three". At the same time we must hold them accountable for their actions. The US Auto Industry must change its business strategy so it can compete with the rest of the world.

I know you can accomplish this before it is too late. Please sir, please help our country.


Best,

Steven Ashe
[e-mail]
[phone]


----------------------...
From: AsheKnightFM
To: [e-mail]...
Sent: 11/10/2008 10:42:13 A.M. Eastern Standard Time
Subj: President Bush please help us.


President Bush,

My wife works for General Motors and we are very concerned. "Not for our own well being" but for "The United States of America". General Motors is in trouble and it is getting worse by the second... not minutes, hours or days... seconds. All of the auto makers need help NOW... not later.

Many people could lose their jobs if any of the "Big Three" go under. Please help our country and all the families who depend on the auto industry to put food on their table, pay for clothing and pay for medical care.

For the first time in my life, "I am scared"... Scared about the future of our country. Please help our country before you leave office, I'm begging.

Best,

Steven Ashe
[e-mail]
[phone]

2008 Nov 10 03:13 PM

[Max Rasmuth:]

The Japanese/Korean manufacturers get "tax breaks" to build here...so they don't pay anything to the government...If GM, Ford or Chrysler want to build or retool a new factory, do they get tax breaks?...

We allow them to flood our market with vehicles...can U.S. automakers sell in Korea?...No. They laugh at the foolish Americans and take our money.

They can sell "some" cars in Japan...at great inflated prices forced by the Japanese government. They protect their own.

The U.S. manufacturers have 100 years of retirees that they are trying to still give a good life too...retirement benefits and health care. The Japanese/Korean automakers, virtually none and what they build oversees is basically done with slave labor...at least compared to our lives.

Bailouts are not what is needed...the government needs to do what every other government does to "protect" their own industry.

Limit the amount of foreign autos in this country and tariff them...30-40%. Watch how quickly the American manufacturers recover and how many more middle class jobs are created as new factories are built to meet demand and more shifts are added. Even if foreign manufacturers who build some cars here have to layoff...the amount of jobs created would easily absorb that loss. Good middle class jobs are the engine that drives the U.S. economy and GM, Ford and Chrysler have been the biggest contributers to middle class jobs for 100 years. Letting foreign competition have a free ride is ludicrous and foolish. Thats why other countries don't allow it to happen.

Its actually very simple.

2008 Nov 10 04:04 PM

[ctj:]

Is there anyone on this blog who would make a 20k-40k purchase that will need parts and service for several years from a company that is in bankruptcy? No....I didn't think so. End of discussion, bankruptcy not an option because it would never make bankruptcy but would skip straight from insolvency to liquidation. Bankuptcy=Nuclear option. GM knows that and that is why they avoid the "B" word at all costs. Problem is you financial guys think like financial guys when it is consumers who buy the product. Thank God GM management inept or brilliant doesn't think like that.

2008 Nov 10 04:20 PM

[2222:]

Sashe,

It warms my heart to know that there are still some Real Americans left in this country. I salute you sir and thank you for serving our country.

As far as GM - we as a nation need to get behind our home teams. Look at Japan - the domestics have a 90% market share, get favorable treatment in the press and manipulation of the yen to keep exporting profitably. What middle class do you expect to be left to pay for the services in a service eceonomy when all the manufacturing is gone? I know when I loose my job the last thing I will afford is a lawn service and a cleaning lady for the house!

Why don't we stop bashing GM based on old data.

Duke 91 you are a classic. If you really think that foriegn companies will "trump GM with new products". GM has been hitting the mark for the past 3-4 years. They have won car of the year honors, look at the Malibu quality data by JD Powers - beats Camry and Accord, more E85 vehicles than anyone else and 3 of the top 7 Hybrid models based on Consumer Reports ROI.

What we need as a nation is to wise up and start supporting GM. A million people rely on them for their health care and retirement benefits. Get a grip and lets buy GM, they make great products.

2008 Nov 10 05:09 PM

[russb:]

This is an abstract of a paper I recently wrote while working on my masters degree in international business

In this article the author presents a lose correlation between the auto manufacturer General Motors and the United States financial sector. The author states his case for General Motors to receive additional government funding to continue its existing manufacturing operation. The article does not address the problems and lack of sound business practices that brought General Motors to this point and concedes that they are a victim of circumstance instead of taking responsibility for their own actions.

The author states that if General Motors were to fail, that failure would have serious repercussions throughout the entire US Economy. The problem that his article only touches on is that General Motors has been losing market share for years due to the corporate leadership’s failure to maintain its competitive advantage. The author does indicate that the General Motors Board of Directors and upper management need to be replaced. To directly contradict the author, General Motors has been losing billions of dollars since 2005 (before our current financial crisis) because the auto maker failed to reduce its costs and maintain higher standards of quality control. Meanwhile its competitors, both foreign and domestic, were reducing their costs and increasing their market share.
The failure of General Motors there would not be a more efficient company there to pick up the pieces and start manufacturing based on sound business practices.

In order for General Motors to survive as some semblance of the company that it is now they need to quit begging for US Government Aid and seriously take a look at their organization and how they can best utilize their remaining resources to better their organization.
General Motors needs to start with an evaluation of its general and specific environment to see where it can reduce costs, increase productivity and gain a competitive advantage. One aspect of the specific environment that General Motors needs to pay particular attention to is its association with the United Auto Workers Union. This association is one of main reasons that not only GM, but Ford and Chrysler are in their current financial situation that they find themselves in. According to the 2007 UAW / GM contract, each UAW worker received an additional thirteen thousand dollars per year in hourly pay, plus substantial increases in all previously agreed upon benefits. General Motors management needs to realize that they should not be held hostage in their own corporations to the whims of unions. How can GM expect to compete against foreign automakers that produce products that far exceed domestic industry quality standards, and are produced at a lower cost per vehicle, if they continually give into demands for higher wages and incentives when their competition is continually reducing their costs.
General motors needs to take a hard stance with the UAW and institute a new contract where the members either accept at least a 40% or more reduction in wages and benefits. This would allow GM to utilize the cost saving and apply it into research and development and develop vehicles that are pertinent to it current operating environment. If ever were the time for GM to approach this tactic it is now, with auto sales at their lowest level is years, GM and the other domestic auto makers bleeding cash at worst a walk out by the unionized employees would save some them money on their current expenditures. If they can’t sell the vehicles their making why continue to pay for production. A prolonged strike would help them save cash and if need be relocate their operations to other geographic areas where the cost of labor would be cheaper.
The United Auto Workers are doing now what the United Mine workers did in the early and mid 1980’s. Where they continually demanded more and more from the companies they held over a barrel and eventually the companies became so unproductive and their products so overpriced. It became cheaper for their customers to import coal from England and Australia than it was to buy it domestically.
More recently the machinist union cost Boeing millions upon millions of dollars in lost sales and missed contractual deadlines because their union officials wanted more wages and benefits, while Boeing’s competitors reaped the rewards of the Boeing strike.
The auto industry if allow to continue on its present course will perish and die, without drastic restructuring they will soon be in line of failed industries, as an example the US textile manufacturing industry collapsed and shipped thousands of textile jobs overseas to lower labor cost markets because the unionized labor demaned more benefits and wages than the industry could afford to pay. If its cost more to make a product than you can sell it at you are doomed to failure
Secondly General Motors would have to examine its relationship with its parts suppliers. According to the course text General Motors owns a majority stake in its parts supplier which greatly reduces its flexibility and negotiation power with them. Here is one instance that GM needs to learn from its competitors and implement the Japanese system of Keiretsu where it relinquishes its ownership to that of a minority level and is still able to manage its crucial inputs. For example because of Toyotas relationships with its suppliers it was able to engineer a seventeen hundred dollar cost savings into each new Camry it produces.
Lastly GM, being as large a corporation as it is needs to examine its hierarchy and restructure it to be as flat as possible to reduce bureaucratic cost to the minimum possible level.
The author did discuss the possibility of a General Motors and Chrysler merger that would result in more restructuring, and that GM over the last few years has been trying to reestablish its market share by producing superior quality vehicles. This analysis is still flawed because GM operates in a very large and competitive market. They cannot survive by only trying to produce a high quality vehicle in a very large line up. This mentality works may work in a niche market like the ones that Porsche and Ferrari are in, but the larger market as a whole is very unforgiving in lapses in foresight.

In conclusion the author is correct that our country needs a manufacturing base for the economy to survive, but he did not take the entire industry into account in his conclusion that General Motors needs government welfare to survive. What GM needs is strong leadership that will make decisions that are best for the survival of the company and stand up to union socialists that will eventually run them along with the other domestic auto manufacturers into the ground, because the companies cannot compete with other foreign industry leaders in cost reduction and product innovation as long as the United Auto Workers has a strangle hold on the corporate leadership.

2008 Nov 10 05:30 PM

[Wadhamite:]

I don't believe the demise of GM or any other automaker would drive prospective buyers away from the product due to warranty concerns. Many of us who have owned vehicles more than 10 years old have already crossed the bridge of no corporate parts support; there is almost always a good third-party network (and lots of junkyards) to fill the gap.

Bankruptcy is not necessarily a dead end. We still have K-mart stores, for example. And we still have Chrysler after their miseries. Never mind Schwinn bicycles.

The government has no money trees. When corporate America goofs, corporate America follows free enterprise.

2008 Nov 10 05:55 PM

[russb:]

I own a 2008 GM (tahoe) and it will be the last one that I ever purchase, within 8 months it has had to be put into the shop almost monthly. The door handles fell off of the inside rear doors, the windows didnt roll up and down properly after 9 months, and the tire pressure monitoring system keeps failing. I have to put it in the shop agian this week because the drivers side window makes a metal on metal grinding sound when it is rolling down. So I really dont believe that winning a award make the product any better than it is.


On Nov 10 05:09 PM user 2222 wrote:

> Sashe,
>
> It warms my heart to know that there are still some Real Americans
> left in this country. I salute you sir and thank you for serving
> our country.
>
> As far as GM - we as a nation need to get behind our home teams.
> Look at Japan - the domestics have a 90% market share, get favorable
> treatment in the press and manipulation of the yen to keep exporting
> profitably. What middle class do you expect to be left to pay for
> the services in a service eceonomy when all the manufacturing is
> gone? I know when I loose my job the last thing I will afford is
> a lawn service and a cleaning lady for the house!
>
> Why don't we stop bashing GM based on old data.
>
> Duke 91 you are a classic. If you really think that foriegn companies
> will "trump GM with new products". GM has been hitting the mark for
> the past 3-4 years. They have won car of the year honors, look at
> the Malibu quality data by JD Powers - beats Camry and Accord, more
> E85 vehicles than anyone else and 3 of the top 7 Hybrid models based
> on Consumer Reports ROI.
>
> What we need as a nation is to wise up and start supporting GM. A
> million people rely on them for their health care and retirement
> benefits. Get a grip and lets buy GM, they make great products.

2008 Nov 10 07:21 PM

[shalmirane1:]

How does having the Federal government lend $15 billion + to fund GM's
retiree benefit obligations help get a single car built? If GM can't pay these benefits then the retirees are out of luck. They will just have to rely on Medicare like the rest of us.

2008 Nov 10 09:42 PM

[Steven Hansen:]

forget bashing the management, the unions, the japanese, the playing field ........ all had a hand in how we got here.

i am a pragmatist. i do not want to throw good money away by bailing out a company that obviously is in a serious decline and has been wounded by a recession. i have heard no plan which shows me how things will be different after they are given the money - and exactly what is the plan to repay any loan if the economy stagnates for the next 10 years (just like what happened in 1930's).

but i am conflicted because the usa is in such a weakened position, this kind of economic shock makes the countries economic stability impossible. i am sure it will start a cascade which will close all of the usa automakers. we can argue all day whether this is good or bad - but the short term effect would be catastrophically negative to the economy,

we need to help the automakers die or reorganize without causing chaos. they cannot continue as is.

2008 Nov 10 10:29 PM

[PacificGate...:]

THE AUTO INDUSTRY NEEDS SAVING, BUT ONLY VERY DRASTIC ACTION WILL SAVE DETROIT

CONGRESS: Here’s a radical plan…

pacificgatepost.blogsp...

It’s this, or bankruptcy. The American Auto industry should be saved but under new conditions.

2008 Nov 10 10:48 PM

[MiddleOfRoader:]

Perhaps an economist can comment on how long it would take, in the event of no bailout and a bankruptcy filing, for the foreign makers to raise prices due to lesser competition such that the cost to the public for new vehicles over the next couple of years exceeds the current cost plus proposed bailout.

2008 Nov 10 10:52 PM

[dr.doolittle:]

using taxpayer dollars? what's in it for the taxpayer? I have no problem saving all those poverty stricken industrialists and their workers (weren't they all make 6 figures from the 80's until 2000?), but like the guy with that POS Chevy Tahoe, demand a maintenance contract from all producers for the American people being forced to given them their hard earned money. I mean, c'mon--are the folks going to get anything for the TRILLIONS being wasted? How 'bout we stick 'em in death camps--I bet then they'll start making something other than the freedom fucking machines they do now.

2008 Nov 11 11:52 AM

[jimmy46:]

""t's been an unfair playing field for years and the Big 3 haven't enjoyed the support that Japanese and Korean automakers get from their governments""
@ELROY

And do the japanese car companies in the US get these benefits?

Bankruptcy is needed to change the pay scales, work rules, and
health and pension plans.

There are too many problems!!!

2008 Nov 11 01:53 PM

[mwclark:]

I've sold GM and Chrysler products for the last 5 years. I've seen them up close and seen how satisfied customers are with them. They're sub-par in quality, reliability, and fit and finish. The Koreans are building a better product. If Hyundai starts building trucks, Detroit can forget about it. When brand new cars need service the day after they roll off the lot, repeatedly, there is a problem.

2008 Nov 11 05:34 PM

[Charles A...:]

Good ole Elroy has his numbers wrong. Japanese parts suppliers are here.
Detroit has been buying parts from Korea and Mexico for the last 20 years. Assembly is mostly Canadian. Why? Among other things, Canada has a national health insurance system.
What's left are an overpaid few who make outrageous money compared with other industries doing the same kind of work. NAFTA has benefitted them enormously. What difference did it make? Look, GM and Ford have spent a fortune facilitating Shanghai with plant and equipment. They have Design Centers there! It was expected that both would become exclusively importers of vehicles into this country. How about ending this bail out insanity and get back to real business?

2008 Nov 11 06:11 PM

[Snuffy:]

No way should the auto industry be given any financial assistance. The only choice I have as a consumer is to not buy items I think are of poor quality and/or overpriced. Apparently a lot of others felt the same way as I do. So those companies should have reacted to the consumers by making higher quality, lower priced products. By allowing the companies to survive you have taken away the consumer power of choice. Know what? People still aren't going to buy items that are high priced junk, so what good is a bailout of a sorry company?? Unless they change drastically, which I think is doubtful.

Let em rot; and root hog or die like my family had to when all the textile mills closed. Where was the government bailout then???????

2008 Nov 14 06:04 PM