The automobile companies, or at least, initially, General Motors (GM), should be put in a prepackaged bankruptcy with preannounced debtor in possession financing from the US government. The following objectives would be achieved immediately through this prepackaged bankruptcy.
- All labor costs, both on worker and executive levels, would be restructured to assure that the company can operate with costs levels that are competitive with worldwide car manufacturing costs (i.e. Toyota (TM)).
- This means that unionized workers will end up with salaries that are significantly less than now, but at least they will have a future and a job which pays much more than McDonald's. Salaries will probably be arrived at by a model which creates an economically viable company and then backs into what can be reasonably paid to the workers. GM executives say they have a structure which by 2010 should make GM worldwide competitive; this should be determined by independent analysis.
- Likewise, executive pay must be reasonable compensation. No big bonuses or contractual payouts.
- The current debt holders must take major write-down on the value of their debt holdings. These might be 50% to 75% reduction of the current face value of the debt. The rest of the debt will be written off in the bankruptcy so that the company can reasonably become cash flow favorable. (Any plan which does not result in GM being cash flow positive is wasting money)
- Currently, equity holders will only receive a very small value of the residual company, say 10%, of the future equity. The rest will be held by the new investors, hopefully including private equity firms who know a good plan when they see it. For example, the new equity distribution could be 10% current shareholders, 20% current bond holders who take a 75% reduction in their debt holdings (this is an addition to the 25% of their original debt holding) and 70% for new equity investors including the US government and private investors willing to bet on the new restructuring.
- A plan will be created (and hopefully exists in the car companies) to make the investment necessary to make them competitive in future low-cost, fuel efficient models and the plant capacity necessary to do this. This plan must determine the monies necessary to implement it.
- The government must create or approve the plan to fund the company based on the above principles. While a significant part of the funding will come directly from the government, private bank financing should be available for a well thought out plan, especially if warrants or other kickers are provided to private equity financiers.
- This plan creates financial losses for almost everyone associated with GM. But it also does not destroy anyone associated with GM. It builds for the future and does not depend on favoring one sector over another (banker vs. employee vs. bond holder vs. equity holder). This writer believes all other plans will provide temporary relief for one sector or another, but ultimately these alternate plans will cost everyone much more.
How does this plan compare to the currently most discussed options in the press?
- Government bailout or stimulus package for auto companies. Without fixing the underlying problems, money put into the auto companies will simply be money down a rat hole. It will provide cash flow for a little bit and then the same problems will cause the bankruptcy. Money alone will not make GM viable. Only fundamental restructuring of labor and financial costs along with updated products can make GM viable.
- Normal bankruptcy. The worst fears of the car companies will be realized. Consumers will not buy cars from a bankrupt company. Parts suppliers will go broke, dragging down the other auto companies also. While the government avoids putting in new money in normal bankruptcy, it will lose much on the cost of social benefits and lost taxes coming from a viable company. Normal bankruptcy is not good for America in this case.
Three additional thoughts.
- Secretary Paulson’s plan to save financial companies is ill-conceived. Saving banks in Secretary Paulson’s terms means really saving the equity investors in the banks and will not produce more loans and jobs in the general economy. You cannot force a bank to lend when the bank believes they are unlikely to be repaid. In recent days, even Secretary Paulson has now publicly admitted this at least with respect to the original TARP proposal.
- President Roosevelt’s plan of building roads in the 1930s and the current Chinese government’s plan to do the same thing is correct economically. The money here goes directly to needy workers and you really get a road when the project is done. The above suggestions on fixing the car companies is much in this same context. Create viable jobs for American workers.
- The US government sector does not have enough money to bail out every problem in the private sector. For President-elect Obama to be successful, he must create bold but effective plans that really fix problems. America has effective leaders that can be enlisted if there are effective plans to fix a problem. But President Obama needs to truly confront underlying problems and not put simple band aids on much deeper problems as has happened in recent times. Dealing politically with the labor issue in the car companies will probably be the hardest part of the above mentioned plan. It will also be a test of whether President Obama is a real leader who truly fixes the problems.
Disclosure: no positions