General Motors Bailout: Consider Other Alternatives

On September 24, Congress approved a $25 billion bailout for GM, Ford (F), and Chrysler. "It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small." The three troubled automakers are already back in Washington D.C. asking for another $25 billion.

A couple of weeks ago, GM said that the future of our nation depended on it getting added billions so that it could buy Chrysler. GM has changed its mind. It just wants taxpayers to give the Detroit three another $25 billion. The problem is that the total of $50 billion is paid by taxpayers like you and me.

Congress would do well to have some national goals for the $50 billion, not goals set by auto lobbyists. Goals include America’s need to become competitive with the world if we hope to create more jobs and end this recession. Workers need help by either keeping their jobs or by getting new jobs. Americans need cars that cost less at the pump and better alternatives to always using a car. America needs to be energy secure, not desperately dependent on oil. To meet these goals, several alternatives are being considered:

• Another $25 billion with no strings attached.
• Let GM reorganize under Chapter 11 bankruptcy.
• Boost consumer auto purchases with tax credits for buying vehicles with excellent fuel economy.
• Invest the $25 billion in rail and transit.

When Chrysler got its 1980 loan guarantee, Lee Iacocca cut his annual salary to a dollar and slashed the wages of other top workers by 10 percent. The tax payers never paid a cent. It was a $1.5 billion loan guarantee.

This time around, Chrysler will be fine. Chrysler President Jim Press, when talking in September at a Western Automotive Journalist meeting, stated, “We need a new business model based on one word – Reality.” The new management team at Chrysler inherited a 4 million car per year overhead with sales falling to one million per year. Chrysler is privately owned by Cerberus Capital Management. Chrysler has been actively downsizing to be smaller, agile and profitable.

Ford is also moving to a business model that matches the name of its best selling car – Focus. In recently discussing its third quarter results, Ford stated that it remains on track to achieve $5 billion in cost reductions in North America by the end of 2008 compared with 2005. After a quarterly pre-tax loss of $2.7 billion, Ford had overall liquidity of $29.6 billion. The company promised shareholders further cost cuts and cash improvements.

In his November 17 Wall Street Journal article, Michael Levine discusses why Chapter 11 bankruptcy is the best option for GM. Chapter 11 would allow GM to be more competitive with Toyota (TM), which is now the world leader in market share.

Over the years, GM has lost about two-thirds of its market share. Only with bankruptcy can GM be free of restrictions that prevent it from being competitive. It has 7,000 dealers compared to Toyota’s 1,500 successful dealers. GM has enormous pension and health care costs that add thousands to the cost of cars. The burden is so great, that GM needs SUVs to make money and sees no margin in fuel efficient cars. Yet, it is fuel efficient cars that customers are now buying. If GM reorganizes under bankruptcy, creditors will be forced to give it breathing room and paralyzing restrictions will be removed.

Robert Reich, former Labor Secretary, wrote on November 11,

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it - called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny. In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts.

Al Gore, in his November 9 NY Times Op-Ed identifies a major opportunity,

We should help America’s automobile industry (not only the Big Three but the innovative new startup companies as well) to convert quickly to plug-in hybrids that can run on the renewable electricity that will be available as the rest of this plan matures. In combination with the unified grid, a nationwide fleet of plug-in hybrids would also help to solve the problem of electricity storage.

Now law, the Emergency Economic Stabilization Act of 2008 gives tax credits exceeding $7,000 for the purchase of plug-in hybrids. President-elect Obama, when campaigning, favored expanded use of tax credits to speed the transition to a competitive auto industry that makes clean cars. Consumer vehicle spending could be boosted now by expanding the offering to include a $2,000 tax credit for vehicles getting over 35 miles per gallon and up to $10,000 for zero-emission vehicles. Auto industry sales would immediately jump without a $25 billion give away.

In the seventies, I left my job with a major Detroit corporation, Burroughs, then the second largest computer firm. At the time, all makers of mainframe computers were in trouble, including IBM. If the government had done a massive bailout and protected their businesses, the United States would not have transitioned into the global giant of information technology. Lacking a bailout, IBM reinvented themselves into a global leader in IT services with a deep new patent portfolio. Burroughs became Unisys (UIS). Honeywell (HON) redefined itself. GE exited the computer field. An industry thrived instead of died. The transition made the United States the global leader in the Internet and technology innovation, creating millions of jobs.

Big corporations resist change, yet change they must. To grow and be profitable, the United States transportation industry must be innovative and responsive to customers.

Car customers are voting with their pocketbooks. The average car owner spends $8,000 on their car. The average household with two cars spends $16,000. People are demanding fuel economy. They have stopped buying vehicles with lousy mileage. They want hybrids that deliver over 40 miles per gallon. There is a pent-up demand for millions of electric vehicles and plug-in hybrids.

Only a smaller innovative customer-oriented GM can create permanent jobs. Yes, a GM bankruptcy reorganization could lead to the short-term loss of over 100,000 jobs at GM, its suppliers, and some of its dealers. These laid-off workers, however, could be part of a million new workers. Federal government tax credits could be given to any company hiring laid-off auto workers. Community colleges could be funded in Michigan and other states to retrain workers for jobs of the future.

$25 billion invested in public transportation would create over one million new jobs in the United States. The America Public Transportation Association has learned that every $1 billion invested in public transit capital projects generates 30,000 jobs, and the same amount invested in transit operations generates 60,000 jobs.

U.S. citizens want better public transportation as ridership soars to 11 billion this year. This November, voters across the country in 16 states approved 23 measures out of 32 state and local public transit ballot initiatives, authorizing expenditures approximating $75 billion. [Clean Fleet Report]

Senate Majority Leader Harry Reid plans to move forward with a bill that would give the auto industry access to the $700 billion Troubled Asset Relief Program set up by the government in October to help ailing banks and other financial firms.

As Ben Franklin observed, “Great haste makes great waste.”

Congress may release the total $50 billion by Thanksgiving. Such haste sends all taxpayers a message, “Enjoy this turkey. You can pay for it later with interest.”

Disclosure: None

Comments

[MichaelZZ]

GM should go through a "packaged" Chap. 11 re-organization to include:

1) Adjustments in pay - union and white collar

2) Strict control over management's salaries and bonuses

3) A massive, but rational, reduction in legacy responsibilities

4) A 100% loss for all common and preferred shareholders

5) At least an 80% loss for bond holders, other than GMAC holders, to be paid for with new common stock

6) An infusion of the People's funds in the form of preferred stock with "business-like" parameters, such as 10% dividends, a very healthy option to convert into new common, and a serious number of long-term warrants to purchase new common

7) Reduce obligations to suppliers by 30% with the reduced amount paid in new common

The above is a good starting-point of discussions



Michael Z.
Sherman Oaks
[e-mail]
[e-mail]

2008 Nov 18 06:06 AM

[David Martin]

Who is going to be daft enough to buy a car from a company that is bankrupt and where supplies of spares may cease and warranties be void?
Actually, the big 3 are zombies, jsut like the banks, but that will not stop TPTB from pumping in good money after bad.

2008 Nov 18 08:57 AM

[derryl]

Good article. I've pretty much always been a virulent antisocialist but a national industrial policy is not socialism. I choose what businesses I will go into based on long term cost-benefit because jolting around chasing short term opportunities doesn't work. By the time you get yourself positioned to cash in, the opportunity is passed and you've sunk a lot of time and money into a low profit venture. If you're already in a business you can quite easily scale up to cash in on rising tides. The same logic applies to nations as individuals.

Since Al Gore became the false prophet of global warming I have amused myself imagining suitable hells for him, but I must admit that he is right about the opportunity America has right now to position itself as a global leader for the future in electric cars and other transportation sector innovations.

This has nothing to do with CO2 and everything to do with energy security and balance of trade issues. Detroit's obsolete economic model and the auto sector's prominent share of US manufacturing dovetails almost perfectly with what I think is America's obvious industrial policy priority. Big Oil sees the same writing on the wall and is investing heavily in the new energy technologies that will replace declining oil.

It's not socialist to have a plan and pursue it. It's just good business.

2008 Nov 18 09:02 AM

[rm]

[As Ben Franklin observed, “Great haste makes great waste.”]

You could have begun the article with this quote. Why is everyone in such a hurry to "fix" these issues, which have been brewing for decades?

[Sen. Debbie Stabenow of Michigan, one of the bill's sponsors.]

She appears to be a good-hearted, well-meaning person, but she is completely clueless on issues regarding the economy.

It's been said that average housing prices are too high relative to average incomes.

The same can be said for automobiles.

The strain that an average car payment places on lower-to-middle income households is steep. While the cost of fuel has backed off significantly (temporarily?), the percentage of net income absorbed by auto-related costs is extraordinary... and unsustainable.

We simply cannot afford cars as they are priced now.

Now, to the hybrid issue...

60% of our electricity is produced by coal-burning plants. "Plugging in" every night will increase that amount substantially. Is this acceptable?

Furthermore, we already see brownouts in major cities when temperatures rise. Will the electrical infrastructure support a massive shift to electric cars?

On (pseudo-) environmentalism: Did you happen to see the 60 Minutes feature on computer disposal? Will China also import our cast-off car batteries in the future?

Whether it's housing, the Big Three or alternative energy, we all seem in a hurry to "fix' things, but we don't seem to be in the mood to think these things through before we act. Not one of these problems will be solved both quickly and effectively. We need to choose which adverb we want to stamp on our "solutions."

2008 Nov 18 10:08 AM

[John Lounsbury]

rm said:

"Now, to the hybrid issue...

60% of our electricity is produced by coal-burning plants. "Plugging in" every night will increase that amount substantially. Is this acceptable?

Furthermore, we already see brownouts in major cities when temperatures rise. Will the electrical infrastructure support a massive shift to electric cars?"

Answer to question 1: It is not acceptable. But neither is 60% of our electricity produced by coal burning plants we already have. For many reasons, diversification of energy production is critical to our economic future.

Answer to question 2: No, current infrastructure will not support the additional demand of plug-in electric autos in wide use. But as you point out, the electrical infrastructure we have now is insufficient. Since it must be improved, let's do it with a plan that recognizes additional uses and capacity demands in the future.

I agree with your criticism of quick fixes. If you take big steps with no plan the risk is a 50/50 chance you will move in the wrong direction. If you leave your house in New York on a cloudy day (no sun for reference, travel on roads with no directional signs, and have no map, compass or landmark references, what are the chances that you will be able to find Chicago?

2008 Nov 18 10:51 AM

[working at ford]

First off, Since when is a bridge loan corporate welfare. If the auto makers go BK who is footing the bill for all the losses. Gm is major DOW player, many government and private pension are invested in this companies stocks and bonds. So the real answer to who will pay is the American people(not everyone pays taxes). The real take home wage for the"dirty hourly" worker is under 30 per hour. There is no one denying that that is not good paying job. But, you must keep in mind that all of these workers are also consumers of other products and services. If they are forced out or required to take a pay cut, the amount of disposable income that is available to spend on goods and services will be decrease with it. Most of today's mortgage crisis stems from over-borrowing of phantom equity. That on top of that bad loans has lead to this crisis. Home values have been pushed down due an over supply of homes on the market. If the auto industry is force to take a pay cut the housing market will be put under incressed stress for people looking to downsize or relocate. As a final thought I can't help but wonder how these companies who have survived and for over 100 years with people who worked their way up. When in the last few years the have been overrun with the so called COLLEGE educated fellows.

2008 Nov 18 11:03 AM

[carey_jim]

It's socialism. Why deny it?

Marx said that huge monopolies would be taken over by the people and Josef Schumpeter agreed with him even though he deplored it and provided his own economic ideas to help slow down the process.

Huge corporations have turned America into an oligopoly/monopoly plutocracy that is owned and run by the rich. It's been called socialism for the rich and capitalism for the poor. America's "only" vitality (actually, it is huge) is our ability to turn ideas and dreams that start as small businesses into huge corporations that transform these dreams into products for many people,

The problem is, we don't know what to do with large corporations when they become moribund oligopolies.

Why deny the obvious? Is it the American advertising machine that has turned us into a nations of butt-in-the-air-head-i... ostriches or is it just human nature to believe in fairy tales?

Merry Xmas and a happy new savior, the government.

2008 Nov 18 01:17 PM

[searcher]

Any realistic aid to big auto would require de facto Chapter 11 as stated, surprisingly, by Dr. Reich. But 'de facto' outside the already established protocols would be a political nightmare. The aid should require earlier agreements that are 'coerced' (from corporate and labor viewpoints, undoubtedly) with a view that a Chapter 11 will honor those agreements. If that requires legislation, so be it.

2008 Nov 18 01:40 PM

[bobbobwhite]

Of course, it is so reasonably obvious that Ch.11 BK is the best answer to the Detroit problem that it is well beyond any questioning. But, because these companies are so large and so many people work in them, the econ/social implications of a total failure would cause such immediate damage in Michigan and surrounding states that a bailout will be made for that purpose alone. Perhaps the Big 3 let it get so bad on purpose so there would be no other solution that worked? They are that selfish, so it could be.

We have reached a new low in our gov't system's practical functionality when tax money is given to private industry failures like the Big 3 just to stem social repercussions. The USA lumber industry, which was much larger than the Big 3, was not so long ago forced to do it on its own and it survived in a much smaller and improved form, so why not Detroit? The answer: tens of thousands of well financed lobbyists and their giant payoffs to self serving, criminal pols who are so very different overall than gov't service used to be when at least some good people worked there and didn't allow all forms of corruption to completely take over gov't as it has done today. That's your American gov't in "action", folks, as it's now no different than the 3rd world.

2008 Nov 18 02:35 PM

[Wadhamite]

Is anyone seriously asking where the federal government is getting these $50 billion automotive bailout monies? The government has no money tree, or bank account, or current budget surplus. The money is being newly created, pure fiat, no backing . . . just inflationary and postponing the problem for another generation or two. How would present-day Americans feel if they were still paying out Studebaker or Rambler?

I'm waiting for the next new car jingle . . . "You've already made the down payment; now come get the rest of your car." Unfortunately, it may be no joke.

2008 Nov 18 04:09 PM