Steve Funk

The Failure to Admit Failure

Mr. Merkel is clearly upset about everyone bellying up to the $700B piggy trough. I don't blame him. He should, however, take his own advice that we be thoughtful about doleing out the money.

Since very few analysts or financial reporters have covered the auto industry in the last two decades there are very few experts to talk about this issue. Mr. Merkel's easy answer that "they" (auto industry) simply be allowed to go out of business is a very glib answer that does not begin to address the repercussions of such a catastrophe. First, he assumes that there will be a Chapter 11 bankruptcy, if it comes to that. Who pays the billions per month in negative cash flow while all the issues are sorted out in bankruptcy court? GM is a very large military contractor and still owns large stakes in Hughes (military satellites). If those interests are sold quickly to the highest bidder probably the only ones with cash will be foreign investors. Is it wise to sell large stakes in a top secret military company? Is it legal? The Pension Benefit Guarantee Corp (i.e. taxpayers) will surely wind up supporting (at least partially) the hundreds of thousands of retireees who will be left high and dry. What of the fallout from dozens of very large corporations being crippled or bankrupted (Lear, Johnson Controls, USX, American Axle, Detroit Diesel, you get the idea).

I don't have the answers to these questions and I don't think anyone does. What does irks me is how glib many are about the auto industry going bankrupt. It shows a total lack of understanding of how industrial complex works. That is not surprising since many believe that we can continue to be a strong economy without producing anything. The second thing that never is mentioned in the many articles like Mr. Merkel's is the huge hand that government regulation and Wall Street have had in the demise of the auto industry. Check into the 1957 Supreme Court ruling that forced GM to divest itself of DuPont (it's proprietary paint supplier) and forced resignation of the Board of Directors. Even in the 1980's engineers were being told that it was illegal to talk out of work with a Ford or Chrysler engineer due to anti-trust rulings. In the 1960's and 1970's the government had a huge hand in backing the Union demands for wages and benefits and unemployment benefits that is at least part of the fixed cost problem that the domestic industry is facing. GM has been coerced by government officials into keeping unprofitable plants open because of local economic concerns.

Obviously a book could be written (and many will) on how the auto industry stumbled. To simply blame it on management and unions is beyond short sighted. I can only hope that our brilliant legislators who brought us to this point will not be as cavalier about the choices we face as Mr. Merkel.