The impending meltdown, many years in the making, of the Big Three American automakers is all over the news these days. No doubt the automakers and their employees considered an Obama victory combined with a Democratic Senate the best of all possible opportunities to get the aid they will need to survive. As usual, all of the "not with my tax dollars!" bitching has dominated the professional and corn-pone opinion on the subject. What escapes these deep thinkers is that, one way or another, we're all going to be picking up the tab for the Big Three. It is a question of which of two distinct alternatives we prefer. On one hand we can provide obscene sums of money to keep them afloat.
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On the other hand we can let them file Chapter 7 and pay for their sins through the bankruptcy courts and via the explosion in social spending that would inevitably result from tossing a million blue-collar workers out on the street.
The story is pretty cut-and-dried on the talk radio level. Greedy executives / greedy UAW members made their own beds and now must sleep therein, and we'd have an easier time working up sympathy (and cash) if they didn't make such shitty cars. Here is the problem. Actually, here are several problems.
1. The sheer size of the two automakers who remain publicly traded (Ford, GM) is staggering. Probably beyond the comprehension of 99% of the people passing off-cuff judgment on letting them go bankrupt. Bankruptcy requires some manner of keeping oneself operating while under protection of the court. While this often comes from something called debtor-in-possession loans, with the banking industry tenuously gripping their last thread of sanity (and solvency), who's going to pony up the tens of billions that are required? That is the point that everyone seems to be missing. They need cash right now. They haven't enough money to keep the lights on and the water running much longer. They have no cash, no credit, and no one willing to lend them a handshake. That's why…..
2. If they file BK, it's not going to be the re-organization (Ch. 11) that people think of when they hear a business has gone bankrupt. GM in particular is staring straight down the barrel of Chapter 7 – liquidating everything down to the copper wire in the walls. With no automaker (even the vaunted Toyota) in a financial position to pick up the pieces, within 30 minutes of a Ch. 7 filing by GM there would be 7000 dealers, a half-million employees, 479,000 retirees, and an entire industry of contractors/suppliers who would be out on the street. There is not a goddamn thing else for any of those people to do right now. GM might be a lousy investment for the government or anyone else, but the auto industry is providing too many meal tickets right now to disappear overnight.
3. Government will inevitably end up doling out billions in assistance after a liquidation or even a milder bankruptcy. Note this cute quote:
Instead, G.M. should submit a prepackaged bankruptcy, laying out steps it plans to enact once in Chapter 11 protection, said Mr. Ackman, who is not a major holder of G.M. shares.
"I'd rather the government's money be used to train people for other jobs," Mr. Ackman said.
We can thank Bill Clinton for making this platitude part of BusinessLogic. We'll just "re-train" or "educate" people in some vague and unspecified way for some vague and unspecified jobs that don't exist. There is some industry right now with a million high-paying jobs, the kind on which people can actually support a family, waiting to be filled. If only Americans would get some "training" to make themselves qualified! We've heard this horseshit for 20 years and we know exactly where it leads – failure. Specifically, it leads to some combination of menial service industry work (think Arby's or Wal-Mart) and massive dependence on welfare, unemployment, Medicaid, and every other manner of social spending. Government and "the taxpayers" are going to foot quite a bill either way. It may end up costing significantly more when we consider how the implosion of such a large industry would decrease tax revenues.
4. People will still fly on a bankrupt airline because all they are buying is 90 minutes in coach before they walk away. People will not buy a car from a bankrupt automaker. A car is a major purchase and a long-term committment. Warranties, the ability to get parts and service in the future, and the re-sale value of the cars (check eBay Motors for an Oldsmobile if you're skeptical) are all important concerns for buyers. So in filing bankruptcy, GM/Ford/Chrysler would essentially be committing suicide. The only way out of bankruptcy would be to sell a shit-ton of cars. And a bankrupt automaker can't sell cars. Repeat circular argument as necessary.
This is not a burden for the new government, it is an opportunity. It is an opportunity to take an important but broken industry out behind the woodshed and give them a thorough ass-beating. In my ideal world, a bailout would resemble the finest moment of a TV show I generally find severely overrated: Christopher's intervention for heroin addiction on The Sopranos. To make a long story short, it begins as the classic "Let me tell you how your addiction has hurt me" intervention led by a social worker and quickly degenerates into a mob beatdown. A perfect bailout would look pretty similar.
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Sure, guys, we'll bail you out. Now here's our list of conditions. No more bloated payrolls, no more skimping on parts so your cars fall apart at 12,000 miles, no more 5800-pound V8 behemoth Expeditions and Tahoes that nobody fucking needs, no more excuses about how they don't have the technology to increase efficiency (every single advance in engine technology for the past 100 years has been purposefully directed toward increasing horsepower, which compensates for Americans' little dicks), no more redundant marketing and "badge engineering" (GM currently sells about 5 different versions of every vehicle it makes), no more 7000-dealer networks (Toyota makes do with about 1200), no more executives who give us things like the Cimarron and the SSR while taking home $20 million annually (hi Rick Wagoner!), and no more pissing and moaning about the free market and the "burden" of regulation every time the government dares to impose any "Draconian" legislation like CAFE on the industry.
Congress will end up spending the money one way or another.
Might as well keep a lot of people productively employed while blowing it. Give them what they need. But there's no reason outside of cowardice to hand them a check with no strings attached.
Chris says:
What about the places like Flint and other cities in the Rust Belt that have already been shit on by GM? America already pays a huge price for GM. Unemployment is like 10% in Michigan. Not to mention other GM failures/repugnant actions, like the contribution to global warming and pollution, suppression of advances in transportation, shitty management, shitty cars, gas guzzlers, etc. If a business has ever deserved to fail, it is GM. The karma factor is just too great to pass up: to hell with them. After growing up around Muncie, it is hard for me to have a shred of sympathy for GM.
Instead of spending money on GM, why doesn't the government hire the greatest automotive minds in America to create a business, give it money, and regulate it? Hell, the people at NASA made it to the fucking moon! Who knows what this project could accomplish?!? We'd see a kick ass electric car in like a month. Instead of spending a shit load of money on a failure, the American Government could really go where it never has and show how government can be good for business. What if the American government creates a company even better than GM in its heyday?!? It would be worth it just for the possibility to see Conservative assholes heads explode like the Nazis on Raiders of the Lost Ark when their entire philosophy turns to shit.
In my opinion, this would be a better way to spend a shit load of money America does not have.
Dustin says:
^ Communist
Matthew says:
I think I speak for the majority of Americans when I say, "This issue is complicated. I will ignore it."
J. Dryden says:
It's moments like this that I both love and hate Jimmy Carter, whose total ineptitude at exercising his authority has obscured the number of things he was intellectually right about. In this case, the notion that our energy policy is the moral equivalent of war, which it rather is. Thanks to the "Americans want cars that go vroom!" mentality of the Big Three, we're forced to suckle at the teats of nations whose governments and culture are often flat-out evil (I'm looking at you, Saudi Arabia, and don't go hiding in the back of the class, Nigeria.) How much better for us if we didn't have to subsidize that evil. To echo Chris, if Obama wants to do something bold, how about a Manhattan Project that puts a gun to the head of GM et al. and tells them to build a car that runs on sugar-water and soy milk, or at least a hybrid that cost as much as a Hyundai? But no–if the repeated airline bailouts prove anything, it's that the government's response to "Give us money so that we can continue the same incompetent business practices that caused us to need money in the first place" will be "Would it be more convenient for you if I just left the check blank?"
Ed says:
The fuel economy issue is an appealing target, but the bigger issue with the Big 3 is quality. And let's not overlook plain old ignorance of what consumers will buy.
Like all American businesses in the 20th Century, GM/Ford/Chrysler base their entire business model on driving down costs. Push down wages, lean on the suppliers, contract everything to the lowest possible bidder, and redundancy, redundancy, redundancy in design. Just use the same platforms, same engines, same drivetrain, and in some cases the exact same car in its entirey in "models" with different badges.
The big three automakers and their management need to be taken out to a test track and forced to drive a Ford Fusion and a Chevy Impala for 4 hours followed by 4 hours in a Honda Accord and Toyota Camry. Until they understand the difference, the process should be repeated indefinitely.
j says:
I am rather anxious about my holiday trip back to my wife's hometown in suburban Detroit. I fear that there are going to be a lot of disgruntled family members.
I happily drive a subcompact Chevy Aveo, which has been described as the least expensive car to own and drive, because it is good on gas and low on maintenance costs: basically everything you want from an economy car. The dirty secret is that is because it was assembled at a Daewoo plant in South Korea!
I feel like GM and Ford just need to survive for a few more years until their old retirees start to die off and so their pensioners' health care costs start to decrease. Most of the entire aging population of Southeasern Michigan is subsisting off GM's good pensions and health care. Combine that with an efflux of young talent from the area and you have a very scary foundation for their economy.
Or else, maybe if we actually had a decent, low-cost, national health care system then these companies could somehow pass off their health care costs to the national system. Either way we'll have to pay for it, like you said, but if we could somehow keep our auto industry extant I believe the US is better for it. Like being able to churn out tanks during WWIII.
The quality issue that you raised, as well as one of your recurring tirades against people who bitch about taxes, points to what I believe is one fundamental thing that has gone awry in our society: that Americans now only want instant gratification on everything. No one will put the time and money to invest in the future anymore. Can you blame the executives are supposed to report their earnings every goddamn quarter?
Chris says:
Dustin, what do you call spending $700 billion on a financial bailout package or propping up the big three with government funds? The government is going to be funding the big 3: it might as well do whatever it wants with the funds and try to create something that is progressive and successful.
jim says:
Ed,
I just wanted to say thanks for the fresh perspective! Fantastic article.
Mike says:
This is a really good perspective. I'm not an analyst on the auto industry or anything, but I think the ideal move is going to be putting them into a special bankruptcy, call it a "conservatorship", where the government puts up the DIP financing to smooth over a transition during a bankruptcy reorganization. (Which is what we did for Bear Stearns and the other pre-TARP failures). I'm not sure that'll happen, but we will see.
I'm skeptical, both in theory and in practice, on how well a "list of conditions" would go. It's one thing to set fuel standards; it's another to say "make this kind of car." I doubt the government is going to be able to come up with a managerial list that makes sense outside of broad strokes, and I think the leverage here is backwards – this doesn't show the auto companies how much we have them over a barrel, but instead how much they have us over one.
Warmbowski says:
I was rather pleased today by the Congress telling the big three that they would be okay with giving them a bridge loan, but "you don't get it unless you show us your plan for success". I am really surprised and dismayed that the Big Three weren't already packing one when they went to The Hill yesterday. Sloppy!
I would like to see the car industry get some help to keep afloat, but make them earn it with a good business plan for turning things around and make it clear to us Americans what we may have to endure during the process. I think Chrysler and Lee I. had were packing one when they went to the government with hat in hand in the eightys. They should be able to crap one out in a day or two. We need to see one primarily so that we can slap them around and take the money back if they try to pull an AIG with the money.
As much as I have a problem with GM, I do have some semblance of respect and trust in Alan Mulally at Ford to actually want to right his ship. That and I don't want to see my father who retired from Ford after over 40 years of service get screwed out of some of his retirement funds.
Thanks for the big picture Ed.