Bailing Out in the Real World
I feel like some of the commentary on the prospect of an auto industry bailout is starting to remind me of some of the stuff I fell for before we invaded Iraq. The kind of thing where someone yes, “yes this sounds like a bad idea, but if we do it like this and like that and like this then it’ll all be okay, therefore we should do it.” Which is fine. But we also need to ask ourselves, if we accept the proposition of Detroit’s management, the UAW, and Michigan politicians that what’s good for General Motors is good for America, how likely is any of this stuff to happen.
TNR’s Jonathan Cohn, for example, makes the most persuasive case for a Detroit bailout. Per Krugman’s summary:
If the economy as a whole were in reasonably good shape and the credit markets were functioning, Chapter 11 would be the way to go. Under current circumstances, however, a default by GM would probably mean loss of ability to pay suppliers, which would mean liquidation — and that, in turn, would mean wiping out probably well over a million jobs at the worst possible moment.
In essence, given the credit crunch Chapter 11 bankruptcy won’t work so the only alternative to bailout is liquidation, but liquidation is unacceptable given the macroeconomic situation, so we need to keep GM on life support as a jobs program.
But then read Jon’s colleague Clay Risen also in TNR:
There’s little I could say in addition to Jonathan’s wonderful article laying out the case for a brokered bailout for Detroit. [...] But any bailout must be predicated on a planned shrinkage of the three companies. Suppliers need to be transitioned to other firms or industries, employment needs to be gradually reduced, and production facilities need to be shuttered. There should probably be a forced consolidation, too, with GM taking over Chrysler–a move that was already in the works before the credit crunch made it impossible to complete without government assistance.
Now there’s no metaphysical issue or law of nature preventing the government from first keeping these firms on life support as a jobs program, and then when the economy starts recovering beginning to shrink the workforce and drop suppliers. But in the real world, that’s very hard to imagine. If you think it’s politically difficult for politicians to stand aside and do nothing as a situation that threatens to cost a lot of people their jobs develops, just wait ’till you try to tell the White House political office that you want the president to order a round of massive layoffs in key midwestern swing states.
Similarly with all this environmental stuff. GM, Ford, and Chrysler may not be very good at turning a profit by selling cars and trucks but they’ve got a lot of political clout. Perhaps enough to get tens of billions of dollars of taxpayer money. Whatever conditions they agree to, they’ll probably be able to fight off.
I hope I’m wrong about this. But I’m pessimistic. The mere fact that it would be desirable to do something to keep everyone who depends on the car industry for a living that simultaneously restores the domestic car firms’ economic viability and serves environmental policy goals doesn’t make it possible. Generally the reason we try not to have the government running businesses is that promoting public goals and maximizing profits require you to do different things. We normally try to advance policy goals by establishing a framework of taxes and regulations so that firms pursuing their interests will be compatible with the public interest. But if GM is going to be a welfare agency, it’s hard to also expect it to be a viable company that will rapidly get off the federal teat.
75 Responses to “Bailing Out in the Real World”
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November 17th, 2008 at 9:45 am
What’s needed in GM’s case is for the government to force a radical restructuring equivalent to Chapter 11. (Chrysler, on the other hand, just needs to die.) Now, it may be true that it’s politically impossible to do anything but simply hand wads of money to the same boobs who ran GM into the ground. (As for Ford, I’m prepared to cut Mullally more slack.) On the other hand, maybe it’s not true. Why give up without a fight, and preemptively frame this as a Hobson’s choice between two unacceptable alternatives (welfare handout and death?)
November 17th, 2008 at 9:52 am
I think everyone should be forced to read transcripts of Congressional hearings dealing with raising CAFE standards on vehicles. There should be records touching on this issue going back, oh, 3-4 decades. Quite a few likely post-Arab oil embargo in the early 70s. Especially highlight various advocates of slowing or forestalling increased fuel consumption efficiencies. Once you’ve identified those individuals, think tanks or corporate entities notify them they’ve been relieved of any voice in a bailout or bankruptcy debate.
November 17th, 2008 at 9:53 am
once you write the op-eds that get the voters to accept it, its no longer your war to run, its george bush’s war to run.
so you’re saying that krugman may be getting friedman’ed?
ouch.
November 17th, 2008 at 10:07 am
When you have irredeemable assholes like Dick Shelby basically saying ‘fuck you, Yankees, let’s have more factories in ‘bama where the workers know their place’, I’m half-inclined to call for a double-sized bailout just to spite him.
November 17th, 2008 at 10:08 am
I just don’t see the problem. If it’s genuinely true that GM won’t find appropriate interim funding sources for a Chapter 11 reorg, then the government should provide money and become the lender of last resort. If legislation to this end (basically Uncle Sam publicly saying “we got your back”) is what it takes to reassure everyone that Chapter 11 for GM won’t be the end of the Free World, then so be it. But this notion that we should subsidize the same morons that decimated GM is foolish indeed. Government subsidy by way of tax policy (will everyone please buy more Hummers!!) is part of what got GM into this mess to begin with.
November 17th, 2008 at 10:14 am
The non-ideological case against the bailout is that there is no realistic scenario, at least none that I have read, in which the $25 billion would produce a healthy Big Three. If anyone has seen such a scenario, I’d be interested to follow their links.
November 17th, 2008 at 10:33 am
Ezra already said what I was going to say here: that the risky position in 2002-2003 was acting, but the risky position right now is not acting. All dramatic action is not created equal, after all—those of us (like Krugman) who were unconvinced by the WMD claims, but are convinced that GM’s failure would be disastrous, may be using our good judgment rather than, as Matt would have it, falling for the same snookering that Matt fell for.
November 17th, 2008 at 10:38 am
Rich in PA: I don’t think the argument is that the $25B would, on its own, fix the companies. That’s not the point at all: its just a bridge to get the industry through the credit crunch/recession. Proponents of such a move – like John Cohn – point out that a lot of the “fixing” has already taken place, and that the current difficulties of the auto companies stem from the macroeconomic downturn and liquidity crisis, not from structural impediments to producing desirable cars efficiently. Now, maybe that argument is wrong, but that’s the proponent’s argument, not that $25B is somehow going to fix things in and of itself.
And while I agree with you, DTM, I think that Matt’s point about the political difficulty of withdrawing support at some point in the not-too-distant future (or not providing further support during a modest overall recovery) is worth addressing directly. First of all, socialist governments in both France and Spain did in fact order massive layoffs from state owned industry during the 1980’s. The Chrysler bailout produced quite a number of layoffs in the US, but also turned a profit for US tax payers. So while the future political risk of zombie-ism is real, its been overcome in the past, here and elsewhere. FWIW, I think my idea of having the US finance and co-invest in a buyout of GM by Tesla is still a very good one, in part because it facilities both jettisoning the deadwood, reducing taxpayer risk, and conversion to a new paradigm of car building.
November 17th, 2008 at 10:39 am
Matt, you forget that the Iraq war was a “War of Choice,” something that we could have avoided altogether. As the auto bailout a “bailout of choice”?
And one of the reasons we went to war was that we wanted to prevent the dreaded mushroom cloud from blowing up in – say – Detroit. At how many billions per month?
What – specifically – would the difference really be between a nuclear attack on Detroit, on the one hand, and the economic destruction of the Big Three, on the other? Be specific, use numbers. Sources.
However, Shelby does have a point about how Midwesterners should have run a tighter ship. I have similar thoughts about those idiots on the Gulf Coast who just live there, exposed to hurricanes. They should move. ( I have similar thoughts about idiots in California who insist on building their homes where those fires roam. )
Republicans are very good at telling others to eat their spinach. This is fine – so long as Republicans eat it too.
November 17th, 2008 at 10:40 am
there is no realistic scenario.. in which the $25 billion would produce a healthy Big Three. If anyone has seen such a scenario, I’d be interested…
Here’s a scenario: as an extension of the promised healthcare reform, the Federal government takes over responsibility for the healthcare costs of retirees. This step would remove one of the major structural inefficiencies weighing down the US auto companies. Relieving them of that burden — by taking steps towards universal healthcare — would go a long way towards making them viable for the long term.
That can happen, but we need to bridge them over until we can get there.
The other reason for the bailout is that it preserves not only jobs, but unionized jobs. Reorganization under chapter 11 would give the bankruptcy courts wide latitude to void portions of union contracts. A bridge loan from the government would not have that effect. I believe the political fight in Washington over the auto bailout is about the power of unions as much as it is about anything.
November 17th, 2008 at 10:44 am
Hai Guyz,
I’m not an economist or a political junkie so this is gonna be dumb.
How about we let one of them fail, die, implode, disappear. The remaining ones sober up a little, we lend them a little money, not a lot (and get rid of top management).
Some people lose jobs, not all. Some suppliers suffer a little, but survive.
Less competition for customers (remember one of them is gone) means the remainder get more sales.
Win — mostly.
The argument seems to be either/or here. Why does it have to be?
November 17th, 2008 at 10:45 am
Want to know why Republicans and Libertarians oppose helping the auto industry? There is one and only one reason – to bust the unions.
November 17th, 2008 at 10:49 am
Chrysler, Ford, and GM have been shrinking on their own for a while. They can’t cut to the bone immediately due to a variety of factores. GM would like to get rid of a brand, so would Chrysler. There are state level regulatory issues related to dealerships that make closing dealerships prohibitively expensive even if the dealership itself is a drain on the parent. So the cuts have been slow and steady. If some of those regulatory obstacles were overcome that would allow the shrinking to happen more quickly, but it would still be slower than Chap 7 (or even 11). As long as it these companies can’t shrink their workforces, dealerships, and pension obligations they need to make too many cars to get the necessary cash flow. The most recent labor deal has given them a path to limiting their workforce and legacy obligations so they can start getting to the correct size, but the dealership issue is still out there.
November 17th, 2008 at 10:52 am
But if GM is going to be a welfare agency, it’s hard to also expect it to be a viable company that will rapidly get off the federal teat.
Spoken like a true AEI Fellow.
The notion that we can continue as a leading industrial nation without an auto industry ought to be incentive enough for a bailout.
November 17th, 2008 at 10:52 am
I heard a UAW guy on the radio this morning. The point he wanted to make (and I have no idea whether it is true or not) is that the auto industry and auto workers have already made most of the transformational changes they needed to make, and that last year the industry was looking quite healthy with soaring stock prices.
But then the entire US economy, through no fault of the auto industry, was hit with an economic bomb. Overleveraged consumers are worried about their jobs in a recessionary economy. Their home values plunged and many are underwater with their mortgages. There is substantial inflation in the prices of necessary, everyday items, making it hard for people to keep up with their mortgages or even think about other large purchases. Consumer confidence has collapsed and retail sales have dropped by record percentages. There is also a credit squeeze and people can’t get the loans they used to be able to get to make these purchases, even if they are in a mind to do so.
What makes cars and the car industry special and the reason it is in particularly tough straits, according to this line of thinking, is not that the auto companies are particularly poorly run. It’s just that for most people cars are a very large purchase, the largest after their homes, and when economic conditions get this bad, car purchases are among the first to be deferred. The auto industy has just gotten caught in the wringer of an overall collapse of retail purchasing by US consumers, a collapse with many causes unrelated to the decisions of auto makers.
If this is an accurate picture, then it doesn’t make much sense to think that the stress of the auto industry is some sort of economic signal of very bad decision making, which should be taken as a market call for a painful self-correction and re-organization. Maybe it’s just a signal of a reasonably healthy and important industry which is abnormally sensitive to big dips in consumer confidence and spending, and needs to be tided over until overall economic health returns.
Now I don’t know if I buy this completely. People need their cars, and cars that work. It seems to me that Detroit should plan ahead and be ready for lean times with a fleet of smaller, leaner, cheaper but highly reliable cars that people will substitute for the more expensive models they would prefer to purchase in healthier times. But I don’t really know how realistic that is.
November 17th, 2008 at 10:53 am
I’m glad has made the comparison to the selling of the Iraq War. It’s one I was going to make in comments to an earlier post. I think it’s the right one to make. There’s all kinds of deliberate conflation between bankruptcy and liquidation going on. The press keeps reporting job losses from bankruptcy as equivalent to GM & Chrysler disappearing in a puff of smoke.
Chapter 11 for GM is not the end of the world. If it’s true that they can’t find the DIP financing to get out of Ch. 11 then the gov’t could step in at that point. That would likely be _much_ cheaper and _much_ more likely to result in a healthy auto industry because the bankruptcy process would allow GM to shed some debt, shed some workers, and shed current management — all albatrosses.
But wait! you say. We want to save jobs, not shed jobs. That’s where Matt’s comments about the tension between GM as welfare agency and GM as successful company come in. GM does not have the demand to support the current number of workers or the current wages. You can blame management for that, you can blame CAFE for that, you can blame the union for that, depending on your politics. But whomever you blame, the fact of the matter remains that GM must shrink or die. Any gov’t policy that forestalls _both_ shrinking and dieing is merely postponing the inevitable.
November 17th, 2008 at 11:00 am
Make them move their headquarters to Godless San Francisco. Maybe the liberal will rub off on them and they’ll start making hybrids.
November 17th, 2008 at 11:14 am
Matt, can’t you see the forest from the trees?
What do you think will happen to the millions of pensions that GM is paying out if they go bankrupt? This isn’t like some theoretical WMD floating out there. It is very real, you can measure it or see it for yourself. GM’s pensions aren’t some secret, and neither is the Government’s Pension Guarantee Fund and its budget shortfalls.
November 17th, 2008 at 11:17 am
I just don’t see the problem. If it’s genuinely true that GM won’t find appropriate interim funding sources for a Chapter 11 reorg, then the government should provide money and become the lender of last resort. If legislation to this end (basically Uncle Sam publicly saying “we got your back”) is what it takes to reassure everyone that Chapter 11 for GM won’t be the end of the Free World, then so be it.
Absolutely. If what’s preventing GM from going into Chapter 11 is financing, the gov’t can provide that rather than a rolling bailout to these jackoffs. Chrysler got a bailout in the 80s and it obviously didn’t do much more than provide life support until they were acquired by Daimler, which only kept them viable until recently and now I guess it’s Uncle Sam’s turn again. Who’s going to bail them out 12 years from now?
November 17th, 2008 at 11:17 am
DTM,
I don’t buy the story about Ch. 11 not being an option because of consumer defection. People have shown themselves routinely willing to fly bankrupt airlines, so there’s no aversion to doing business with bankrupt companies. If it’s a warranty issue then any in-bankruptcy bail-out could include a gov’t guarantee of warranty obligations. Finally, creditors — who would become the new owners of GM in bankruptcy — have a strong incentive to not liquidate the company. GM’s assets are unlikely to find buyers in the current market and the company is almost certainly worth more as a “going concern” than as individual assets — especially once debt payments have been reduced and union contracts renegotiated.
People can disagree about what might or might not happen in bankruptcy but given that the gov’t can jump in and bail out GM as easily post-bankruptcy as pre-bankruptcy, why not wait and find out?
November 17th, 2008 at 11:22 am
Harkening back to Matt’s earlier airline/auto post, which now seems abandoned (that would be an interesting study, do threads become abandoned sooner nowadays?), here is a perspective on a GM bailout/bankruptcy from a very well regarded former airline executive (who is also a well regarded scholar in both economics and law), Michael Levine. This was published at WSJ online
Why Bankruptcy Is the Best Option for GM
Chapter 11 would better preserve the valuable parts of the company than an ad hoc bailout.
By MICHAEL E. LEVINE
General Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.
[Commentary] AP
Consider the costs of tackling GM’s problems with some kind of bailout plan. After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of “change,” GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.
GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota’s.
Foreign-owned manufacturers who build cars with American workers pay wages similar to GM’s. But their expenses for benefits are a fraction of GM’s. GM is contractually required to support thousands of workers in the UAW’s “Jobs Bank” program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it’s not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.
And therein lies the problem: The cost of terminating dealers is only a fraction of what it would cost to rebuild GM to become a company sized and marketed appropriately for its market share. Contracts would have to be bought out. The company would have to shed many of its fixed obligations. Some obligations will be impossible to cut by voluntary agreement. GM will run out of cash and out of time.
GM’s solution is to ask the federal government for the cash that will allow it to do all of this piece by piece. But much of the cash will be thrown at unproductive commitments. And the sense of urgency that would enable GM to make choices painful to its management, its workers, its retirees, its suppliers and its localities will simply not be there if federal money is available. Like AIG, it will be back for more, and at the same time it will be telling us that it’s doing a great job under difficult circumstances.
Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM’s viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn’t be easy but, unlike trying to bail out GM as it is, it wouldn’t be impossible.
The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it’ll be just as large and there will be less money to soften the blow and even more blame to go around. The PBGC will probably need money to guarantee GM’s pensions for its white- and blue-collar workers (pension support is capped at around $40,000 per year, so that won’t help executives much). Unemployment insurance will have to be extended and offered to many people, perhaps millions if you include dealers, suppliers and communities dependent on GM as it exists now. A GM bankruptcy will make addressing health-care coverage more urgent, which is probably a good thing. It would require job-retraining money and community assistance to affected localities.
But unless we are willing to support GM as it is indefinitely, the downsizing and asset-shedding will have to come anyway. Even if it builds cars as attractive and environmentally responsible as those Honda and Toyota will be building, they won’t be able to carry the weight of GM’s past.
GM CEO Rick Wagoner says “bankruptcy is not an option.” Critics of a bankruptcy say that GM won’t be able to get the loans it will need to guarantee warranties, pay its operating losses while it restructures, and preserve customers’ ability to finance purchases. While consumers buy tickets from bankrupt airlines, electronics from bankrupt retailers, and apartments from bankrupt builders, they say consumers won’t buy cars from a bankrupt auto maker. But bankruptcy no longer means “liquidation” or “out of business” to a generation of consumers used to buying from firms in reorganization.
GM would guarantee warranty support with a segregated fund if necessary. And debtor-in-possession (DIP) financing — loans that provide the near-term cash for reorganizing companies — is very safe, because the DIP lender has priority over all other claimants. In normal markets, it would certainly be available to a GM that has assets to sell, including a viable overseas business. Such financing is probably available even now.
In any event, it would be lined up before a filing, not after, so any problems wouldn’t be a surprise. As a last resort, we could at least consider a public DIP loan to support a reorganizing GM with a good chance to survive — as opposed to subsidizing a GM slowly deflating.
The fate of Daewoo — the Korean auto maker that collapsed in 2000 after filing for bankruptcy, leaving about 500 dealers stranded in the U.S. — is often cited as “proof” that a GM bankruptcy won’t work. But Daewoo was headquartered in a part of the world where bankruptcy still carries a major stigma and usually means liquidation. Daewoo’s experience is largely irrelevant to a major U.S. company undergoing a well-publicized positive transformation, almost certainly under new management.
GM as it is cannot survive without long-term government life support. If it gets that support, it can’t change enough and won’t change fast enough. Contrary to Mr. Wagoner’s brave declaration, bankruptcy is an option. In fact, it’s the only option that merits public support and actually has a chance at succeeding.
Mr. Levine, a former airline executive, is a distinguished research scholar and senior lecturer at NYU School of Law.
November 17th, 2008 at 11:22 am
This isn’t true. Chrysler didn’t get a bailout, they got a loan that they paid back with interest ahead of schedule. They increased their marketshare until they were acquired by Daimler, who proceeded to run them into the ground.
Right now Chrysler isn’t looking for a bailout because they aren’t an independent company, they are owned by Cerberus.
November 17th, 2008 at 11:25 am
If the auto industry truly needs to shed jobs, the so be it. Let’s see some economic plans that look for some other way of putting them to work. What I object to is the widely-held doctrine that the only role of government in economic reorganization is to provide unemployment insurance and maybe some small re-training subsidies as a “safety net” and let the free market handle the reallocation of workers, the restructuring of industry, and the life and death of communities.
Surely there is some medium between socialist planning of an economy and the laissez faire commitment to the sole reliance on private market decisions and entrepreneurialism as the most socially and economically rational mechanisms for the re-organization of economic and social resources and re-allocation of labor.
Yes, those displaced workers will all find jobs in the slots to which the invisible hand of labor supply and demand ultimately delivers them, mostly at lower wages with less seniority, and in many cases after they move away and take their taxes and schools with them, leaving depressed, rotting, bombed-out shells of communities behind them. Detroit will become another dust bowl.
But why do it that way? When we have the workers; and we have the existing communities; and we have the existing social infrastructure of schools and parks and playgrounds and civic organizations; and we have the healthy families with roots, and remembered histories; and we have their homes and neighborhoods with networks of loyalty and friendship and mutual support; then why do we allow the impersonal economic leviathan to do what it will do, and pluck up workers like exchangeable parts, and ship them around the country where the supplies of capital and entrepreneurial agents of change, working with highly imperfect knowledge, decide they should go?
When we know large structural changes are necessary and are coming, why don’t we do more to, not command them and direct them, but in some way guide them and shape them, and bring them to where the workers are, rather than demand the workers pull up their roots to find the changes? I just don’t believe all the theory that says the free market gets this job right and produces economic and social effect that are more optimal than those produced with some balance of localized, independent free market decision-making and government planning.
November 17th, 2008 at 11:27 am
Time to put the final hurt on the auto workers unions.
November 17th, 2008 at 11:29 am
It’s a lot easier to make these policy decisions for other people when the people most affected aren’t your neighbors, when the neighborhoods that will be devastated aren’t your neighborhoods, when the homes that go into foreclosure don’t belong to anyone you know. Until we can assure a more robust safety net and other social and financial protections for the hundreds of thousands of people in Michigan alone who will be devastated by the decision to let the auto companies sink, we should tread very, very carefully.
November 17th, 2008 at 11:31 am
Why not encourage the UAW membership at GM to buy GM and operate it….lord knows they’ve got the money….and worker control of the factories makes more sense than having the place run by mediocrities who are richly rewarded for failure. First, though, GM should be broken up so that workers could buy the worthwhile parts and let the rest sink like a Hummer in the ocean.
November 17th, 2008 at 11:35 am
Iraq War supporter and bailout advocate Matthew Yglesias forewarns the dupes about the dangerous machinations of liberal economists and trade unionists conspiring to destroy his utopia of enlightened liberalism.
Problem is, as many have pointed out, the cost of inaction here – unlike the bailout of millionaire (and billionaire bankers) and their apprentices – has both serious macroeconomic and microeconomic ramifactions. In fact helping the auto industry – aside from the humanist reasons for doing it – is the cost savings.
If allowed to fall to its own devices of bankruptcy:
1) No one will buy autos from a company that is in bankruptcy proceedings. The polling suggests about 80 percent of people would not purchase from such companies. In short, you are condemning an end to American auto manufacturing
2)The fallout on job losses, more to the tune of 3 million (with suppliers added in), will cost considerably more, as more unemployment insurance is needed and whole communities and state budgets are destroyed and in need of money. The negative externalities will be immense
3) The pension and health care programs will be destroyed. The push of benefits to the PBGC will make any airline dumping look minimal, as the government is forced to deal with these lost pensions. Large costs and considerable lost purchasing power for retirees.
4) Health Care benefits for many retirees that are pre 65 – a significant amount -will be entirely wiped out, adding innumerable people to the rolls of the uninsured.
It should be noted that the big 3 are not an aberration, as all car manufacturers are losing significantly, and other countries recognize this and refuse to let their industries fail.
Beyond the obvious reality that it will cost more to deal with a fallout than a bailout, the indecency of Yglesias to the millions of Americans that stand to lose is baffling. His liberalism is so shallow, and childish with its utopian urbanist/ hipster nonsense, it is disgusting to read. I wish the real world would come and smack him upside the head for a minute. Hell, the way the economy is going, he may yet have to deal with the reality that many others face. but I doubt it. He seems well insulated from the tragic realities that may americans face. It is quite easy from the sidelines to dish out advice. Much harder on the field, though.
November 17th, 2008 at 11:40 am
Kid bitzer- what do you mean by “getting friedman’ed”?
November 17th, 2008 at 11:44 am
25 billion is nowhere near enough. That’s 4 months of cash burn. GM has 30+ billion in debt that’s trading at 20-25 cents on the dollar. GM alone would cost 100 BN to bail out, and we’d never get our money back because government isn’t going to do a good job running this company as a welfare agency.
Good post, Matt. Nice to see that I’m not the only liberal who has a problem with this.
November 17th, 2008 at 11:52 am
Thanks to the couple of people who addressed my question above. My follow-up question: is there trustworthy independent confirmation of the idea that the Big Three have in fact turned the corner except for the externalities of a bad economy and expensive pensions/health care? I’d hate to spend money on the say-so solely of interested parties.
November 17th, 2008 at 12:18 pm
The idea that an auto company Chapter 11 would be little different from an airline or an electronics retailer is dubious at best. When you buy a car, you’re not just making a brief (perhaps a few months) commitment of a few hundred dollars as you are with an airline. Your commitment with a car is measured in years and you’re on the hook for tens of thousands of $$. And it’s not just a case of warranty issues; many of us hold onto a car long after the warranty has expired and we look to be able to continue to get parts for years to come. Daiwoos had to be practically given away once the company went belly-up. As for buying electronics at bankrupt retailers, generally speaking those retailers are not the actual manufacturers and are not the ones warranting the product. One has to wonder just how many of its own 4-year service agreements Circuit City is able to sell these days.
November 17th, 2008 at 12:28 pm
I tried to post this Daniel Gross article about the perils of GM bankruptcy earlier, let me try again: http://www.slate.com/id/2204582/
DC, you say:
“People have shown themselves routinely willing to fly bankrupt airlines, so there’s no aversion to doing business with bankrupt companies.”
Maybe that’s because they’re not worried that the pilot will become unemployed during the flight, or that the company will stop refueling their jets. But since a car is a ten-year investment, not a three-hour investment like a flight, car customers want to be sure that someone will be there to fix their car in the future. Which brings me to…
“If it’s a warranty issue then any in-bankruptcy bail-out could include a gov’t guarantee of warranty obligations.”
This cracks me up. The government is going to be in the business of repairing GM cars, huh? Manufacturing the replacement parts for cars that are no longer built? Do you go to the DMV for that?
November 17th, 2008 at 12:29 pm
Who is going to buy all those cars? Probably not people who have falling real wages, no savings, and negative home equity when their credit lines have dried up too.
No amount of supply side bailout is going to spare GM from cutting production and laying off workers. Year after year, they build so many cars that they have to borrow money just to sell them all. That’s what zero percent financing amounts to. It would be dumb to pay them to build cars that nobody wants to buy.
Instead, it would make more sense to let them shut down, spin off and consolidate what they need to, and bailout the workers with health insurance, generous unemployment compensation and personal debt restructuring.
November 17th, 2008 at 1:59 pm
Hi Matt – I’m Christopher Barger at GM. I noticed your post and wanted to take a minute to respond.
The fact is, GM was well on its way to returning to profitability before this economic tsunami consisting of poor consumer confidence, higher prices for fuel, and a credit crisis combined to affect our business. There’s this myth out there that we’re a “zombie firm” (words you yourself have used) but I’d ask you look at the facts. Prior to this crisis, we were aggressively restructuring — closing productivity and quality gaps with Asian automakers, investing $10b a year in plants and equipment, shifting our product mix greatly toward cars and crossovers, and negotiating new contracts with the UAW that take effect in 2010.
I’ll quote the Detroit Free Press here – here are some facts about our business that you might not have been aware of:
“GM outsold Toyota by about 1.2 million vehicles in the United States last year and holds a U.S. lead over Toyota of about 560,000 so far this year.”
“The independent J.D. Power Initial Quality Study scored Buick, Cadillac, Chevrolet, Ford, GMC, Mercury, Pontiac and Lincoln brands’ overall quality as high or higher than that of Acura, Audi, BMW, Honda, Nissan, Scion, Volkswagen and Volvo. Power rated the Chevrolet Malibu the highest-quality midsize sedan. Both the Malibu and Ford Fusion scored better than the Honda Accord and Toyota Camry.”
“Ford and GM each now offers more hybrid models than Honda or Nissan, with several more due to hit the road in early 2009″
GM outsells Toyota in the US. Independent analysts like JD Power report that our quality is equal to or better than most of our foreign competition. And while we were admittedly late to the game on hybrids, we’ve now more than caught up. Does that sound like a company that was going out of business to you?
Federal aid to GM is not an issue of charity, or one of keeping people employed until times are better. Jonathan Cohn laid out the case perfectly: our company holds enormous promise, not only in terms of our current vehicles but in developing technologies that are right around the corner, such as the Chevy Volt, hydrogen fuel cell technology, and hybrid mass transit. Given GM’s underlying strength and the magnitude of loss the country would experience if it fails, I think a short-term aid package is a much better investment than paying the price we’d all incur should the domestic industry collapse.
Look, I’m not saying we’re perfect, or that our company hasn’t made mistakes in the past, or that we’re above criticsm. What I’m saying is, the perception that we were failing as a business before the current economic crisis is just not accurate.
Anyway, thanks for listening.
November 17th, 2008 at 2:13 pm
The only thing that seems to be common between the Iraq war and the bailout of GM is the use of insane analogies – like the one between the Iraq war and the bailout of GM. The reasons to oppose the Iraq war were numerous, centered around the fact that the U.S. knew squat about Iraq’s culture, had no gameplan that made sense for an occupation, and had ratcheted Iraq up to a priority it didn’t deserve. Among others. The bailout of GM could prove to be an excellent opportunity to get something done – to force the car company to make a much more environmentally sound car that would use much less gas. In fact, we are not going to have this opportunity again. It is very very easy to see ways of forcing GM and the other car companies into an open carware source program in which a 21st century motor is finally devised – and that motor will make it the case that most cars on the road will have to be junked, sooner or later. A small raise in the tariff of cars that are not manufactured in the U.S., the right kind of tax incentives, and we could be talking about the U.S. assuming a lead in car technology. In WWII, just this kind of opportunity was taken to give the U.S. the lead in a number of technologies, including medicine (cortisone and almost all medical steroids in use today came out of a crash progam devised by the military, looking for painkillers), nuclear power, aeronautics, etc.
It is the Harvard neo-liberal hangover that Matt suffers from – which makes for upside down priorities. The Government cannot and will not be able to fix the financial markets, which we are currently wasting money trying to do. The Government can, however, use its resources to make a much better car type and to make it possible to run it in the U.S. – for instance, to create a nationwide system of diesel delivery, if such is necessary for a better mileage car. This is the kind of spending that will re-invigorate the economy. MY’s 90-ish penchant, if shared by the Dems, will surely destroy their chances in 2010, and rightly so. We don’t need neo-liberal ideas, rewarmed.
November 17th, 2008 at 2:50 pm
Regarding bankruptcy vs. bailout, it does not have to be either/or. In the arguments so far, both sides are right and both sides are wrong. The oversight for the financial bailout has so far been mainly illusory; nevertheless, a bailout was, and remains, necessary. The question is what is the best structure for the bailout that meets all the necessary goals. Bankruptcy might be a good option, but Chapter 11 bankruptcy will not allow the influx of cash necessary to keep the auto makers open. So the bankruptcy courts are not the best option, at least not as bankruptcy jurisdiction currently exists.
The best option then is a dramatic expansion in the jurisdiction of the bankruptcy courts. An entire new set of cases could be given to the bankruptcy courts (the jurisdiction to be created in a new Chapter 15 of the Bankruptcy Code). The bankruptcy courts can, and I believe should, administer the bailout. The advantages are huge:
* Coersion: A bankrutptcy court can force companies to do things they couldn’t normally do. The union contracts need to be torn up. Ditto for upper management. A special master can be hired to enforce best business practices at different levels of the company.
* Supervision: It is in the core institutional competency of the bankruptcy courts to oversee companies which are doing badly. In constrast, a board of oversight is attempting to create the procedures of oversight from nothing at all, without institutional knowledge of how it should be done. In bankruptcy courts, there are established procedures for ferreting out accounting and other malpractices hidden deep within the company books. This way, the bailout money can go directly to where it is needed.
November 17th, 2008 at 3:38 pm
I don’t like the half hearted nature of the “tough love” bailout, with a bunch of constraints/strings on the money.
The congress should either just buy preferred stock paying 5%, like the triaged banks, or else agree in advance to provide DIP financing.
If it loans on easy terms, it needs to be clear that this is a one time loan.
This would be a $25 billion bet that GM is really viable and has gotten whipsawed by energy and lending problems. The key thing is to somehow structure it so it is a one time thing. Perhaps include a DIP financing provision as the next step.
If GM is going to work its way out of this, it needs to be able to sell trucks or whatever it can, however it can.
If the $25 doesn’t do it, consider it a “jobs” program and let it go at that. The idea that congress can impose tough terms and conditions in a way that is remotely close to Chapter 11 is silly.
November 17th, 2008 at 3:40 pm
“I can’t believe that closing the money hole is even on the agenda.”
http://www.theonion.com/content/video/in_the_know_should_the_government
November 17th, 2008 at 3:52 pm
GM is now trading just over $3/share; its entire market capitalization is now under $2 billion. It strikes me that the government should simply invest the $2 billion and buy the damned thing in the market; I don’t know– merge it with AIG, or Freddie Mac, or Iraq, or something else the U.S. government already owns. Or sell it to the UAW, which can then negotiate with itself over work rules and its insane pension and health care costs. Or, as a commenter noted upthread, the government can take this once in a lifetime opportunity. Maybe it can buy an enterprise the size of GM lock stock and barrel for less than $2 billion as an experiment in producing socially and environmentally desirable products at an absurdly low cost, while also running it as both a jobs and a research program. [I admit, that sort of thing will piss off many a blowhard southern senator, not to mention the Big-3 owned Michigan Congressional delegation, which is all the more reason to do it.]
November 17th, 2008 at 4:01 pm
When Senators Shelby and Kyle go on Meet the Press and say with a smirk that, ’some times companies just fail” – they don’t sound like sober defenders of free-market virtue to most Americans. They sound like agents of Al Qaida.
Supporting the invasion of Iraq was the dumbest move any politician or pseudo-journalist made – EVER. As a result, gas prices went through the roof.
The big three automakers have many problems. They need to make better cars. They need better management. But their biggest problems are related to our country’s failure to address comprehensive health care reform, high gas prices and the tightening of credit – none of which is their fault.
For the good of America, GM must be saved. To reject a 25 billion dollar bailout after spending over a trillion dollars on Iraq and the Wall Street bailout would be worse than a bad idea. It would be treason.
November 17th, 2008 at 4:08 pm
Most of the supporters of the auto bailout (and other bailouts) claim that the bailout is necessary because otherwise a vast population (of workers in these and ancillary industries) will be adversely affected, as hilzoy says of the order of 1-3 million.
Obviously the argument is that these institutions are too big to fail.
Let me propose some remedies. Let us first suppose that above “N” employees a company becomes too big to fail. The exact value of “N” is not important. There are two possible solutions:
1. No company will be allowed to have more than “N” employees. In which case it will never become too big to fail and thus we will never need bailouts again
or
2. if company has more than “N” employees, confiscate some proportion of the gross company revenue (I say revenue and not profits because profits can be whittled down by generous compensation to management and workers) which will be kept by the government and released to the company when it desperately needs some cash and this release can be decided by Congress.
Any feedback about the two solutions proposed above?
P.S. To be fair, I did not think of solution 1, it was thought of by a friend of mine. Solution 2 is obviously inspired by solution 1.
http://digitalcabinet.blogspot.com/2008/11/too-big-to-fail.html
November 17th, 2008 at 7:34 pm
you can only make so many cars and sell so many cars as per supply and demand,why did they make more than needed,and they want a bailout,so they can make more cars than they can sell.common sense has become so uncommon.the one with the best product and price wins,the others lose as in everything.change with the tide,bend with the wind or be outdated and destroyed.very very simple
November 17th, 2008 at 7:48 pm
We gave more than $125 Billion to a company most never heard about until recently- AIG. No questions asked. Even let them keep their orgies.
I say we bail out the Big 3 and issue the shares directly to taxpayers. We replace 75% of the board with Citizen Reps. If they don’t like it- let them find funding elsewhere. Maximum pay set at $150K/year for ALL employees. Again, if you don’t like it- go to Toyota or Honda. Brain drain? WHAT brain? Obviously those Yukons and Hummers and Escalades were not the way develop products?
November 17th, 2008 at 7:50 pm
I understand this money is going to the union for retirement and health funds as an initial payment into that fund, which means the auto industry will be back for more, besides haven’t they sent their operations to China? So, who makes out? China and the auto exec’s and the American citizen gets it up the ying-yang. Nope, there has to be a restructering either chapter 11 or internally.
When I read a post on another site that workers in the auto industry work for three hours at $71/hr and then sit around the rest of the day doing nothing because they have met their quota I was flabbergasted! This says the union is asking for too much and there is a diffinite need for a restructureing. I say, auto industry, restructure, lay-off, etc., and let the union sue, mayby if they win they can collect in 10 or 20 years and by then it will not matter because America will be fully socialist by then and nobody gets anything.
November 17th, 2008 at 10:25 pm
The only way any form of bailout should be entertained is when the following conditions are met:
1. UAW contracts are unilaterally adjusted to reflect the true market price of labor in the auto industry. Put an immediate and permanent end to the unnecessary and utterly ridiculous overpayment of the “Big 3″ auto workers and bring their labor costs in line with their competitors so that they can be…wait for it…competitive.
2. UAW contracts are unilaterally adjusted to maintain existing pensions for workers who are within a pre-defined window to retirement, reduce pensions for workers with less than “x” years of tenure and completely eliminate pensions for new workers. Instead of a lifetime annuity on the company’s dime how about a 401K like the rest of us; so you can stop bleeding the company to the point of bankruptcy every few years.
3. Restructure the company so that the there is more money being spent in making cars that people want to buy than on providing health care. Last I checked GM was supposed to be an auto manufacturer not a health care provider.
Absent all of the above getting put into place we have no business keeping these companies afloat.
If the UAW and the Big 3 aren’t willing to make the painful but necessary choices to get their industry healthy then they should close the doors and they can all send their employment applications to Toyota, Honda, Kia, Suzuki etc. etc.
November 17th, 2008 at 10:30 pm
Matt, You say that you doubt that the Big 3 will be able to (or willing to) shrink their workforces after a bailout. Why not? That is what they have been doing for the last 25-30 years.
The reason that the bailout is the less risky alternative is that I have no idea how the economy will absorb, all at once, 2-3 million unemployed people. Do you? If the answer is no, isn’t it less risky to spend what we incur in 5 months in Iraq to preserve the status quo, and if the market economics says these companies should be 2/3 their current size allow that to happen over 3-5 years?
November 17th, 2008 at 11:15 pm
Some have suggested that the domestic auto industry, however late, recognizes its missteps and has been working towards a better future. Others have also claimed that the biggest problem these companies face right now lies on the demand side, because nobody wants to buy a car and a lot of people can’t even if they want to. If it’s clear that there’s legitimacy to both of these claims, and there might be a future in the domestic auto industry, then perhaps aid with concessions isn’t so terrible. Of course, would it then not be propping up zombie firms? At the very least, it seems like the government should guarantee the loans in bankruptcy, if it comes to that.
I guess I’m a little confused about at the core of the issue. Nobody can see the future, so it’d be a little hard to know exactly what would happen if this or if that occurred. Perhaps I’m overestimating the value of business consulting or any other sort of analysis that would be relevant to the decision making process in this case, but it seems it wouldn’t be that hard to get a fairly decent sense of where these firms were headed, based on certain conditions down the road and what would happen if certain steps were taken. If a consensus can be reached, then the administration should go from there. I’m obviously leaving out the potential political problems in selling a possibly unpopular plan to congress or to the public, but I’d rather have the administration fighting congress with the right ideas in mind than going along with something else just because.
November 18th, 2008 at 10:43 am
If the end goal is a healthier US auto industry that provides jobs, maintains a manufacturing base for national defense purposes and requires fewer bailouts, then GM should be split up. The government can supply the DIP financing in bankruptcy and financing for private equity firms to take parts of GM.
This will make the whole industry stronger, make it more likely that some will survive, make the industry more competitive and thus able to compete globally. I like that better than “the Chevy Volt will save us”.
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