Bankruptcy Is Bailout
One of the confusing things about the drive to provide some kind of bailout to GM and other car companies is that discussion often seems motivated by the notion that if a firm can’t pay it’s bills then everything just somehow vanishes. But as Justin Fox says, the bankruptcy code provides an established process for what amounts to bailing out an insolvent firm. As Brad DeLong says, there’s a specific problem with letting a bank go bankrupt so instead of bankruptcy you get special bailouts to prevent everyone else from getting screwed over. But a car company is not a bank and doesn’t share the relevant properties of a bank. And bankruptcy is a form of bailout.
Two things we know about the outlook for the car industry is that there is going to continue to be demand for cars and other sorts of vehicles for the foreseeable future, and also that the operations of the “big three” firms aren’t going to become profitable without some substantial restructuring of the business. One way for that restructuring to happen would be for congress to try to serve as financier and central planner of the auto industry. Another way would be to let the bankruptcy process unfold. And there’s no reason for us to experiment with socialism in this regard. Spend federal money on helping people in need meet their needs, but trying to step in and dictate the specific course of change in the industry is folly.
93 Responses to “Bankruptcy Is Bailout”
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November 14th, 2008 at 9:26 am
The question is whether bankruptcy would help ease the legacy costs, pensions and retiree health care, that are so burdensome on the car manufacturers.
November 14th, 2008 at 9:29 am
It’s time to put the welfare of the workers and union members first in all of this. They will be wiped out were any of the Big Three to be allowed into bankruptcy and to retool as a bare bones, cost-cutting operation.
http://www.sunstateactivist.org/ssablog/
November 14th, 2008 at 9:37 am
The talking heads on cable make much of “legacy” costs driving the U.S auto industry to the brink of collapse. In the next breath they advocate unspecified schemes in which hundreds of thousands of retirees lose most or all of their pensions and retirement health care, for the greater good, the saving of GM, Ford and Chrysler. I don’t hear anyone address what several hundred thousand people are supposed to suddenly do in their 60s, 70s, 80s and beyond now bereft of pension and medical monies they’ve budgeted and counted on for years or decades. Many paid into these funds or agreed to withholdings or lower negotiated wages as a tradeoff for future benefits. Yes, life can be cruel, it deals you unexpected losses and the new economy may dictate “You’re screwed, sorry about that!” but the news you’ve drawn the short straw sometimes seems delivered rather blithely by the messengers. Buchanan, Dobbs, Hannity and Limbaugh must find it easy to advocate such draconian remedies as they sit on multimillion dollar offshore bank accounts.
November 14th, 2008 at 9:40 am
The problem is the bankruptcy process can take years to get through. The best solution here is basically a legislative bankruptcy combined with an influx of capital (about $25 billion). That way, you would get all of the benefits of a bankruptcy (including the appointment of a receiver who would begin restructuring the business, the wiping out of all existing equity interests, and the ability to renegotiate labor and management contracts), but you wouldn’t have the costs in time and uncertainty of a traditional bankruptcy.
Under ordinary circumstances I would be all in favor of a traditional bankruptcy for GM because it would probably end with it being bought by Toyota. But, with the current state of the market, there is no way Toyota could presently buy it. So, the timing is really what makes it unfeasible.
November 14th, 2008 at 9:42 am
I’ve been a critic of the Big Three in Detroit for about 30 years. That said, I’m somewhat torn on a well-thought out bailout vs. letting them slip into bankruptcy. http://www.slate.com/id/2204582/ does a good job of looking at some of the trade-offs. I don’t see it an easy question from the stand-point of what’s best for the workers and the economy as a whole.
November 14th, 2008 at 9:43 am
> The talking heads on cable make much of “legacy” costs
> driving the U.S auto industry to the brink of collapse. In
> the next breath they advocate unspecified schemes in which
> hundreds of thousands of retirees lose most or all of
> their pensions and retirement health care, for the greater
> good, the saving of GM, Ford and Chrysler.
GM ended management retiree health benefits from the class of 1987 forward, but on July 1st of this year they announced that health benefits for all current management retirees would end on 1/1/2009.
November 14th, 2008 at 9:45 am
Just as others “get screwed over” if a bank goes into bankruptcy, so will all the many, many suppliers and distributors of the big three if they go into bankruptcy. This isn’t a little thing. You will send hundreds of other companies into bankruptcy with them. Also, these processes all start out as Chapter 11 reorganizations, but many of them will end up as liquidations in Chapter 7. If we assume that won’t happen with a bailout (not a guarantee, by any means) that’s a huge difference between a bailout and a bankruptcy.
November 14th, 2008 at 9:48 am
Oh, hell. Daniel Gross over at Slate does a good job of looking at some of the trade-offs.
November 14th, 2008 at 9:50 am
I’m torn myself, as starting to feel that economic plans this time are too hard to get right, at least without a deep breath. But I’m fascinated by the politics of this. One reasonable liberal perspective is apparent in blogs like this one, in letters to the Friday Times, or in Friedman’s last column: the feeling that we have to be skeptical about corporate handouts, especially when the environment is at stake and in the Bush era’s deregulated economy. Yet in Congress, the split is strongly along party lines and in the opposite direction, with Republicans blocking action.
How would you all explain it? Is it just that, while one never sees a Republican not embracing a corporate handout, the rules change when the interests at hand are in regions with a Democratic base?
November 14th, 2008 at 9:51 am
DanG- that’s exactly why Wilbur Ross is in the headlines this morning saying that going Chapter 11, in the middle of this economic meltdown, would be a disaster and the companies would be unlikely ever to emerge from it. A successful vulture capitalist ought to know what he’s talking about in that area, I would think. I hope somebody’s paying attention in DC.
What I’d like to see is government help for Ford and GM (stick a fork in Chrysler, which should have happened long ago) with very serious strings attached- in GM’s case that would extend to firing the current board and top management. (Over at Ford Mulally et al. actually seem to have a clue.)
November 14th, 2008 at 9:54 am
Somebody is gonna get screwed if the car companies can’t pay. The people who supply steel and plastic will go under if they don’t get paid. The retirees individually will go under if they don’t get what is coming to them.
All of these groups have already given something of value to the car companies with an explicit contract guaranteeing payment in the future. I don’t see why labor is should be a seen as less important than goods.
November 14th, 2008 at 9:58 am
The Auto companies do share one bank like characteristic which would make a bankruptcy problematical. Their equity is a rounding error in the scheme of things (and in all truth probably non-existent), the huge asset bases are essentially debt financed. They have only been allowed to get this far by the fact that markets considered them too big to fail. I can remember telling an accounting friend of mine to take a look at the balance sheet before accepting a job with one of these companies (horrified, he declined and went to work at a Swiss drug company); that was ten years ago and it has only got worse. These companies also infect a large proportion of synthetic CDO baskets leading to further bank like cascading failures.
November 14th, 2008 at 9:58 am
My old grad school just informed me that I have an outstanding bill of $950 that, according to them, was due months ago. I need a bailout like whoa. Unfortunately a bailout seems unlikely, so I am prepared to implement option #2, which consists of not paying my bill. This seems like a sound path for me to take, and unlike the big 3, my debt is largely in bogus fees the university laid on me without my knowledge. Thats my “i’m bitter becasue i wont get a bailout but people who f’ed up will” story.
November 14th, 2008 at 9:59 am
Here is my proposal for dealing with the auto industry:
The federal government takes over 100% of pension obligations for the companies. The existing union deals are renegotiated to replace future pension obligations with better salaries now. In exchange, the federal government gets some preferred stock and gets to wipe out the current executive staff at those companies. At that point, the companies have the flexibility of downsizing if they need to in order to survive and we don’t have to worry about screwing all those pensioners.
November 14th, 2008 at 10:06 am
They can’t go bankrupt right now. TED spread is still fubar. There is no entity on the planet that will extend DIP financing to them. If you let the process unfold you will destroy not just the auto manufacturers but thousands of other companies that supply them. You get something like the Oklahoma dust bowl occurring in the midwest instantly.
November 14th, 2008 at 10:15 am
By propping up failing businesses aren’t we risking damaging the competition? I certainly feel bad for the workers who may lose their jobs and pensions etc., but what about the additional workers who won’t be employed if Toyota, Honda, Etc. aren’t able to further increase their operations because failing companies are allowed to eat into the demand?
Maybe we can start importing Tata Nano’s… cheap cars for the new depression!
November 14th, 2008 at 10:18 am
The biggest argument against chapter 11 is the cost in terms of consumer perception. So the consensus that seems to be building is to structure the bailout like a bankruptcy… in which case the title of this post is exactly backwards.
November 14th, 2008 at 10:18 am
I think the problem is that no one is going to buy a car from a company in bankruptcy, as you are also buying a long term warranty and whatnot. I think what is going on is they are trying to accomplish everything that would happen in a bankruptcy without ever using the word.
November 14th, 2008 at 10:20 am
Well, I’m pretty sure that’s what Obama wants to do. Trouble is, Jan. 20 may well be too late.
November 14th, 2008 at 10:23 am
What if we’re so tied down that the only way to dethrone king oil is through political effort? Include clean cars, maybe, along with your push for trains.
Please re-read Harry Reid’s convention speech.
http://www.giveemhellharry.com/page/community/post/harryreid/BGZ
November 14th, 2008 at 10:26 am
This pseudo-bankruptcy bailout sounds great – it’ll be just like a bankruptcy, but without the negative consumer perception! The problem is that there’s no reason to think that all the parties will actually behave like it’s a bankruptcy. Part of the reason bankruptcy works is because it’s a wakeup call to everyone involved that they need to start making concessions before it’s too late. If the federal government’s sitting at the head of the table, everyone else at the table is going to be staring at the government’s big pockets.
November 14th, 2008 at 10:29 am
Maybe you’ve never been to Michigan, Matt, but the local impact of a possible bankruptcy would be absolutely devastating, and if a Democratic President and Congress let it happen, the upper midwest would shift Republican. That’s a certainty. Anybody campaigning in Michigan against “the party that let the Big 3 die!” would find very fertile ground. Thus, there’s not only a humanitarian reason not to allow this to happen, but a political reason as well.
November 14th, 2008 at 10:30 am
It is foolish to say “Ch. 11 won’t work” as a reason to pump money into an enterprise like GM which is losing several billion dollars a month. If they need financing help in Ch. 11 to reorganize successfully and avoid liquidation, then that is when the gov’t can step in and provide the debtor-in-possession financing that is needed.
To do it before hand is just flushing cash down the drain.
November 14th, 2008 at 10:36 am
pennaguy- people who know a lot more about this stuff than you or I say that CHAPTER 11 WON’T WORK. You need to assimilate this, and the reasons for reaching that conclusion, and formulate reasons why you think people like Wilbur Ross are wrong, before spouting off.
November 14th, 2008 at 10:43 am
I vote for “experimenting with socialism” and “dictating the specific course of change in the industry.” Matt says this is folly, but I don’t see what expertise he brings to the question.
Seriously, I thought there was general agreement among progressives that the US needs a focused program of public investment in the foundations of a new green energy economy and infrastructure. My understanding was that beginning such an effort was a cornerstone of the Obama agenda. Why rely here solely on the free market processes of bankruptcy, and just let banks and private investors do what they will with Detroit, as armies of dislocated workers will probably see their communities and way of life destroyed, and are driven into a Rust Bowl exodous? Seen in the light of Obama’s policy ambitions, the state of the auto industry is not just a challenging emergency, it’s a wonderful political opportunity to roll an ambitious public investment program into an emergency response to a threatened economic sector, in a way that will make it easier to get around and surmount political obstacles.
Matt has already suggested that his own brand of “progressivism” is not averse to allowing millions of workers languish in depressing and unproductive unemployment on the public dole. He doesn’t seem to see much difference between providing for their “needs” in this way and the alternative route of saving their jobs, careers and dignity.
And given that he is an avowed enemy of cars, I wouldn’t assume that Matt has the real long-term interests of the industry or the people work in it at heart. Indeed, the very fact that Matt opposes government investment and restructuring for the auto industry makes me more inclined to support it. Matt’s hoped-for urbanist dystopia of huddled masses shuttling about on their concrete and asphalt patches on bikes and in trains doesn’t appeal to me as much as a future of rangy green freedom powered by clean, cheap and energy efficient personal transportation vehicles.
November 14th, 2008 at 10:44 am
24, 25: I’m not sure how much different your views are if you would listen to one another. Sending money to GM with no strings attached is a terrible idea. On the other hand, forcing the company to recognize that bankruptcy is basically where they’re at (they need more than just cheap money) and forcing them to make the type of concessions that normally occur in bankruptcy, but providing the financing necessary to avoid chapter 7 is exactly what we should be doing.
The question is on a practical basis whether we should force them to begin normal chapter 11 proceedings before intervening or whether we should jump start the operation now.
November 14th, 2008 at 10:55 am
I respectfully disagree with you guys. Look at the airlines. Most of the major airlines have operated in Ch. 11 over the last few years (US Air twice). Many other industrial cos. have been doing it over the years since we’ve had the current bankruptcy laws. The only difference now (which may be what Wilbur Ross was referring to, I don’t know), is that with the financial crisis, DIP financing is unavailable. That is where the gov’t can step in.
If you are saying Ch. 11 can’t work, even with a DIP line from the gov’t, then I think you are saying there is no hope under any circumstances. Because putting money in now just postpones things for a few months.
November 14th, 2008 at 10:57 am
The biggest problem is that if GM enters Chapter 11 bankruptcy, it appears likely its assets will stop generating revenue.
Why is this so?
November 14th, 2008 at 10:57 am
I’m unsure of this, but I heard some guy on CNBC saying that recently GM, Ford, and Chrysler amounted to 10% of US Corporate bonds. That seemed high to me, but he did seem like one of the few people that occasionally make sense on that channel.
If Detroit debt is held by insurance companies, which are already under considerable stress after Fannie and Freddy preferred stock and Lehman’s debt imploded, this would be a decent reason to consider a bailout.
We really don’t need more AIGs.
November 14th, 2008 at 10:57 am
Since all of the rightwingers are bitching and moaning about how legacy costs and healthcare destroyed the Big Three, here’s the deal: the goverment takes over those costs for them, in exchange for much tougher CAFE standards. Structure it as a loan, or a purchase of preferred stock, I don’t really care.
But the majority of workers will have some protection, and Detroit will finally be forced to re-tool in an environmentally positive way. There’ll be some early pain, but it seems like a win-win.
And dittoes on not calling these bailouts socialism, even if Matt is being snarky.
November 14th, 2008 at 10:58 am
32: We can’t bail out GM bondholders. They bought extremely risks bonds to get enormous returns. At best they should get .50 on the $1.
November 14th, 2008 at 10:59 am
“Part of the reason bankruptcy works is because it’s a wakeup call to everyone involved that they need to start making concessions before it’s too late. If the federal government’s sitting at the head of the table, everyone else at the table is going to be staring at the government’s big pockets.”
Exactly. Chapter 11 is the only solution that will force creditors, unions, management, and shareholders to make the sacrifices required to turn the automakers back into viable companies. Nobody’s going to face the music if a free shopping spree in the bailout candy store is in the offing.
November 14th, 2008 at 11:00 am
Re: number comment #27 and earlier discussion of a “non-bankruptcy bankruptcy” — I don’t know if that can work or not, the legal aspects seem tricky (when you stop paying on bonds/loans, the creditor can sue to put you into involuntary bankruptcy).
November 14th, 2008 at 11:02 am
This is a chance to get the kind of transportation we need. If we sit back, again, and let the big money interests choose the next generation of transport, they’ll find a way to box us in.
http://en.wikipedia.org/wiki/General_Motors_streetcar_conspiracy
“Between 1936 and 1950, National City Lines bought out more than 100 electric surface-traction systems in 45 cities,[citation needed] including Detroit, New York, Oakland, Philadelphia, Phoenix, St. Louis, Salt Lake City, Tulsa, Baltimore, Minneapolis, Seattle[citations needed] and Los Angeles,[1] and replaced them with GM buses.”
Read Nader on the “Highway Lobby.”
November 14th, 2008 at 11:02 am
Government help with the legacy costs would be frightfully expensive, but there may be no reasonable alternatives.
November 14th, 2008 at 11:05 am
The End of the Experts?
Matt knows best for the auto companies and the millions of middleclass americans that work there, or receive a pension?
Not so fast, just sub in “Matthew Yglesias” for “Thomas J Friedman”:
By Thomas J. Friedman
Published: July 4th, 2009
The sudden outbreak of peace in Iraq has made me realize, among other things, one incontestable fact: I have no business holding a pen, at least with intent to write.
I know, you’re thinking I’m going too far. I haven’t always been wrong about everything. I recently made some sense on global warming and what we needed to do about it, for instance.
But to have been so completely and fundamentally wrong about so huge a disaster as what we have done to Iraq — and ourselves — is outrageous enough to prove that people like me have no business posing as wise men, and, more importantly, that The New York Times has no business continuing to provide me with a national platform.
In any case, I have made a decision: as of today, I will no longer write in this or any other newspaper. I will immediately desist from writing any more books about how it’s time for everyone to climb on board the globalization high-speed monorail to the future. I will keep my opinions to myself. (My wife suggested that I try not to even form opinions, but I think she might have another agenda.)
Baffled? I don’t blame you. So I’ll cite some facts to support my decision — a practice, I must admit, I have too seldom followed.
Let’s start with the invasion itself. I was pretty much all for it. Mind you, I was not one of the pundits, reporters, or public figures who said that Saddam Hussein was a threat to the United States. I knew better — but I said it didn’t matter!
Back in February of 2003, I wrote in this space: “Saddam does not threaten us today. He can be deterred. Taking him out is a war of choice — but it’s a legitimate choice.” In other words, we should invade a sovereign state and replace its government in order to remake the world more to our liking.
Now the simple fact is, an unprovoked attack on a sovereign state is a war crime, even when linked to grand ideas of the future of mankind. In fact, that’s exactly what Hitler did, for exactly the same reasons. The Nuremburg War Crimes Tribunal called it the “the supreme international crime, differing only from other war crimes in that it contains within itself the accumulated evil of the whole.”
What was I thinking? And more importantly, why didn’t anyone stop me?
But wait, it gets worse. Having expressed how acceptable it was to commit Hitler’s signature crime, I then applauded the invasion of Iraq as an “audacious roll of the dice.” It should have occurred to me that this gamble would be unspeakably painful for an untold number of Iraqis who had done nothing to us — in other words, any of them.
Soon, when it became obvious that my pipe dreams for a peaceful and democratic subject nation were just that, I decided to say it was too soon to tell how things would turn out in Iraq, but that we would definitely know in six months to a year. I said this pretty much every six months for five years. And The Times just kept giving me more and more column-inches.
I’m not trying to beat myself up here. I’ve done that plenty already, believe me — and my wife has done the rest! But I have one question: why are newspapers like The New York Times letting people like me make fools of themselves, mislead the American people, and, worst of all, give their wives a lifetime of ammunition?
To err is human, but to print, reprint, and re-reprint error-mad humans like me is a criminally moronic editorial policy.
Nor, of course, is it only me. Just consider who populates the opinion pages of America’s top newspapers. Bill Kristol, who was actually hired by The Times long after being proven wrong on Iraq. Charles Krauthammer. Robert Novak. Mona Charen. Fred Barnes. The list goes on and on of officially-approved wise men (and a woman or two) who never once doubted that Iraq had vast stockpiles of W.M.D.s. And that’s just in newspapers.
We were all wrong again and again — and the consequences were devastating. Can anyone tell me why any of us should ever be asked, let alone paid, for our opinions ever again? Or, for that matter, why Richard Perle or Paul Wolfowitz should be allowed behind any sort of desk whatsoever as long as they live?
Peace in Iraq will undoubtedly have many far-reaching consequences. As promised, I’m not going to speculate publicly about what they might be.
Except one. As of today, I’m putting down my pen, to take up a screwdriver. I am going to retrain as an engineer and spend the rest of my life working to build non-carbon-based energy technologies. And I’m going to spend a lot of time washing my hands.
PS they prosecuted media figures for inciting the Rwanda massacre, interesting precident ain’t it?
November 14th, 2008 at 11:14 am
stan,
The “GM killed the streetcars” meme is nonsense. Streetcars died because they couldn’t compete with buses and cars.
Lyn Long, a researcher at UC Berkeley’s Institute of Transportation Studies who specializes in transportation history has studied the history of transit in LA extensively. Long concluded that the LA streetcar system died for the following reasons:
Long also points to the elimination of streetcar lines in Britain and elsewhere in Europe, as automobiles became increasingly affordable and popular and streetcars lost market share.
November 14th, 2008 at 11:17 am
DTM: maybe you are right. I would have thought that flying on a bankrupt airline would have seemed scarier to a consumer than buying a car from a bankrupt auto firm, but they got used to the idea. But obviously this is unknown territory.
November 14th, 2008 at 11:34 am
When you fly on a bankrupt airline you are renting a seat for a few hours for a few hundred dollars. When you buy a car for $30,000 you want to be assured that you’re dealer won’t be eliminated in bankruptcy and you will have to drive very far to get service, you are worried that the company will not make it out of bankruptcy and you won’t be able to get spare parts a few years down the road. A consumer has a multi-year relationship with a manufacturer that they buy a car from, very unlike the airline business.
Nobody who understands chap 11 or works in the bk field believes that it is a good solution for GM. It would take 3 years for gm to emerge from chap 11, years during which there sales would fall even further and the losses would be even greater.
Also, if GM, Ford, and Chrysler go under the Dems will suffer major losses in the next election as the economy will still be miserable two years from now.
November 14th, 2008 at 11:39 am
But the FDIC can seize a bank that is “almost” insolvent. Banks already have a mechanism which is more aggressive than bankruptcy.
Here are the cap categories for banks:
* Well capitalized: 10% or higher
* Adequately capitalized: 8% or higher
* Undercapitalized: less than 8%
* Significantly undercapitalized: less than 6%
* Critically undercapitalized: less than 2%
at less than 6%, the FDIC can replace management and force changes. At 2% they seize the bank. This is not bankruptcy, this is a quasi-government takeover.
Somehow the bailout seems like a way to avoid the normal process which would allow a management shake-up.
November 14th, 2008 at 11:44 am
Bill (#44) is completely correct. If the Democrats allow Michigan to lose (roughly) one million jobs, they’ll never win the state again. Northern Indiana and Northern Ohio would be hurt pretty badly too. What kind of a progressive wants to allow rats to use bankruptcy proceedings to invalidate union contracts? That sounds like something Megan McCardle would support, not a progressive.
November 14th, 2008 at 11:45 am
For bailout of U.S. automakers: Democrats in Congress, President-elect Barack Obama, UAW, respected left-leaning economics columnists such as James Surowiecki of the New Yorker, Daniel Gross of Slate.
Against bailout of U.S. automakers: Republicans in Congress, President Bush, Cato Institute, Matthew Yglesias.
Politics makes for strange bedfellows.
November 14th, 2008 at 12:28 pm
Love ya Matt, but this is the most inane thing I’ve ever read here, insofar as it ignores the likely negation or severe diminishment of current & future pensions & etc which will occur in bankruptcy. Indeed, this union busting, not any eco or poly theory, is what’s fueling the anti-bailout, pro-bnkrptcy movement.
also, folks, big difference between going from NY to LA on a bankrupt airline & making a major purchase of an item that you expect to last awhile & be reasonably backed-up service & parts wise.
November 14th, 2008 at 1:01 pm
Okay, I understand the problem people have with chapter 11 now. But I think that is an easily avoided problem. The legislature should just pass a bill which forces GM to go through bankruptcy like proceedings, while inherently insuring that the company will be recapitalized (with federal funds if necessary) sufficiently to return to business at the conclusion. With the right name for the bill (auto maker revitalization plan?) I don’t think consumers will lose their confidence in the company.
It’s certainly risky b/c the big 3 need to downsize and that could cost the Dems Michigan, but it will probably cost the Dems the whole country if they spend $100B over the next 4 years trying to prop up that failing business sector.
November 14th, 2008 at 1:09 pm
One problem with any of the Big 3 going bankrupt is that the American taxpayers will be left holding the bag wrt the pensions & healthcare bills of those who have retired.
Now I will grant you that their competition does not have the same pension/healthcare liability the US automakers have & that does need to be addressed but I don’t know that we the people want to take on that obligation.
November 14th, 2008 at 1:37 pm
Nationalize the auto industry. Nationalize the finance industry. Nationalize energy & healthcare.
Quit screwing around trying to save capitalism. It’s toast.
November 14th, 2008 at 1:45 pm
Nationalize the auto industry.
Personally, I can’t wait for the chance to buy my first U.S. Government Model #1 Automotive Unit. Think Trabant without the charm. And it’ll come in any color you like as long as it’s black. The price may be a bit high, if the Five-Year-Plan for auto production is off. Honda and Toyota will of course be deeply troubled by this dazzling new competitor.
November 14th, 2008 at 2:21 pm
Matt’s pretty clearly out of his depth on this one, here’s Felix Salmon with what seems to be the emerging consensus outside of the right-wing yahoo’s and transit fundamentalists:
(Emphasis Added)
November 14th, 2008 at 2:58 pm
Despite being a registered Dem, I would normally be all for letting GM go bankrupt. Having worked for a time supplying and supporting the auto industry, I view the destruction of the Big 3 as a collaborative effort between management and the UAW, which had only one thing in common: neither gave a s**t about the end customer.
But these are not normal times. A GM Chapter 11 is, for reasons mentioned above, not likely to lead to a productive outcome. Not only will it kill sales, but it will have a ripple effect through the automotive supply industry. The suppliers are viciously competitive and work on tiny margins, leaving them with no ability to withstand suspension or reduction of payments, especially in the current credit climate. The ripple effect through these suppliers (many of them *not* union shops, BTW) will drag down the entire US auto sector, including even the domestic plants of foreign manufacturers.
Some kind of federally managed quasi-bankruptcy, as described by posters above, seems like the least economically risky alternative.
November 14th, 2008 at 3:00 pm
Why is the costs of the employees the problem? The world didn’t want to drive to work in a gas-guzzling tank, yes? How about they start building buses?
November 14th, 2008 at 3:04 pm
Mixner, sometimes monopolies produce the Trabant, and sometimes they produce the Western Electric 500 (perhaps the perfect telephone design, in every way). I’ll take my chances with progressive government-led control over the auto industry rather than the scam artist capitalists who’ve been running the private equity firms and hedge funds. As a side benefit, we could prevent the complete economic destruction of every facet of Michigan, and much of Northern Indiana/Northern Ohio.
November 14th, 2008 at 3:38 pm
Mixner, sometimes monopolies produce the Trabant, and sometimes they produce the Western Electric 500 (perhaps the perfect telephone design, in every way).
We’re not talking about a monopoly, we’re talking about nationalizing an industry. Nationalized industries have a very poor record in the marketplace. And by the way, if the “Western Electric 500” is “the perfect telephone design,” why aren’t people using it?
As a side benefit, we could prevent the complete economic destruction of every facet of Michigan, and much of Northern Indiana/Northern Ohio.
We don’t need to nationalize the auto industry to do that.
November 14th, 2008 at 3:44 pm
Why is the costs of the employees the problem?
Because they’re too high. They’re not really “the” problem, though. There isn’t just one serious problem. There are a number of problems, and labor costs is one of them.
The world didn’t want to drive to work in a gas-guzzling tank, yes?
Americans did. And still do, to a significant extent. Trucks and SUVs were the most profitable product lines for many years.
How about they start building buses?
They do build buses (GM, at least) But the market for buses too small to substitute for more than a tiny fraction of car and light truck production.
November 14th, 2008 at 4:16 pm
Michigander raises an interesting point I hadn’t considered– this electorally flushes away Michigan and Indiana (near miracle we got it this time) and probably Ohio. I don’t want to start the re-elect cycle with a 48 EV (really 96, because they’d go to the other guy) swing to the right.
If you let them enter bankruptcy now, what do you think the likely effects are for suppliers, unions and retirees? What effect do you think supplier closures will have on the remaining auto-manufacturers? Even if this would be a solid measure, you can’t believe this is a good time for the economy to absorb that shock.
November 14th, 2008 at 4:24 pm
“if you let them enter bankruptcy now, what do you think the likely effects are for suppliers, unions and retirees?”
Unions: Well, since the goal of bankruptcy seems to be (in part) the ability to sluff off union contracts and costs, I suspect this would be devastating for the UAW. Also, if bankruptcy comes right before the health fund begins, kiss that goodbye too.
Suppliers: Many would go out of business. Even areas that you don’t think of as auto manufacturing areas (Hermansville, Escanaba, etc.) would be devastated by supplier failure.
One you forgot:
Universities: U of M and MSU would be crippled, especially Michigan’s engineering school. Plus, the State’s running low on money for universities anyway (they skipped a payment recently), so big-3 bankruptcy would dangerously exacerbate that.
November 14th, 2008 at 5:38 pm
Just ran across this article, which makes essentially the same points I did in my post above, but much better:
http://www.tnr.com/politics/story.html?id=a4893b49-36df-4784-9859-2dfa3a3211bf
November 14th, 2008 at 5:47 pm
Re: What kind of a progressive wants to allow rats to use bankruptcy proceedings to invalidate union contracts? That sounds like something Megan McCardle would support, not a progressive.
Matt seems to feel about cars the way Fred Phelps feels about gays, and maybe, unconsciously, thinks that if the US auto industry goes down everyone will end up riding the bus or biking. He’s hardly alone in this attitude, an this shows a dangerous fissure in the liberal-progrsesive alliance, between those who care about Labor and those whose others concerns make them quite willing to flush Labor down the drain.
Re: Michigander raises an interesting point I hadn’t considered– this electorally flushes away Michigan and Indiana (near miracle we got it this time) and probably Ohio. I don’t want to start the re-elect cycle with a 48 EV (really 96, because they’d go to the other guy) swing to the right.
It could be much worse than that. People in thoe states are already POed at the GOP. If they also find cause to be POed at the Democrats where do they go? Turn those states into an economic charnel house and you could breed some very toxic political movements that would make Dick Cheney look like St Francis of Assisi. Remember the Michigan Militia? Increase that several powers in size and evil and see if you like that future.
Also, there are international implications here that no one is noticing. GM going down would blow a huge hole in Canada’s economy too. And Canada has thus far escaped the brunt of this mess– its financial sector is actually healthy, but being a smaller country it doesnt have as much capacity to absord body blows. Then there’s Mexico. If the maquiladoras and auto industry of northern Mexico collapses how more illegal immigrants will we see streaming across the border?
November 14th, 2008 at 6:00 pm
Why, of course, that makes perfect sense- last year, when we subsidized them to build Bloat-mobiles, that was free enterprise. But if we subsidized them this year to build Econo-mobiles, why, that would be socialism. (Boo,
hiss.)
So, we’ll take the middle road- give the industry enough money, somehow, to keep workers employed (sort of). But keep the same management to make sure that no worthwhile changes occur. It’s a well-trodden path- the British tried the same thing to keep their auto industry on life support for about thirty years.
The Germans and the French have other paths to the same result (or, almost the same- nobody would seriously compare a product of Detroit with a Mercedes or Citroen). But learning from them would involve foreign languages and, possibly, the dreaded tint of socialism, so we won’t go there.
Because what we’ve been doing is working so well.
November 15th, 2008 at 2:23 pm
Some updated lyrics to the Don McLean classic:
Bye Bye Miss American Pie
Drove my Chevy to the levy
and let the dog die.
“Let the dog die” is a brutal, but common, assessment (in the turn-around industry) of an impaired business which is allowed to go under because the perceived value of its assets is worth more to creditors than its value as an on-going business. Speculation that GM can file for bankruptcy and that somehow it will emerge as a leaner, well-managed company is hopelessly naïve. Bankruptcy will put the brand out of business. If one thinks that the so-called “Wall Street” bankers are greedy and immoral, as characterized by much of the political mainstream, they are collectively Mother Teresa compared to the bankruptcy process. There are no more vile words in the English language than “assigned for the benefit of creditors”. As a group, secured creditors and their counsel are the most rapacious breed of animal in the financial markets. Bankruptcy courts have absolute power to do anything they perceive is in the interests of creditors; once a company like GM files for bankruptcy, everyone will be looking for their share of the booty. Having run a successful fund which acquired companies out of bankruptcy (with the plan of turning them around and not liquidating them), I can assure you that GM will not survive a bankruptcy filing. Assets will instantly be worth 10 cents on the dollar, and so-called professional fees (attorneys, investment bankers, trustees, et al) will absorb 20-50% of that amount as compensation for administering the bankruptcy. Proprietary assets such as molds, designs, manufacturing processes, patents and trademarks, marketing materials, training programs, dealership support programs et al… will be worth virtually nothing in a liquidation. In this environment, there is absolutely no chance that some entity will have the wherewithal and the interest to turn around and retool a company as complex as GM. Creditors will take what is left after the scavengers have picked the bones clean. Talk of providing “retraining” for workers is a pipedream. Retrain them to do what? And where? I’m guessing that a GM or Ford failure will lead to the collapse of both the City of Detroit and the State of Michigan, as the entire automotive industry supply chain collapses and thousands of suppliers to GM/Ford go bankrupt in rapid succession. Dealerships, after-market retailers and repair shops nationwide will also fail, leading to more economic problems in every community in America. What is left of the US automotive tire industry will also fail, which will put pressure on all big-box retailers. Should we let those dogs die, as well? It is all well and good to talk about how inept the management of GM is, but the failure of GM or Ford has far larger ramifications. Do you really want to wipe out billions of dollars of brand equity and an entire industry because their management is inept? Can we afford such a cavalier attitude in the face us such a severe financial crisis? What if we were talking about drug manufacturers and hospitals, or the airline industry? Just because we have the option of buying automobiles from Toyota or BMW does not mean that losing GM or Ford is good for the country. Seriously, do you want an America where no American branded cars are produced? Baseball, motherhood and apple pie can’t be far behind.
A better solution would be to force these companies into Federal Receivership as a condition of bailout funding. A Federal Receiver has the same options as a Bankruptcy judge, but not the obligation to manage assets solely for the benefit of creditors. Instead, a Receiver can manage the assets for the benefit of all constituents and stakeholders (e.g. employees, creditors, suppliers, customers, shareholders, taxpayers etc…). A Receiver could renegotiate contracts and retirement plans, assign equity, defer compensation and replace management at will. If/when a leaner healthier GM (or Ford) emerges, stock or notes can be issued and sold to recoup the bailout investment. There are literally hundreds of talented turn-around executives who would welcome the challenge of restructuring the automotive business with the proper authority and financial support. It won’t be easy, but at least it isn’t unconditional surrender. A public/private partnership to create a 21st century automotive industry should be a large part of our coming energy independence. It will not come to pass by callously destroying what little is left of the US auto industry because “they deserve it.”
November 15th, 2008 at 8:27 pm
Re: guessing that a GM or Ford failure will lead to the collapse of both the City of Detroit and the State of Michigan
Detroit is already in a state of collapse and has been for years.
But you need to think bigger than that. Not only Michigan, but Ohio, Indiana and Ontario (the latter with severe consequence for all of Canada). The federal pension guarantee
fund. Possibly Mexico as a whole, with either revolution and/or mass migration north resulting.
Heck, possibly a violent uprising in Michigan itself.
How much fire do people like Matt and Meagan McCardle really want to play with in order to teach those incompetent managers and those greedy unions a lesson?
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