No BailOut for the Car Companies? I'm Heading that Way

by francine Hardaway on November 17, 2008

Obama looked pretty good on 60 Minutes Sunday evening. He looked like he had everything under control in his "no drama Obama" way.

But the world has changed again. With Citibank's layoff of 53,000 employees and the Republicans in Congress still fighting against the bailout, one wonders what unemployment will look like before this is "over," whatever that means.

I've been debating with myself for weeks over whether we ought to bail out the auto industry. I made a little pro-con list for myself today.

 On one hand, the auto industry is a huge industry, symbolic of American engineering and technical leadership. American cars are part of everyone's gay mad youth (unless they are young today). On the other hand, the industry has been staggering and contracting under the weight of both its own profligacy and global competition for years.

 On one hand, Detroit has a supply chain of about 3 million total jobs.
On the other hand, not every job is lost in bankruptcy and those suppliers can continue to supply Honda, Toyota, and the others who are competing successfully.

 On one hand, all these workers will go on welfare and public assistance, further taxing our entitlement programs.
On the other hand, a bailout is just an entitlement program distributed differently.

On one hand, we can attach strings to the bailout that will force the companies to do business differently.
On the other hand, the President of GM has already indicated he won't resign for a bailout and the current POTUS has already said he'd give them $25b with no strings to keep them in business.

You see where this is heading.

I am heading to the conclusion that we ought to let these companies go bankrupt, and throw our energy into restructuring them forcibly while shielding them from creditors so they can continue to operate, which always happens in a Chapter 11 filing. They will get DIP (debtor-in-possession) filing, won't they? The board can then throw out the CEO if he isn't doing the job, can't it? And the company will come out stronger.

Look at Continental Airlines. It went bankrupt and came out much better for it. So have many other, less notable examples,

 If we let them go bankrupt ( they might not ALL have to seek Chapter 11, but if you give out bailout money, you can be sure they will all ask for it, and their suppliers, too), jobs will be lost, but those jobs will be lost no matter what. Many of those jobs are "faux," created by unions and by bloat, the way big companies always grow when they have the money to do it.

I find all this hard to square with my social safety net predilections. But I've been watching layoffs in Arizona for two years now, and layoffs in Silicon Valley, and now in New York. We've seen Wall Street completely collapse and restructure.

Why should the auto industry be immune?

Have an opinion you want to share?

{ 12 comments… read them below or add one }

Damon November 17, 2008 at 1:51 pm

They are trying to save jobs that shouldn’t be saved. The car companies need money to maintain the status quo within their companies. It sucks when people lose their jobs…but that is capitalism. They will move on to do better and brighter things. If we keep them doing the same thing, those companies won’t change and everyone will be worse off for it.

mike connolly November 17, 2008 at 8:10 pm

I have gone through the same process and have concluded that the CEOs of companies who have claimed they are free-market believers sure change their tune when they think the stupid taxpayers will bail their asses out of the hole they have dug for themselves. Like you, I hate to see people lose their jobs, but if we are going to continue to believe in capitalism then even big companies either must fix themselves or go out of business. When Tandem Computers began laying off people in 1994, 1995 and 1996, the federal government never bailed out that company. It was very difficult for some of the people that got laid off to find a new job.
I don’t think we should subsidize companies to build products consumers won’t buy. I also do not believe the taxpayers should provide them with a loan. If the CEOs can’t convince a commercial bank they have a good business plan then we the taxpayers should not take that risk.
I feel the same way about loaning these rascals money so they can retool their assembly lines, which they should have been doing all along.
GM has had the same CEO since 1995, the company has consistently lost market share since 1999 and the it has not made a profit since 2004. Where does pay for performance fit into this CEO’s compensation plan? Why is he still employed by that company?

Francine hardaway November 17, 2008 at 8:20 pm

Yes, that’s what I think. But then when you look at this video, you realize how complex it all is:

Phillip Blackerby November 17, 2008 at 9:40 pm

To me the question is whether the car companies are really headed toward collapse. If they collapse, and simply dissolve under forced liquidation, the results would be disastrous, just as the video claims. But how can we believe an industry that has behaved as scurrilously and performed as poorly as GM, Ford and Chrysler? Like Bush, they have squandered their credibility!

If they stay in business while in bankruptcy, void their UAW contracts, renegotiate retirees’ benefits, dump current management, sell obsolete assets, streamline (“cut”) bureaucracy, change how dealers negotiate and sell, and a whole lot of other things, then bankruptcy would be the better solution.

The big three will never be competitive under their current labor agreements; bankruptcy is the only way to void those agreements.

The “national security” argument holds no water. We have too much vehicle manufacturing capacity and a lot of it is owned by foreign makers from just two countries: Japan and Germany; neither has a military. Worst case, we could nationalize anyone’s factories, and make lots of HumVees, Abrams tanks or whatever is needed.

But one of the big reasons why the situation is so dire today is simply the economy. Sales are down for every carmaker. Consumers won’t make a big purchase now (house or car), and banks are lending only to FICO scores of 715+, if at all.

The carmakers are asking for a $25 billion line of credit to float their cash flow to the other side of the credit crunch and recession. Then they expect to be able to sell the smaller, more efficient cars for which they have earlier borrowed $25 billion to retool.

My best guess is that a $25 billion line of credit won’t get them through to the other side. It will just get them to spring or summer 2009, still at least a year short of the other side. What will we do then? Another $25 billion? Another $50 billion? How much good money will we throw after bad?

Whom can we believe?

francine hardaway November 18, 2008 at 5:48 am

That’s what I think. Everyone says if they go bankrupt, it will throw them out of business because their agreements will be voided and their retiree health benefits will go. But no one else has those benefits anymore. There is, after all, Medicare.

And if they get bailed out? I bet those things have to change anyway. The free lunch is over, and today I wake up thinking it’s all academic.

Jack Kessler November 18, 2008 at 12:52 pm

The world is not constituted such that we can punish the motor company executives for their exploitation and cynicism. Even now they are trying to shift the blame for the results of their cynicism and incompetence onto the workers. I assume it was the GM workers who thought the Hummer was a good idea? But I digress.

They will not see the inside of jail cells for their maladmnistration, nor will they be reduced to the circumstances of the unemployed workers and consumers whom they have beggared. They have demonstrated that they are incapable of shame. All that remains is to humiliate them on their own terms. Sell GM to Toyota and Ford to Honda.

These companies are no longer national assets that we must not let fall into the hands of foreigners. We are faced with more of the same at even higher cost. In the hands of their current managements they are national liabilities and their managements will game anything that is done to deal with them. They have to be replaced as a class and the way to do that is to make sure that every executive was born in Japan. Only that will wipe the slate clean of these people.

Toyota and Honda and Mazda are making money building cars here in the United States right now. If we are going to put our own money into car companies, the least we can ask is that they be put into other hands than those who have ruined them.

Phoenix Business Coach November 19, 2008 at 1:22 pm

The American taxpayer will have to shell out billions regardless of what strategy is used. In a BK scenario we’ll have to bail out the creditors. In a “let them fail” scenario you can add unemployment to that. If retooling is the required route, that won’t be free nor cheap.

There’s still a big hole in the ground and whether it’s filled with dirt, concrete or beer cans, it will have to be filled.

joe November 19, 2008 at 10:49 pm

what about bailing out the companies – but using their assets to lower barriers to entry in the automotive industry ,by changing industry structure ? this would enable more startups to compete , increase innovation , do alot to reduce global warming , and since america is the best country in the world in building startups , it might enable america to have the best automotive industry in the world .

while not without risks , currently there are no low risk options to this crisis.
maybe worth a try ??

BigAl November 20, 2008 at 12:10 pm

One question I have – Are the big three going to Mexico and Canada asking for money too – isn’t this where a lot of the cars are made? So should the US taxpayer be subsidizing their plants in other countries? I don’t think so!

francine hardaway November 20, 2008 at 2:38 pm

What is fascinating about all these comments is the wide range of crowd-sourced solutions you have come up with. Amazing that Congress doesn’t figure some of this out.

Ethan Bloch November 20, 2008 at 4:20 pm

We haven’t really seen Wall Street “completely collapse and restructure”. The feds have pumped billions into Wall Street and other financial firms. Lehman is the exception not the rule.

I do however agree that the big 3 should be left to fail, a rescue now only prolongs their demise and throws good money after bad. We should have let Chrysler fail in the 80’s, people say that was a success, I say look at Chrysler today, if that is success what is failure?



RickC December 9, 2008 at 10:57 am

It is definitely the car companies fault for putting themselves in the position where they would have to be bailed out in a capitalist country. However, America isn’t ready to deal with the gravity of situations that will stem from not bailing the car companies out.
All the jobs that are associated with American car companies will be lost. That means all the car part suppliers and builders and people who didn’t necessarily put the car companies in the position where they would have to be bailed out would be punished. Hundreds of companies would have to go out of business and millions of jobs would be lost. The key now is to preserve jobs and prepare to get the economy back on track. Unfortunately, the tax payers have to pay the price.
Also, people who already own American cars, which represent a large amount of car owners, are at a disadvantage. If their car breaks down and needs a new part, where are they supposed to go? The companies that supply American car companies with parts would no longer be in business. There’s no guarantee that you would be able to buy genuine parts for your American cars. Not bailing out the car companies may put a huge financial burden on the millions of people who already own American cars. This would only further complicate things for many Americans.
I realize taxpayers are angry at the car companies for being irresponsible, and they should be. Usually if you have a bad business in a capitalist society, then you go out of business. However, the car companies may have known that they were too important to ever let die which allowed for them to manage their companies poorly. Therefore, government workers should be appointed to make sure the car companies handle things properly after the bail out. Also, taxpayers should expect to be reimbursed if American car companies get back on their feet. I would agree that it is a necessary to preserve American car companies, but I would also agree that it was unnecessary for them to take advantage of the system.
Since the American car companies don’t manage themselves well and are being given money, they should be classified as risky. If the taxpayers are giving the car companies money, they should expect to know how well it is being used. That is why I proposed earlier that government workers, who have experience in financial and business management, should be appointed to keep an eye on the car companies (until they get back on their feet). This goes against capitalist ideals, but having these people watch over the companies would relieve the taxpayer and let them know their money isn’t being used irresponsibly.
It is unfortunate that American car companies would put our country in the position where taxpayers have to pay for their mistakes. However, preserving the car companies saves hundreds of companies and millions of jobs. It also prevents financial burden on those who already own American automobiles. However, we shouldn’t leave them alone with our money. We need to supervise their businesses and overlook everything they do. This goes against capitalism, but it is necessary to prevent more bad decisions.

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