GM Bailout Should Come With Major Changes
By Alan Stewart Carl | Related entries in Business, Congress, EconomyTime Magazine looks into whether GM is worth saving or not, and what the costs of action versus inaction would be.
Basically, GM has us over a barrel. Either tax dollars pay to keep it alive or tax dollars pay to handle the disaster of its failure. But that doesn’t mean we have to hold our noses and give GM whatever it says it needs. Just because a million or more jobs are on the line at GM and its suppliers doesn’t mean we should panic. If the company is too big to fail today, a blind bailout will mean it will still be too big to fail tomorrow. The goal should be making sure GM can never hold us over a barrel again.
Determining the proper solution will take serious debate by numerous experts. But there’s one idea that makes good sense to me. Bust GM up:
[C]ritics like Jim Schrager at the University of Chicago Booth School of Business say the wrong people are in charge: “I think you would only put money in GM if you had a complete change in the board and the current management. They are diligent. They worked very hard, but it just hasn’t worked.” In Schrager’s view, GM is a strategic failure. It can manufacture high-quality cars, but it neither makes the right kind nor markets them effectively. He’d bust the company up into three independent firms: Chevy, Buick-Pontiac-GMC and Cadillac-Saab-Saturn.
I’m sure such a plan would have some negative consequences and I don’t know it would affect the supplier chain or manufacturing infrastructure. But breaking GM into more companies means more competition, more opportunity for dynamic decision making and less chance for one company’s failure to bring down the national economy.
Just look at the failure of Circuit City. That’s a big company too, but it’s being forced to file for Chapter 11 bankruptcy protections rather than being given a government bailout. Why? Because the electronics retail industry has enough diversity and dynamism to prevent one company’s failure from forcing our government to take extreme measures.
What we’d like to ensure for the future are U.S. automakers that, in the event of failure, would be obligated to use the same Chapter 11 rules available to all other failing businesses. Right now, GM’s immense size means we have to give it special treatment. But that treatment shouldn’t be a band-aid. It should be a remedy. We need to make sure GM can never again put our nation in this position.
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November 13th, 2008 at 9:50 am
I always knew you were a liberal…or at least a Teddy Roosevelt Republican
November 13th, 2008 at 9:59 am
How do we know that ? Because some guy from the University of Chicago said so ? And who’s to say that Barack Obama, Rahm Emanuel, or some government bureaucrat have any idea how to run a car company ?
If we allow G.M., and by extension Ford and Chrysler, to bypass the already existing mechanism of Chapter 11 reorganization in favor of a taxpayer-funded bailout, then you’re essentially guaranteeing that any future “big” company will also be deemed “too big to reorganize”
And one other point — this idea that the “American auto industry” isn’t diverse enough for GM to go into bankruptcy only makes sense if you think that the auto industry that existed in the 1960s has any relationship to the way that industry is today. The auto industry is more than just GM and Chrysler, it includes a host of “foreign” companies who build and sell automobiles in the United States.
The main reason that GM is hurting is because it can’t compete with the likes of Honda and Toyota. That’s not reason enough to make taxpayers who don’t want to buy their cars bail them out from their own mistakes.
November 13th, 2008 at 10:44 am
Doug, you make good points, but I don’t think you can take Alan to task unless you weigh in on the central premise of his post, which is that we’re paying for this one way or another. What’s the cost to the country in terms of the auto industry’s failure in terms of lost jobs and crashing stock prices? It’s easy to say *let ‘em fail* if you don’t fully address the pragmatic ramifications of failure. Of course, the stock is going to be pretty much destroyed in the event of a bailout from everything I’ve heard, so I’ve yet to be presented with any scenario from the *experts* that adequately explains how to minimize the damage.
November 13th, 2008 at 11:08 am
Doug, I don’t think you took your analysis far enough. Yes, GM (and Ford and Chrysler) are hurting because they are unable to compete with Toyota and Honda. But WHY not? Because they are paying vast sums in legacy costs: pensions (which were not funded at the time) and medical care for retirees (ditto). And that’s the real reason why the politicians don’t want to let GM go into bankruptcy: part of that process would entail slashing the benefits for those retirees. Lots and lots of retirees.
November 13th, 2008 at 11:13 am
Precisely, blackout. We’ll pay because the feds have already made guarantee provisions in the event of GM’s failure.
And we’ll pay in higher unemployment, and we’ll pay in lost economic production and reduced consumer spending on the pat of all who lose their jobs. It would be a huge and painful waste of currently existing labor and manufacturing capacity to just let such a huge enterprise collapse.
If there’s anything to criticize Alan for, it’s for not explicitly talking about labor costs. If we split GM up into 3 companies who pay their workers $25+ per hour plus great benefits and generous pensions, we’ll just replace 1 big uncompetitive company with 3.
November 13th, 2008 at 11:25 am
blackout,
Yea, there will be a price to pay in either case but the real question ought to be what the best method for cleaning up the mess. Bankruptcy can do that, a government bailout most assuredly will not.
November 13th, 2008 at 11:27 am
wj,
I agree completely
November 13th, 2008 at 11:30 am
There’s a lot of evidence that more competition in an industry yields better results. That’s my attraction to the idea of busting up GM. But, as I said, there would be negative consequences which would have to be weighed. And it wouldn’t cure the labor ills, as several of you have pointed out. That’s why I didn’t title the post “GM Should be Broken Up.” Right now, I’m just searching for alternatives to handing over a big fat loan and saying “enjoy!” to the car companies.
As for gerry’s comment: I’m a tricky one to pin down. I’ve always thought trust busting can be a useful government tool to preserve the market. I kinda think that, if you believe it’s a great idea to have concentrated wealth and power in specific industries, you’re not a capitalist. You’re an oligarch. Trust busting is an extreme remedy, but if a company is seriously abusing the free market, it’s one we should have available to us. I kinda think asking the government for billions in bailout dollars is abusing the free market. But I could be swayed away with a good counter-argument.
November 13th, 2008 at 11:38 am
In regards to Chapter 11, I believe the argument is that GM is too large to benefit from a bankruptcy filing. The relief wouldn’t be enough to save them or stop the domino effect of all their suppliers going bankrupt too. I admit I am not well versed in Chapter 11 protections so I’ll need to do more research. Obviously, using the existing system would be preferable to creating a new one.
November 13th, 2008 at 12:00 pm
Alan,
A General Motors Chapter 11 would admittedly be big and complex and I wouldn’t envy the Judge assigned to preside over it, but there’s absolutely nothing about Chapter 11 or General Motors that would suggest the two are incompatible.
In fact, I would say, and have been saying for weeks now, that the situation that GM is in right now is precisely what Chapter 11 was created to remedy.
November 13th, 2008 at 4:18 pm
We can make damn sure that they never put the nation in this position again - by letting them fail.
November 13th, 2008 at 4:42 pm
@ Doug
I agree that Chapter 11 may be preferable to a bailout, but then there a lot of degrees of bailout to consider before we pronounce this as cut and dried. Just as it’s silly to go into panic mode and throw money at every problem I think it’s equally so to stamp *let ‘em fail* on every struggling industry as if the risks of failure aren’t immense. The complexities of the current crisis and the way they seem to undermine almost every corner of our economy with a termitic inexorability isn’t going to be answered with broad stroke ideology. The dismal science indeed.
November 13th, 2008 at 5:38 pm
we have become a nation of Serfs, fools, and slaves its on us now and to have his back we need to be critical and supportive, Obama has yet to deal with the structrual concerns of our economy in his proposals on the campaign trail , nor has Paulson or Bernake, we all just a Pay check away from a pink slip
November 13th, 2008 at 7:36 pm
Not only should we break GM up as part of any bailout, but that should become standard operating procedure for any federal bailout from now on. This would serve two purposes: (1) Discouraging companies from seeking bailouts except under the most dire of circumstances, and (2) replacing an entity that’s “too big to [be allowed to] fail” with multiple smaller entities that aren’t.
November 13th, 2008 at 9:22 pm
November 14th, 2008 at 11:24 am
GM used to be divided into separate divisions. I started with the Fischer Body division in 1964 and worked for GM as a skilled tradesman for 38 years. I wound up with the Buick-Oldsmobile-Cadillac Division and then finally the North American Operations, all the same factory. Foreign car manufacturers in the U.S. get special tax agreements and subsidies from the States that they locate in. They start with no retirees. GM has more retirees than active employees. When your parents grow old are you going to dump them in a cheap “old folks” home? We retirees are facing a catastrophe that we did not make. I have paid taxes for nearly 60 years and never applied for an un-employment check in my life. The UAW and GM should be holding emergency meetings and hammering out a workable and mutually beneficial contract model that works and allows GM to go forward without being overloaded with ridiculous financial and work rule commitments. The harder GM tries to run the more they are choked. It is time for commonsense agreements.
November 17th, 2008 at 10:45 pm
GM…PULL THE PLUG, Reset, PLUG BACK IN
Without the THREE U.S. automakers combining into one there is no rationality to bailing out GM. GM’s cash burn is triple the street estimate and has lost all control over its sales, its product development and its future. The executives and the unions have the company hostage to government capital infusion. Bankruptcy is a viable answer that can push off creditors and force unions and management to make concessions that are impossible unless a loaded gun is at their head. There is too much capacity, too many models, too many plants, too many employees producing products that are more easily produced by others. The VW bug was the first indication that the Big Three did not have a clue to the needs and long-term preferences of the U.S. consumer. And today we have a glut of SUV’s that will ultimately have to be sold at a first-ever half-price sale. GM has already built them, they have already paid for them and no one wants them. You need cash, blow them out the door ½ price or less and they are out of inventory and cash hits the balance sheet.
But to infuse GM with cash to keep it afloat without bankruptcy is no answer because next in line will be Ford and Chrysler. These three should be forced to combine and re-form to use their talents and capacity to building something we all need and that is energy independence.
There is one industry that has a payback that cannot be overlooked as a place to re-train and invest and that is in renewable energy. Train those people, insist that the manufacturing capacity of GM be converted to energy and produce, once and for all, a source of energy that once in place CAN NEVER GO UP IN PRICE. In World War II Ford built a massive number of B-24’s in their new Willow Run plant in Ypsilanti. That change in production and product proved that it can be done and Ford did a spectacular job producing that airplane to the considerable consternation to the Nazi war machine. Fast forward to 2008 and our enemy is our own waste and inefficiency; energy independence is crucial to our national safety and we can actually budget part of our national defense budget to this end.
I am not against giving money to GM…but I am against giving them money to build products that have no measurable or important upside to our economy long-term. I am against giving money to GM with Ford looking like that doggie in the window. Force them into solar, wind, wave and nuclear. Support them in their endeavor to re-tool and you got my money. Absent that, you will not get me to suggest giving them, their workers or their bloated retirees belly-aching about their co-pay when millions have no health care a single dime.
The side benefits are obvious: our defense structure is enhanced because we no longer have to depend on a cartel of Bedouins in the Middle-East to determine for us how much oil we are going to use and our environment actually can become healthy in L.A. vs. choking to death sitting in traffic on the five. We put a pin in our energy costs once in for all and bankrupt our dear friends in the middle east forcing them to drive Chevy Cobalts and trade in their Bentleys.
Here is what we said about the Chrysler/GM merger talk=
“Two drunks walking down the street
holding each other up…
until they hit the curb,
then they both fall down”
November 19th, 2008 at 7:23 am
The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.
http://nomedals.blogspot.com/2008/11/gm-bailout-makes-no-sense.html
December 11th, 2008 at 11:28 pm
This post is very interesting and the comments have provided more than enough facts for anyone to realize that this bailout is not a good idea. The part that really hits hard for me is that the UAW has not come out and said that they need to change. They have only said that they will make changes once the plan is passed. This is completely illogical and totally shows that the union is only interested in paying their employees. I was reading a report, I believe on http://www.emptypig.com that the average hourly wage at GM is 55/hour and if you include the legacy payments, 75/hour. That is incredible. Concessions need to come from all sides. Regardless, I still don’t favor a bailout.