pageok
pageok
pageok
"Let Detroit Go Bankrupt":
In yesterday's New York Times, Mitt Romney offered up an interesting essay arguing that Congress should not try to bail out the Big 3 automakers.
Richard Aubrey (mail):
What does a bail out mean?
Does anybody in the bailout bunch have any idea what it would look like? Is there any sense of how much money would be necessary to support the Big Three until they got back into the game?
At the rate they're burning cash, how long will $25 billion last? Where will they be then?
Wagner said that, under a worst-case scenario it would take a "significant" amount of money to get to the end of March. This was in the context of the $12-$13 billion requested, so the implication is that it would be considerably more. What will be happening in March of next year to make another huge belt of tax-payer money unnecessary?
11.19.2008 2:37pm
Frog Leg (mail):
Very interesting coming from Romney. I heard him speak in Lansing before the MI primary at the beginning of the year, and he was calling for federal help of automakers then. Wonder what's changed.
11.19.2008 2:42pm
LA Denizen:
There is a statutory "bailout" procedure available: Bankruptcy. Shareholders get wiped out, but that's the risk they take. Unions get worse contracts, but that's the price of keeping jobs at all. And it doesn't cost the taxpayers a cent.

The GM factories aren't going anywhere; nobody claims that GM would just shut its doors if it didn't get the money. The only question is whether the necessary changes get made through bankruptcy today, or through bankruptcy tomorrow (after billions of dollars of taxpayer money are spent).
11.19.2008 2:43pm
smitty1e:
Hey, if DC makes me buy a Detroit product via taxation, I'm freed of any partiotic duty to buy American, no?
11.19.2008 2:49pm
Robert Farrell (mail):
Bankruptcy is a good idea, but there are a couple other elements that should be included, one Romney mentions, and one he doesn't.

First, as Romney says, restructuring should include profit sharing or stock for all employees, cuts in executive compensation and eliminating executive perks. If the unions have secured contracts that have bankrupted the owners (I don't buy this, but if so, good for them) then the logical solution is to transfer the stock to the employees in exchange for givebacks. Guaranteed pensions and healthcare benefits are assets, just like an annuity. Owners who want to buy back those assets should pay for them with their own assets -- their stock.

Second, comprehensive healthcare reform. Without it, every large employer with pension costs that include healthcare expenses is going down, as are a fair percentage of any business that tries to provide its employees with good health insurance (whether because they want to or because, as in the case of the automakers, they are contractually obligated to do so.
11.19.2008 2:50pm
Frog Leg (mail):
nobody claims that GM would just shut its doors if it didn't get the money.

Well, yes, a lot of people are making that claim. The piece of evidence cited to in support is that of a poll of car buyers, 85-90% of whom said they would not buy a car from a company in bankruptcy, since they don't know if they will have a warranty worth anything, parts available, etc.
11.19.2008 2:50pm
Syd Henderson (mail):

Frog Leg (mail):
Very interesting coming from Romney. I heard him speak in Lansing before the MI primary at the beginning of the year, and he was calling for federal help of automakers then. Wonder what's changed.


This is Mitt Romney we're talking about. The wind changed direction.
11.19.2008 2:51pm
David Welker (www):
Well, Mitt Romney is still for a bailout. He just wants one that allows these companies to restructure their obligations to workers, retirees, and others in bankruptcy and which hits both shareholders and bondholders hard.


The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.


LA Denizen:

Romney's proposal would potentially cost the Federal Government something. He wants the government to guarantee post-bankruptcy financing, which given the current credit environment, the car makers in bankruptcy would not likely be able to obtain without such a guarantee.
11.19.2008 2:54pm
David Welker (www):
Frog Leg,

Actually, Romney is still calling for the Federal government to save the auto industry. By guaranteeing post-bankruptcy financing and the warranties that the companies provide their customers.
11.19.2008 2:56pm
YF:
The problem with Bankruptcy is that there are literally no DIP lenders available right now, and nobody wants to see a GM liquidation. I think the best solution would be for the Federal Government to provide a DIP loan to the big three. Given the super priority DIP lenders enjoy, it's low risk for the government, it lets the bankrupt corporation take advantage of Chapter 11 laws that would enable it to shed its most burdensome contractual obligations, and it avoids the disastrous liquidation that everyone agrees shouldn't be allowed to happen.
11.19.2008 2:56pm
CJColucci:
If any of the Big Three had gone into the tank a year ago, a Chapter 11 bankruptcy of the ordinary sort might have been just the ticket. Now, however, the financial crisis has made obtaining the necessary debtor-in-posession financing next to impossible for reasons entirely separate from the cluelessness and stupidity of the auto industry. What may be in the cards is a sort of government-sponsored Chapter 11, with the taxpayer providing bridge financing if and only if the industry goes through a drastic restructuring, the bondholders take a haircut, the stockholders get wiped out, and the management gets replaced.
11.19.2008 2:58pm
Don Miller (mail) (www):
Maybe I am crazy, but this sounds sane.

The automakers and the UAW have wound a tangled web of problems. The Automakers are probably more to blame, but the UAW did its share too.

A complete restructure of the companies is probably the only long term solution.

My Brother-in-Law finished his Masters in Mechanical Engineering just two years ago. He was recruited by the big 3, but eventually turned him down. Too bad too, his Masters work was on emissions improvements for diesel engines. He told me he didn't want to work for a company where the average engineer made less than the average line worker. Because engineers were considered management, they aren't covered by the UAW contract.

I don't know if it is true, but that was the impression he received. If it is true, it helps explain part of the problem. The only engineers they can hire out of college would be the ones who weren't good enough to find a better job.

Of all the offers he got, my BIL considered the offers from the big 3 to be among the bottom 10%
11.19.2008 3:01pm
BT:
This sounds like Romney's first shot at 2012, especially given, as one poster above mentioned, he backed assistance in the past. It seems like he has read the R tea leaves and sees that most republican voters are less than happy with continued bailouts for various businesses ad infinitum. Politically for Romney how this will play out is anyones guess. I happen to agree with him that going BK would be the best option but the chances of that happening with a D congress and president are very small.

Anyway, this has nothing to do with the above subject but my first car was a 1973 American Motors Hornet--I loved that car!!!
11.19.2008 3:01pm
Don Miller (mail) (www):

but eventually turned him down.


Should read "but eventually turned them down.
11.19.2008 3:03pm
mkl:
LA Denizen:
1. Shareholders and bondholders will get wiped out. Insurance companies that are major bondholders will fare accordingly.

2. Suppliers won't get paid. Many will also go BK. Same with dealers, who are already being cut back on reimbursements from GM.

3. Many are claiming that GM will just shut its doors (i.e., BK will be Chapter 7). GM is operating cashflow negative, and will need the $25B in DIP financing to keep its doors open. There does not appear to be $25B of available DIP financing in the private markets. Nor is there an obvious source of private equity and new debt capital to take a meaningful chunk of GM back out of BK.

I think I'm being too optimistic on the behavior of the government and (hopefully) too pessimistic on the market, but I think giving them $50B (and no more) so they can just go bust 2 years from now would be money well spent vs. letting them go bust today.
11.19.2008 3:07pm
Thorley Winston (mail) (www):
Very interesting coming from Romney. I heard him speak in Lansing before the MI primary at the beginning of the year, and he was calling for federal help of automakers then. Wonder what's changed.


I'm not sure what you mean. When I read the transcript of the speech he gave to the Detroit Economic Club before the Michigan primary, the only "help" he called for was for the federal government to increase its R&D spending in energy research from $4 billion to $20 billion which is the same thing he's called for this op-ed.
11.19.2008 3:15pm
Allan Walstad (mail):
I'm against any bailout, as I was against bailing out the Wall Street fat cats. But here's a compromise idea, for the sake of discussion.

How about letting them go bankrupt, auctioning them off, and giving the NEW ownership a loan that's limited to certain purposes and conditioned on permanent departure of all the previous top management.
11.19.2008 3:23pm
YF:
Wasn't the 1.9B federal loan to Chrysler in 1979 structured as a pseudo-bankruptcy?
11.19.2008 3:24pm
Frog Leg (mail):
What I mean, Thorley, is that Romney in his speech in Lansing called for "federal assistance" to automakers. I don't remember him being any more specific than that. I guess he left that part out of the DEC speech, which might have been the same day.

I found it interesting that in the DEC speech (as well as in the speech I heard in Lansing), Romney blamed the automaker's woes on higher CAFE standards. That's a good one.
11.19.2008 3:25pm
Mark Creatura:
Not so, Prof Kerr. Mr Romney in the linked article says that the federal government _should_ do what it takes to make feasible a BK restructuring of the automakers, and outlines what he thinks would be needed.

He may or may not be right, but he is clearly advocating a significant government role. Just not that we follow the path of British Leyland.
11.19.2008 3:30pm
Tom952 (mail):
They go bankrupt. Healthier automakers (Toyota) buy Corvette, Saturn, and the truck business. Honda buys the VOLT and makes a fortune with it. The trustee gives Chevrolet, Buick, Cadillac, and Pontiac to the UAW, which rebrands the vehicles with the proud UAW moniker and resumes production with advertisments for buyers to "Step up and Buy American - Buy UAW!".
11.19.2008 3:43pm
wfjag:

Some say we're looking for a bailout. Baloney--we at GM do not want a bailout. What we want--after we take the actions we are taking, in product, technology, cost and every area we're working in our business today--is the chance to compete on a level playing field. It's critical that government leaders, supported by business, unions and all our citizens, forge policy solutions to the issues undercutting American manufacturing competitiveness. We can do this. And we need to do it now.

Mr. Wagoner is chairman and CEO of the General Motors Corp.

A Portrait of My Industry
GM wants a level playing field, not a bailout. by RICK WAGONER
Tuesday, December 6, 2005 12:01 A.M. EST
The Wall Street Journal
www.opinionjournal.com/extra/?id=110007641

What a few years, changes in control of Congress and then the White House, and the precedent of tossing hundreds of millions of dollars at failing Wall Street firms without any plan or adult supervision, will do to someone's opinion.

And, there's a certain irony in "We can do this" being the GM CEO's slogan in 2005.
11.19.2008 4:00pm
Bpbatista (mail):
I think Romney DOES support a bail-out. But only in the context of a bankruptcy filing. He calls for a federal guarantee of DIP financing and warranty obligations. Not too many Chapter 11 filers get that from the Feds.

I'm not sure I agree with Romney's proposal, but it's better than Barney Frank's asinine statement that the Not So Big 3 should pay back any bail-out money if they are not financially viable.
11.19.2008 4:07pm
Kazinski:
There is no way we should do any sort of bailout without resetting the UAW contracts to market wages. And GM executives should have there contracts set to below market wages.

If that is not done then the whole exercise will be nothing more than finding deeper pockets for the UAW to pick.
11.19.2008 4:14pm
justaguy (mail):
It seems to me that universal healthcare is a large part of any equation to make the big three competitive. Of course universal health care ala Canada or Britian is probably the only way medicare and medicaid become affordable to the states and Federal Government too - so we had all better be healthy!
11.19.2008 4:59pm
Elliot123 (mail):
Didn't Al Gore run against the corporations in 2000? And now the dems want to give them taxpayer money?
11.19.2008 5:05pm
David Schwartz (mail):
I wonder how hard it would be for Ford to secure a third-party to insure its warranty obligations. Would that really be cost prohibitive? (I honestly don't know.)
11.19.2008 5:14pm
Lib:
Kazinski:
And GM executives should have there contracts set to below market wages.
This attitude has always perplexed me.

When I'm hiring someone for a position that is important (in my case, senior engineering positions), I focus on getting the right person, not the person willing to work for "below market wages". In my experience, the best don't work cheap and the cheap don't work best.

When someone in an important position is not doing their job, I don't cut their pay, I get rid of them.

In a similar vein, if I needed a neurosurgeon, I'd probably be looking for the best I could afford, not the one who would work cheap.

It really seems a similar strategy should be used for restructuring executive management of the Big 3. Get rid of those senior executives who are not worth top dollar and replace them with those who are worth top dollar (and, as a consequence, will have to be paid top dollar to convince them to leave their current positions). Yes, one might be able to economize a little on executive compensation by exploiting the "physic income" and bragging rights that come from successfully piloting the barge through the storm successfully, but that savings is not going to be all that significant. Yes, in this case, executive compensation should heavily tied to long term corporate success (perhaps by long term stock options and/or replacement of a significant portion of cash compensation with restricted stock that can't be sold for five years - but would be worth a mint if the company is doing well).
11.19.2008 5:28pm
Robert Farrell (mail):
How about letting them go bankrupt, auctioning them off, and giving the NEW ownership a loan that's limited to certain purposes and conditioned on permanent departure of all the previous top management.

Trouble is, by all accounts, management has been making some smart moves lately, but has been overmastered by the sudden onset of the Bush Depression.

That said, it's a mystery to me why the Big Three have no plan for a 100% hybrid future. Toyota has seen the writing on the wall and is aiming for all new models to be hybrids by 2015. Hybrid drivetrains pollute less, are more fuel efficient and a hell of a lot of fun to drive (powerful, quiet). This isn't an experimental technology any more -- just a better one.

The principled way to encourage lower CO2 emissions is a carbon tax. Unfortunately for principle, we are living in an anti-taxes polis which is furthermore in desperate need of stimulus at the moment, not a further drag on consumption. If sticks are out of bounds, carrots are the other option; one could, for example, offer low-interest loans for 100% of the cost of retooling all domestic automakers' factories to produce plug-in hybrids exclusively (with commercial and sporting exceptions where appropriate).

Follow with a 5-10k credit for recycling a non-hybrid and purchasing a hybrid.

As you successfully transition the nation's car fleet to plug-in hybrid technology, you create a new demand for electricity as the demand for gasoline is surpressed. This could, in turn, be addressed by building new solar, wind, nuclear, or clean coal plants.

You stimulate employment and capital investment (retooling the factories, building new capacity into the grid), stimulate consumption (the credit), and strengthen the auto sector without a bailout.

Now, for the most part I agree with the CW that says the government should not pick winners in technological races. Hybrids are a bit of a special case, I would argue, as they reduce emission (an important environmental goal), are clearly superior to the existing technology, and they are a mature, proven technology that will give us decades of benefit even if something like hydrogen cars replaces them eventually.
11.19.2008 5:34pm
David Larsomn (mail):
"Trouble is, by all accounts, management has been making some smart moves lately, but has been overmastered by the sudden onset of the Rangel/Pelosi/Dodd Depression"

There: fixed it for you.
11.19.2008 5:44pm
Robert Farrell (mail):
Sorry, David, Bush is your guy, and this is his economy, managed with the special Katrina/Iraq/can't capture Osama incompetence we've come to know and love.

That's the trouble with Republicans. Much as you love to preach "personal responsibility" you can't walk the walk.
11.19.2008 6:16pm
Kent G. Budge (www):

I heard him speak in Lansing before the MI primary at the beginning of the year, and he was calling for federal help of automakers then. Wonder what's changed.


Perhaps he's decided he isn't running in 2012. That would be a sensible decision given the political fallout from Proposition 8 in California. So he's decided to play "elder statesman" and say what he really thinks.

By all accounts, he is a very bright guy, and so he has to know this is political suicide.
11.19.2008 6:29pm
Elliot123 (mail):
"Sorry, David, Bush is your guy, and this is his economy, managed with the special Katrina/Iraq/can't capture Osama incompetence we've come to know and love."

How does the president manage the economy?
11.19.2008 6:34pm
Robert Farrell (mail):
How does the president manage the economy?

For one thing, he is in charge of appointing the senior staff of the major regulatory bodies of the government. Such that if, for example, you have a numbskull who believes all supervision of business and corporations is bad, bad, bad, you are likely to see regulatory failures, as when key parts of the financial sector have tied up vast sums of money they don't have in risky investments they don't understand.

The president can also influence the economy by wasting hundreds of billions of dollars on a pointless and stupid war in the Middle East, hundreds more on irresponsible tax cuts targeted at the very wealthy, and hundreds of billions more on an entirely new entitlement program designed to maximize the profits of the already absurdly lucrative prescription drug market.

The list goes on. But you have the right strategy: when faced with the facts as understood by the reality-based community you must deny, deny, deny. Eventually reality will go away and leave you alone -- or your voters will, anyway.
11.19.2008 7:07pm
Dr. T (mail) (www):
Romney's essay impressed me until he wrote, "It is not wrong to ask for government help..." I stopped reading at that point. He's definitely a politician, and not an economist, a true capitalist, or a conservative.
11.19.2008 7:08pm
Robert Farrell (mail):
How does the president manage the economy?

Let's also note that:

Of all the members of the Federal Open Market Committee, five members of the Board of Governors (usually seven, but two sets are currently empty) and twelve district bank presidents for a total of seventeen, how many were appointed under Democratic presidents?

Answer: There is just one, William Poole of the St. Louis Fed (though St. Louis is not currently a voting member of the FOMC).


link

The entire Board of Governors at the Fed was appointed by Bush. Really, 123, have you not got anything better in the way of rebuttal? If not, keep the softballs coming.
11.19.2008 7:24pm
Elliot123 (mail):
"The list goes on. But you have the right strategy: when faced with the facts as understood by the reality-based community you must deny, deny, deny. Eventually reality will go away and leave you alone -- or your voters will, anyway."

Do you need an emoticon?

"The entire Board of Governors at the Fed was appointed by Bush. Really, 123, have you not got anything better in the way of rebuttal? If not, keep the softballs coming.

My, you're so forceful.

Who had authority to regulate the CDS market?
11.19.2008 11:38pm
Hrm:

For one thing, he is in charge of appointing the senior staff of the major regulatory bodies of the government.


Most of those appointments are confirmed by the Senate. So his pick is their pick. And a lot of the problems we're seeing were caused by bad congressional policies finally biting us in the ass instead of the ankle. But I realize you're not trying to make sense, you just want to bash Bush. It's cool. I just wonder who you'll chase when he's not around to take the hits anymore.

I'm always surprised at just how much power Bush has over so many people though. They just can't seem to control themselves, bubbling over with all sorts of nonsense when anything concerning him pops up. Or in this case, even when it didn't. Depression was a nice touch, btw. When you learn what that word actually means, the teacher may have a star for you ;)
11.20.2008 12:07am
Slocum (mail):
It seems to me that universal healthcare is a large part of any equation to make the big three competitive.

Why? The cars that have been killing Detroit are built by American workers (with American, employer-provided healthcare) in southern U.S. factories owned by Toyota, Honda, etc. The problem is that the UAW has negotiated far more expensive health care coverage than most Americans get (and more expensive than would be provided by any universal plan). Even where government health care is already in place (Medicare for retirees), UAW members get an expensive, gold-plated upgrade.
11.20.2008 8:00am
Elliot123 (mail):
Does anyone here feel a personal responsibility to ensure the UAW retirees get everything GM promised them? Does anyone feel a social repsonsibility to ensure UAW retirees get everything GM promised them? Who?

For those with such feelings of responsibility, do you feel the same respnsibility to ensure GM management gets the golden parachutes promised to them? Who?
11.20.2008 1:44pm
TCO:
LEt them go belly up. Some blend of liquidation and continued operation of assets will occur. Let it happen. The market will jump if it sees the end to socialism. Right now the Dow is pricing in an expected Rooseveltian round of socialism. One that the pussy-ass RINOs dove into. Fuckers. Wish they would die. Hope Obama rapes their babies.
11.22.2008 4:43pm