It looks like President Bush eschewed my advice to allow the automakers to file bankruptcy. Not surprising at this point, but disheartening nonetheless (at least to me).
The best case scenario is that the strong accountability measures that have been announced will actually work to either promote reform or pave the way for an eventual bankruptcy.
Logically, the plan seems to be primarily to give the automakers an opportunity to get their ducks in a row for a prepackaged bankruptcy filing sometime in the spring. In which case, this truly was just an effort to make sure that any bankruptcy will turn out to be "orderly," although it seems like Detroit only has itself to blame for not being better-prepared for a bankruptcy filing right now.
Realistically, however, I'm afraid that isn't going to happen. Sure, President Bush talked a tough game today. But do we really think that come March the Obama Adminstration is going to stick to its guns and enforce the accountability provisions in the bailout? It seems hard to believe that two months into his administration, Obama will let these guys go down, even into a prepackaged bankruptcy.
So what seems most likely is that come March, Detroit will be no better off, and Washington will roll over the loans and provide still more cash for another six months or so. If that is so, then this action--although purportedly short-term and qualified with numerous conditions--is a huge victory for the UAW and incumbent management, who have likely bought themselves time well into 2009 before they have to deal with a reckoning.
Does this really help them beyond that? It is hard to see how. A lot of people object that consumers won't buy a car from a company in Chapter 11. But do we seriously think that many of those consumers will be a car from a company on bailout life-support? If not--and I haven't talked to anyone who thinks it makes a difference whether they are in Chapter 11 or on life-support--then it is hard to see what this action does to fundamentally transform the prospects of the automakers. In other words, bankruptcy still looks inevitable, and it is just a matter of how many billions of taxpayer dollars we're going to throw away before we get there.
But there is a more fundamental issue here. The President faced a fundamental decision whether the fate of the automakers would be decided by the well-established economic process of Chapter 11 reorganization or the ad hoc political process. He opted for the latter. And once he did, he triggered a new political dynamic. Now that the government has extended money with strings, politicians are likely to insist on the power to impose further strings. For instance, if GM wants to close a plant in a given community or discontinue orders from a given parts plant, what's to stop politicians from intervening to try to prevent that from happening?
Consider the issue of the dealers, which may prove the toughest nut to crack without bankruptcy. General consensus holds that GM has too many nameplates and too many dealers. And dealerships are hard and expensive to close because of state dealer-protection laws. But dealers are often among the most important and politically-connected businesses in a given town. After forking over all this cash, will politicians stand by and allow GM to close those dealerships?
It is hard to see how taking this out of the economic process and putting it into the political process is going to improve Detroit's long-term prospects.
All of the micromanaging provisions (like the prohibition on issuance of dividends, wage adjustments, managerial compensation, etc.) are just artificial efforts to replicate the natural processes that occur within a Chapter 11 case. (Amazingly, GM was still issuing dividends as of June of this year). Hayekians will recognize this as constructivist attempts to replicate the knowledge of time and place, with all the problems that implies.
Andrew Grossman has more on "Bush's Awful Auto Bailout" here. Andrew has had several good posts on this issue over the past week or two.
What would Jesus do? Bail-out Detroit.
This is solely a "not on my watch" bankruptcy measure.
Nothing can save Chrysler, and it deserves oblivion. Its products suck to the point of being both laughable and hazardous to their occupants.
GM can't survive unless it is relieved of the UAW's contractual work restrictions, retirement pay &medical benefit obligations, and state laws restricting its ability to close or consoidate dealerships. Any one of those might be possible without bankruptcy, but all together require bankruptcy reorganization.
Furthermore the longer GM's bankruptcy reorganization is delayed, the less likely it is that GM can survive.
Ford has a much better chance than GM of surviving bankruptcy reorganization, and even has a small chance of survival without it, but the latter is probably a pipe dream if GM goes entirely out of business due to disruption of the suppliers Ford shares with GM.
Being originally from Detroit, I will admit that I find it difficult to consider this issue objectively. The idea that GM could fail is almost literally impossible for me to contemplate. At the same time, all of those folks who are saying that GM and Chrysler should be allowed to collapse because they got themselves into this mess are significantly discounting just how terrible times are in the auto industry--the credit crunch has devastated the entire industry, not just GM, as evidenced by the fact that despite ruthless cost-cutting Toyota looks set to post it's first annual loss in 71 years. Honda also lost more than a billion dollars in the second half of 2008.
I also do not think it is sufficient to say that this is a slippery slope argument because every industry has been affected in some way. Other than houses, there isn't a single consumer industry that relies so heavily on the availability of consumer credit as does the auto industry. Almost literally no one pays cash for a new car, and if credit isn't available, people cannot buy cars.
It's true that years of mismanagement and structural problems have placed GM in a delicate position vis a vis its Japanese rivals (though, in fairness, those rivals have enjoyed decades of government support and have benefited for years from an essentially captive market in Japan). But this economic crisis and its effect on credit is a singular event with uniquely harmful consequences for the auto industry--perhaps, rather than urging bankruptcy, it makes sense to carefully consider whether these extraordinary times demand extraordinary intervention, at least until the freeze in the consumer credit markets pass.
The alternative is even higher levels of unemployment and the cascading effects of hundreds of suppliers driven out of business. That cannot be good for anyone at this particular moment in time--and is one reason why even Toyota supports the bail-out.
In reality, the alternative to the bailout is not Chapter 11 but Chapter 7 liquidation. In current circumstances, this does not seem a great alternative
IMO there would be very little opposition to direct federal bail-out loans, in lieu of private DIP financing, for a GM bankruptcy reorganization, and less opposition to Ford's.
Chrysler deserves oblivion. GM might, but I don't object to giving it a chance provided it has that chance, which it doesn't absent bankrupcty reorganization. Ford does not deserve oblivion, though it might happen anyway.
And Chapter 7 is probably what should happen to Chrysler. Wind down its assets to pay off suppliers, keeping the suppliers solvent, and try to give the employees and retirees as soft a landing as possible.
I'm not necessarily opposed to giving money to Detroit (where I was born, incidentally). But we need to be realistic about what it's for. If we think this money is going to save Chrysler, it absolutely will not do that. If we think it will make Chrysler's death in a few months easier, then it's good.
I'm not really sure whether giving this money to Chrysler is helping them stay aloft a little while longer, or adding jet fuel to the the plane just before it crashes.
It's likewise ludicrous to expect the public to pay healthy 50-year-old UAW retiree so he can continue a life of bass fishing.
More people are standing in line to screw Chrysler and GM than are standing in line to screw the UAW. When my town's Chrysler dealership closes, I intend to go there and urinate on its vacant lot.
Union backers pay attention: you can make dealers into a boogeyman without much work. Everyone hates buying cars from them and they're usually rich.
Retired airline pilots whose former airlines failed got the same deal. Benefits are capped, and the pilots' retirement/health plan guaranty benefits were a lot smaller, relative to what they had negotiated with their bankrupt employers, than those the UAW retirees will get.
The only safe retirement benefits are those which offered by fully funded plans. The rest are just scams to be dumped on the taxpayers, at reduced rates.
Franchise laws make this illegal. Manufacturers are not allowed to sell directly to the consumer. The dealers have put enough laws in place to ensure they will always be the obnoxious middle men they've always been. (NPR did a story on this issue yesterday, when I did my annual NPR listen)
Please explain the "but" above. I worked for a couple years for a GM dealership - (former) family business. Explaining exactly what value we were adding was not our strong suit, if you get my drift. On the used side, maybe. New, not so much.
Bunch of obsolete rent-seekers that need to be shown the door alongside those 50-year-old UAW retirees with gold-plated bennies, if you ask me.
Then perhaps it is time for us to stop buying so many things on credit. Cars included.
I blame the management for kowtowing to the endless desires of the useless unions. How's that?
There are millions of workers in Detroit who would gladly stand on an assembly line for $15.00 an hour with no benefits. Hopefully after Chrysler and GM fail, Honda and Toyota will refit the plants and put those people to work.
They're a general drain on the industry. If you want to buy a car, in nearly all states you must go through a dealer. You are legally forbidden from buying direct from the company. Becoming a new dealer to compete with existing dealers may also be forbidden, depending on how many currently exist in your town.
Just examine the absurd terms of the loan: if the firms go bankrupt, they are supposed to pay the loan back right away. What is this supposed to mean? Wouldn't such terms be illegal under the bankruptcy laws if done between private creditors and lenders?
How does the Executive Branch have the authority to rewrite the bankruptcy code? I thought writing laws was a legislative function? Or is anything allowed to push this giant **** of a bailout through?
IANAL, but I think that a company about to go bankrupt is not supposed to give preference to some creditors ahead of others. Perhaps the bankruptcy code provides that the government-as-creditor gets special treatment.
Why do you choose to be so offensive? Have you always been bigoted against religion?
I can see how that could cause problems for dealers, but it says nothing about how it would cause problems for the manufacturers.
Having more outlets selling chocolate wouldn't bother Hershey's. Why would more dealers for cars threaten in any way the car manufacturers?
There are millions of workers in Detroit who would gladly stand on an assembly line for $15.00 an hour with no benefits."
Another fan of Pottersville comes out in the holiday season. Must be a white collar employee who does "important" work. Who needs a middle class anyway?
And I'm sure those dealers vote Republicans because they like free market values, right?
Alexia: "There are millions of workers in Detroit who would gladly stand on an assembly line for $15.00 an hour with no benefits."
Why stop there? I'm sure there are millions more who would glad work for much less. Question Alexia: How many people would gladly do YOUR job at half your salary? Just askin'
Who needs any class? If people aren't pulling their weight I don't feel sorry for them. Real Americans built this country on hard work and being better and more free to pursue prosperity and happiness. In a few decades we've turned into entitled, petulant losers, in nearly every industry.
Randy's post just reeks of entitlement, tell you what Randy, I can tell you who the people are that would do my job for less, my COMPETITORS, and its up to my employees and me to be better than them. I need good people and pay them accordingly, there is no one that would do their work for half the salary because they don't exist. I don't tolerate incompetence or laziness.
I don't tolerate incompetence or laziness."
And what's your position on the use of TARP funds for those Morgan Stanley and Goldman Sachs bonuses? Or is only the blue collar workers who are "incompetent and lazy"?
I have a friend who works in the german auto industry. He was traded to Detroit to be a manager. He was in charge of a division with quite a few workers. They had several contracts, so employment and work was going well. Then they ended, and he was told to lay off all the workers. In Germany , they would never do such a thing -- they would keep them on the payroll even if there was no work. Why? Because they are experienced workers, and that builds loyalty. You want them available for when the next contract comes in.
Sure enough, another contract came in about six months later. However, the company lied during negotiations and said that they had all these experienced workers on hand. My friend was now to go back and hire all the workers. By now, however, most had moved on, so the majority of hires were inexperienced low skilled workers, not the ones that were needed for this contract. My friend was so furious, he quit and returned to Germany to work in a more sane environment.
So -- you gonna blame the workers for this? They are paid too high? I wouldn't, instead, I would blame the managers who considered only the bottomline for the next month, and couldn't think longterm. Sometimes you *should* pay people more because they are in fact worth more, and it beneifts you in the long run, which I'm sure you agree with, although it doesn't seem as though Alexis does.
That was my point. If that is 'entitlement' then so be it.
So, you know what? I will consider his opinion on the matter to be slightly better informed than this know-it-alls who blame everything on the $15 per hour workers.
Grrr.
Sophistry.
My point is that people that are willing to work "effectively" will be compensated as such. That's not a fallacy, its reality. My people are good, our system is good, we can't tolerate inefficiency. GM may have many good people, but the efficiencies are so (evidently) poor they can't compete. You can't fix this on words and promise.
The sooner this country realizes this, the better. "Hope" and "Change" are simply words, we need actions and great efforts to make them happen. Rewarding mediocrity (again, decades in occurrence) got us where we are.
I agree if experience = efficiency. The cat will be out of the bag soon, its not as if UAW workers have special skills. Just saying they do doesn't make it correct.
Won't the bailout constitute "subsidies" by World Trade Organization treaties?
Unless the big 3 quit all US production export they would then be in violation of those treaties.
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