Should The Government Bailout GM?

[redsk1]

I'm interested to hear what alot of you have to say about the government bailing out GM, who is basically bankrupt, for many different reasons. The reasons start long before any of this housing mess started.

There's pros and cons, like many tough decisions.

Thoughts?

Sorry for the length here but a great article from John Mauldin is below.

Is GM too Big to Let Fail?

(Let me say at the outset I am truly sorry for those who have lost their jobs or are facing the possibility of a job loss, whether at GM or any other firm. I have been there, as have most people at one time or another.)
I wrote in 2004 that GM was essentially bankrupt. They owed more in pension obligations than it seemed likely they would be able to pay, without major restructuring of the union contracts. I was not alone in such an assessment, although there were not many of us. Now that assessment is common wisdom.
Bloomberg today cites sources that claim a collapse of GM would cost taxpayers $200 billion if the company were forced to liquidate. The projections also called for the loss of "millions" of auto-related jobs. GM, Ford, and Chrysler employ 240,000. They provide healthcare to 2 million, pension benefits to 775,000. Another 5 million jobs are directly related to the three auto companies. GM has 6,000 dealerships which employ 344,000 people. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50 percent, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years. (Edd Snyder at Roadtrip blog)
How did we get to a place where the market cap of GM is a mere $1.8 billion and its stock price has dropped from $87 in early 1999 to $3.10 today? (See chart below.) Where Rod Lache of Deutsche Bank has a "price target" of zero for GM? "Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," Lache wrote.
The litany of reasons is long. At the top of the list are union contracts which mandate high costs and pension plans which cannot be met. Then there is the problem of many years of poorly designed cars, although they are now getting their act together. We can also discuss poor management and bloated costs, like paying multiple thousands of workers who are not actually working. GM is structured for the 50% market share they used to command, whereas now they only have 20%.
Wilbur Ross, a well-known multi-billionaire investor, was on CNBC saying that allowing GM to go bankrupt would throw the country into what sounded like a depression. Of course, he does have an auto parts company which supplies GM; so he, as my Dad would say, does have a dog in that hunt.
Ross said that we as a nation are to blame for GM's problems (I am not making this up) because we do not have a national industrial policy. The US allowed other automotive companies to build plants in states that had lower labor costs, and that is the reason GM is uncompetitive. GM pays an average of $33 an hour, and those selfish other companies pay a mere $19 plus a host of benefits.
Ross evidently believes that because some states have lower taxes and right to work laws, that it is the responsibility of the taxpayer to give GM a certain type of immortality rather than suggest GM deal with its problems directly. I assume that Ross also sides with the French when they suggest that Ireland should raise taxes so they will not have to compete with Ireland for business. Such thinking is nonsense and is also unconstitutional.
Let's all acknowledge that having GM go bankrupt would not be a good thing. But it is not the end of the US automotive industry, nor even of GM. Let's think about what a GM bankruptcy might look like. In a bankruptcy, the debt holders line up to come up with a restructuring plan so that they can maximize the return of their loans or obligations. The shareholders get wiped out, but with GM down over 95%, that has largely been accomplished. That process has happened with airlines, steel companies, and tens of thousand of other companies. It is called creative destruction.
First, let's understand that the real owners of GM are the pension plans, as I wrote in 2004. They are the entities with the largest obligations and the most to lose. They are the biggest stakeholders in a successful GM. Giving them the responsibility for making a new, leaner, meaner GM with realistic union contracts would be rational; otherwise they would lose most of what they have.
Factories need to be closed. Auto sales are down to 11 million cars a year, the lowest since 1982, which was the last major recession. Automotive companies sold cars at such low prices in the last few years that sales went to 16 million a year. But the cars that have been sold will last for a long time. Few people are going to buy a new car when the old one is working fine, especially in a recession and a Muddle Through economy. Further, does GM really need eight automotive lines, some of which have been losing money for years?
A restructured GM with realistic costs could be quite competitive. They have some great cars. I drive one. It is four years old and so good I am likely to drive it for at least another four.
At some point after the restructuring, the pension plans could float the stock on the market and get some real value. If actual pensions need to be adjusted, then so be it. While that is sad for the GM pensioners, is it any sadder than for Delta or United Airlines or steel company pensioners who saw their benefits go down? For the vast majority of Americans, no one guarantees their full retirement. Why should auto trade unions be any different?
Taxpayers in one form or another are going to have to pay something. Unemployment costs, increased contributions to the Pension Benefit Guarantee Corporation, job training, relocation, and other costs will be borne. So, it is in our interest to get involved so as to minimize our costs, as well as help preserve as many jobs as possible.
Sadly, I think it is likely that a Democratic majority next year will quickly pass a bailout that will not solve any of the longer-term problems. Obama evidently wants to appoint an "automotive czar;" and the name being floated is the very liberal Michigan former Representative David Bonior, whose anti-trade and pro-union positions are well known. This is appointing the fox to guard the hen house. It is not a recipe for the restructuring that is needed.
The bailout for GM is a bailout for the trade unions and management (who not coincidentally both made large contributions to the Democratic Party and candidates). US consumers are simply going to buy fewer cars in the future. That is a fact. Spending $50 billion does not address that reality. That $50 billion can be better spent by helping workers who lose their jobs. Without serious reforms a bailout will simply postpone the problem, and there will be a need for more money in a few years. And do we think that the management which got GM into the current mess is the group to bring them out?
And as to the argument that "We bailed out Wall Street, so why not GM?" it doesn't hold water. What we did and are doing is to try and keep the financial system functioning, so we don't see the world economy simply shut down. But don't tell the 125,000 people who have lost jobs on Wall Street that it was a bailout. That number is likely to go to 200,000. No one thinks that a restructured GM would see anywhere close to half that number of job losses.
Do we protect Circuit City? Sun just announced plans to lay off 6,000 workers. Where is their bailout? Citibank announced 10,000 further job cuts today. This is a recession. And sadly that means a lot of jobs are going to be lost. GM workers should have no more right to their jobs than a Sun or Citibank or Circuit City worker.
Now, would I be opposed to a bridge loan to help in the transition? No, because a viable Detroit is good for the country and will cost the taxpayer less in the long run than if we have to pick up their pension benefits. But any money must come with realistic reforms that put in charge new management and a realistic cost structure so GM can compete.

[Daseal]

I'm completely against bailing out GM. It obviously sucks for those who are employed by GM (past and present). The housing collapse I understood, although I think the government should have been a bit stricter with the banks (seizing useful assets until the banks can pay them back.) However, that meant normal Americans that did nothing wrong except getting accepted for a loan were going to lose their homes. In this case, it's a private company that has made a sub-par item for years, and they have been dominated by other companies. Is this country based on capitalism or not? GM isn't cutting the mustard. Sorry. Goodbye.

[redsk1]

Originally Posted by Daseal

I'm completely against bailing out GM. It obviously sucks for those who are employed by GM (past and present). The housing collapse I understood, although I think the government should have been a bit stricter with the banks (seizing useful assets until the banks can pay them back.) However, that meant normal Americans that did nothing wrong except getting accepted for a loan were going to lose their homes. In this case, it's a private company that has made a sub-par item for years, and they have been dominated by other companies. Is this country based on capitalism or not? GM isn't cutting the mustard. Sorry. Goodbye.

FWIW, I tend to agree. It's going to hurt, but the gov't can't bailout everyone. If GM was stroked a big check, they'd be coming back for more down the road. It's sad, but like the article sais, there are reasons GM is virtually bankrupt.

[Daseal]

Yeah. It's not like our government is sporting a surplus either. Everything is rough right now. Not like this will keep Americans from buying a car.

[dmek25]

roughly 3.8 million Americans will lose their jobs if the big 3 collapse. we are talking about a depression, not a recession. something has to be done. im not sure what, but something

[firstdown]

Originally Posted by dmek25

roughly 3.8 million Americans will lose their jobs if the big 3 collapse. we are talking about a depression, not a recession. something has to be done. im not sure what, but something

I agree with you and its also a matter of defense. If we had to go to war who would make our tanks, jeeps, etc... to support our troops.

[12thMan]

In less troubling econmic times, I think you let GM ride this one out like the airlines industry did post 9-11, and have continued to do since then.

I'm not sure we have that luxery to play hard ball with the auto industry. There is way too much at stake here. If GM fails consumer confidence will be in the toilet for a long, long time. The impact of losing nearly 4 million jobs can't even be fathomed.

Our choices are bad and worse when it comes to the big three. One thing's for sure, as a part of any potential bailout, the CEO's have to go. Period.

[Slingin Sammy 33]

In the hearings today a Sen. from Tennessee asked one of the CEOs that if the Gov't gave them the money would they promise not to come back later looking for more. The CEO gave a BS answer about the economy. The Big 3 were hemorraging money before the recent downturn so that argument is pure BS.

Let them go into Chapter 11, they all have ridiculous labor costs, retirement costs, real estate costs, and other poorly structured overhead costs that $ 25B won't fix. All this needs to be restructured so the Big 3 can move forward into 2010 and compete on a level playing field with Toyota, Honda, BMW, etc. (Who BTW all have major plants throughout the SE US and are profitable).

The 3-4M jobs won't be lost, some may, and all the union jobs will either pay less or have benefit changes to be in line with autoworkers in other parts of the country. The UAW is a major part of this problem and their members have benefited in a BIG way over the last 30-40 years. The restructure will also allow limits to be set on executive compensation so the failed CEOs and other executives won't have golden parachutes.

[EternalEnigma21]

the whole thing needs to be restructured. a bail out would not solve their problems. The management structure is the issue... not the labor, but they continue to attack the labor, as if they cannot pay them and still be competitive.

Also, going chapter 11 won't mean they will cease to exist. They will close a few plants, but they've been doing that for years claiming they cannot remain competitive paying american labor rates (meanwhile companies like toyota are opening new plants in the us every couple of years) Without demanding a complete revamping of management I would not give them a dime.... but then if government starts controlling businesses in exchange for tbills we have something other than capitalism don't we?

American auto manufacturers have been taking this country for a ride for years, lobbying to just keep competition out or more expensive than their cars and not paying attention to what its customers want, and that is a quality product and great customer service. I've worked for GM, Ford, and Toyota and BY FAR toyota was the most concerned with these things.

also, i thought it was funny that all 3 CEOs took private jets (separate of course) on the 45 minute flight from detroit to DC... on an average cost of over $20k/flight, to beg congress for money because they're broke.

[dmek25]

that seems fair. the C.E.O' s that ran those companies into this financial mess walk away with their money, and lets penalize the every day workers. those union workers have already made a ton of concessions to try and right the ship. i think your looking at the wrong end of the issue

[dmek25]

Originally Posted by EternalEnigma21

the whole thing needs to be restructured. a bail out would not solve their problems. The management structure is the issue... not the labor, but they continue to attack the labor, as if they cannot pay them and still be competitive.

Also, going chapter 11 won't mean they will cease to exist. They will close a few plants, but they've been doing that for years claiming they cannot remain competitive paying american labor rates (meanwhile companies like toyota are opening new plants in the us every couple of years) Without demanding a complete revamping of management I would not give them a dime.... but then if government starts controlling businesses in exchange for tbills we have something other than capitalism don't we?

American auto manufacturers have been taking this country for a ride for years, lobbying to just keep competition out or more expensive than their cars and not paying attention to what its customers want, and that is a quality product and great customer service. I've worked for GM, Ford, and Toyota and BY FAR toyota was the most concerned with these things.

also, i thought it was funny that all 3 CEOs took private jets (separate of course) on the 45 minute flight from detroit to DC... on an average cost of over $20k/flight, to beg congress for money because they're broke.

good post

[firstdown]

Originally Posted by dmek25

that seems fair. the C.E.O' s that ran those companies into this financial mess walk away with their money, and lets penalize the every day workers. those union workers have already made a ton of concessions to try and right the ship. i think your looking at the wrong end of the issue

What concessions have the unions made?

[Daseal]

I agree with you and its also a matter of defense. If we had to go to war who would make our tanks, jeeps, etc... to support our troops.

Boeing, Lockheed, Rolls Royce, etc. There are tons of companies that could take over those duties. Boeing and Rolls Royce already make huge amounts of vehicles for the government. I know it's shocking, but we could also stop sticking our nose in everyone elses business until we get our own country straight.

[saden1]

Blame everything on the unions...I have never bought an American car, if you're going to blame the unions might as well blame me as well. People act like the unions want to see these companies go out of business...like they're not willing to concede perks such as having union members flown on private jets.

Certainly the unions can do things better but lets not act like they're to blame for all that is ill in Detroit. When they're selling cars and making money everything is great, when they're not it's blame the union time. What's really killing these companies are 1) bad product, 2) health care costs, 3) the completion.

[saden1]

Originally Posted by firstdown

What concessions have the unions made?

This one.