Wednesday, November 19, 2008

Bailout vs. Bankruptcy

From the New York Times, on the bailout talks for the auto industry:
G.M is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized.

But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington. It makes a lot of sense.
Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.

So, first, the government would force G.M into a prepackaged bankruptcy now — even before policy makers may think it needs to be. As an inducement, the government would allow the merger with Chrysler to go forward. (There’s a lot of resistance to saving Chrysler too, but we need to look at the industry as a whole. And don’t worry: Cerberus, the private equity firm that owns Chrysler, would have its equity wiped out too.)
In all, the 35 plants of G.M. and Chrysler would probably be cut by half.

Then the auto workers, whose benefits are off the charts.

G.M. currently employs about 8,000 people who actually don’t come to work. Those who do go to work are paid about $10 to $20 an hour more than people who do the same job building cars in the United States for foreign makers like Toyota. At G.M., as of 2007, the average worker was paid about $70 an hour, including health care and pension costs. [emphasis added]
The automobile industry has argued that bankruptcy will be a disaster for the industry; that people won’t buy vehicles while they’re in bankruptcy for fear that the warranty won’t mean anything. There’s a fix for that too. The government should establish a warranty insurance fund that would insure the warranties of all G.M. and Chrysler vehicles bought while the combined company is still operating under bankruptcy protection. The cost to taxpayers should be next to nothing, assuming the company survives and can takeover the warranty obligations.

Article here.

Also from the New York Times, Mitt Romney, former governor of Massachusetts and Republican presidential candidate has an op-ed on the bailout:
IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.
First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

Read the op-ed here.

Naturally, the CEOs would rather receive bailout money. From Bloomberg:
Nov. 19 (Bloomberg) -- Chrysler LLC Chief Executive Officer Robert Nardelli told Congress his automaker studied a prearranged bankruptcy before dismissing the idea as unworkable and approaching the U.S. government for money to survive.

In recounting the deliberations, he spotlighted the industry's objections to a so-called prepackaged bankruptcy as championed by some Republican lawmakers. While proponents say such a filing would let U.S. automakers survive, the companies say going to court would end in their liquidation.

``We did look at prepackaged,'' Nardelli said at a hearing in Washington. ``We looked at pre-negotiated. We've looked at almost every alternative within Chrysler as a privately held company before we came here and asked for support.''

Nardelli and General Motors Corp. CEO Rick Wagoner, who has repeatedly ruled out bankruptcy, told senators yesterday that a failure would produce an economic ``catastrophe'' much costlier than the $25 billion in aid being proposed by Democrats. GM has said it may run out of operating cash this year.

The question isn't whether there is going to be pain; lots of pain is pretty much a foregone conclusion. The question is who should bear the brunt of that pain -- the auto companies and their (unionized) workers and company execs, along with suppliers, towns and businesses associated with Detroit automakers, or workers across the nation working in industries wholly unassociated with automaking. In other words, should the general public pony up for the failures of Detroit and its unions, or should those who created and actively participate in those failing enterprises suffer the consequences of their long history of greed, incompetence and mismanagement.

Of course, political considerations are likely to overwhelm any other considerations. Unions are no doubt going to explain to the Dems in Congress the ramifications of not making Joe and Jane taxpayer foot the bill for their gold-plated worker benefits. The auto execs (who reportedly traveled to DC in their companies' private jets) testifying begging before Congress today are merely the front men for this taxpayer con-game.


Jason said...

For those GM employees concerned about their retirements don't fret the Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of nearly 44 million American workers including those at GM.

The only problem is that the taxpayer is the Pension Benefit Guaranty Corporation. Keep GM and its employees working or pay for their retirements.

David said...

It's probably not in the nation's interest to have GM liquidate and cease to exist. But neither is it in our nation's interest to have GM's current broken model persist. The Bankruptcy code was designed to give failing companies a shot at a second chance, by giving them (via a bankruptcy trustee) the legal and financial tools to try to fix the fundamental problems with their broken business model. For companies with an irretrievably broken business model, liquidation is in fact the appropriate avenue.

With regard to pensions, the Pension Benefit Guaranty Corp. (PBGC) is not funded by general tax revenues, but by the insurance premiums that companies like GM pay to PBGC.

The PBGC covers pensions up to a guaranteed maximum limit. Those plans whose defined benefits exceed the guaranteed maximum can thus expect to see their benefits cut if PBGC takes over their plan under a distress plan termination, such as would be the case via bankruptcy. The bankruptcy court would have to approve the PBGC takeover.

Thus, GM retirees with generous pension benefits that exceed the PBGC guaranteed maximum will likely see their pension benefits cut in the event that GM goes through the bankruptcy process and PBGC takes over GM's pension plan. The taxpayer, however, would not generally be on the hook for those retirement benefits.

Life sucks, but it's better that the sucking be limited to those whose companies fail, than for everyone not associated with the company, which is what would happen in the event of a bailout. Or bailouts, because the likelihood of GM fixing it's broken model is small if they simply get bailed out, and the likelihood is great that they'll be back for more bailout money in the future.