Thursday, November 20, 2008
This afternoon I argued to an old friend that if we are going to devote taxpayer dollars to the Detroit Three, we should do it in the form of "debtor-in-possession" financing after they file under Chapter 11. That is the only chance to deal with the structural issues facing the industry, including the dealer network, the union contracts, and the retiree healthcare obligations. So, naturally, I was delighted to see that Todd Zywicki at the Volokh Conspiracy -- a smarter man than me -- makes the same argument, only with more nuance. Any bailout without Chapter 11 is throwing good money after bad, and wasting resources that we may well need for industries that are in fact economically viable.
That said, if I understood my friend correctly he argued that the case for bailing out the Detroit Three comes down to one word: "confidence." His point was that the economy is facing a crisis of confidence more than anything else -- Joe Sixpack has stopped buying out of fear -- and that the failure of General Motors and Ford will simply crush his confidence.
Tease out the truth in the comments.
UPDATE: Jack Welch reads TigerHawk! Maybe. I'm watching him at 8:25 this morning on CNBC call for federal DIP financing following a Chapter 11 filing. His big issue: The dealer network!
Two decades or so ago, the bankruptcy court in Detroit was so corrupt - judges and clerks, one or more of them indicted - that it was put into receivership by the federal court there. Heads rolled.
Based upon my own professional experiences in the Motor City, I would not be at all surprised to find that the corruption is still there, maybe even more rampant as it was back then, if that's possible.
If these companies file for reorganization protection in Detroit, hold on for a wild ride, because you can be sure that the political influence of the UAW and others on the court system there will be intense and unremitting.
Could they file elsewhere?
Maybe, but it would be risky, and it would bring out in full fury those to whom the auto companies are deeply indebted, the kinds of people the auto companies are going to want to have in their corner.
So as much as I am against the bailout idea, I would not want a decision to be made on the assumption that greater problems are not lurking in the bankruptcy court there.
There's no winning hand in this game, at least not for us.
Having spent time financing companies through the bankruptcy process, and witnessing the legal process at close hand during these deals, I'd suggest you couldn't be more wrong. A standard bankruptcy court process for businesses this large would take a decade or more to be resolved, and in that time whatever brand value these companies still have would be destroyed completely. The physical assets would take enormous time to be sold to new owners, and in that time the cost to middle American industrial suppliers would cause enormous disruption.
There has been lots of talk about a pre-packaged filing lately, but that wouldn't work well here. There is no well defined business plan, no smart money already lined up, no activist lender to take control of the various creditor groups. A pre-packed process can't be organized in time, and the risks of the whole thing falling apart once the creditor groups start getting into the assets is too huge.
Let's see -- only a few decades ago, GM's problem was that it was so successful that the Gov't was afraid to let its market share grow any larger. Now GM is bust. And the problem was in large part that, during the good times, GM promised unfunded pension & retiree health care benefits.
Only a few decades ago, the US Federal Government seemed to be unstoppable. Won WWII, put a man on the moon. Now the Gov't is deep in debt, and it has unfunded pension & health care obligations which make GM's problems seem trivial.
Is there a message here about the shape of things to come? Talk about wake-up calls!
".... during the good times, GM promised unfunded pension & retiree health care benefits."
Actually, it wasn't that GM went looking for sweeping promises to make. Those promises were extorted by a UAW labor monopoly (written into state law here in Michigan) which could demand anything it pleased. Once they had their princely (and early) retirement benefits guaranteed, there was no incentive at all for any long term thinking.
Hell... at least by the market cap data on Yahoo yesterday (I know if's not updated that frequently), you could buy both GM and Ford for 5B. They want 25B when combined with Chrysler.
I don't know about whether a pre-pack or other BK approach will work, but there's a "come to Jesus" in the very short horizon for these bozos. To hear them talk about needing the money to build efficient cars is laughable, and insulting. What about the ongoing CAFE standards that drive such designs, the 35-year long on/off gas "crisis", and even the most remote focus on strategic planning? Detroit builds, on balance, an uninspired, low-quality product. They should NOT get a mullie for that.
And footing Union contract promises on the taxpayer dime is just plain wrong. Go BK like we did in the Airline industry, retroactively fix the ills foisted by the unions, cutting the pension benefits, if necessary for survival, and all other costs that are killing the industry. See who survives, or make room for the low-overhead, efficient upstart.
I can't imagine ever buying another American 'branded' auto product again, at least until there's quality in the design, build, and after purchase. And until then, I go with the American
'assembled' Hondas, or their like.
If the government provides the DIP financing it puts them in the same place - solving the auto company problems (primarily that they have become health and life insurers) without destroying the vested interests (unions). It doesn't make a heck of a lot of difference.
Bankruptcy gives the autos the opportunity to restructure contracts, but we don't have the political will to allow it.
It would give the auto group the opportunity to completely restructure their business model, not just the union deals. The unions have already given up cost parity with transplants, according to the CNBC auto panel, so you should aim your fire elsewhere Senor Dreck, like at the dealer network, the warranty mess, the bureaucracy, and the general lack of design creativity.
Restructuring these companies requires first and foremost some individual who wants to do it. "We" can't do anything, and all Congress can do is provide a legal umbrella and maybe some interim financing. Is there anyone left in America who wants to make money? Any banks out there with money to lend?
We just put the better part of $350 billion of taxpayer money into the banks-- lend some of it! If I were running these hearings I'd have Jamie Dimon in the chair asking why the bank group, creative as they undoubtedly are, can't find a good secured bridge structure and put all our dough to work! Get Cerberus in the chair, and find out why they've been scarcer than even Obama has been in all this mess.
We got the right short term result on Detroit. The cabal of the Big Three / UAW / select Dems overplayed their hand. Pelosi - Reid are now trying to put the blame for their collective failure onto the GM executives.
Not having a prepackaged bankruptcy plan ... or at least having the the threat of one ... was a mistake. The Big Three have to pick a fight with the UAW and their dealers to survive ... it's inevitable. With a pre-pack, the US could have provided the "debtor-in-possession" financing ... a decent investment for the US in these circumstances. Instead, the Big Three execs said that any kind of bankruptcy would kill their sales ... even though passengers kept flying on bankrupt airlines and never lost a single mile from their frequent flyer accounts. Who will buy a GM car now ... knowing that GM could go bankrupt tomorrow without any US backstop?
I suspect Obama was a player behind the scenes. I see Axelrod at work here. He's now proactively telling the media .."yes, we were in contact" but downplays Obama's role ... so there's no angle for a reporter to work. The Big Three didn't even get quick access to the $25B already on offer. Why was that the outcome if the Big Three ... especially GM ... supposedly needed cash immediately? I suspect Obama's objective was two-fold: 1) have the Detroit bailout be bi-partisan, so Obama can share any blame if the Big Three continue to fail, and 2) get the Republicans to approve Obama's having broader authority to use the $700B piggy bank Paulson created.
GM won't go broke before Jan 20, but will very soon after. Then Obama has to make some hard choices. Given recent developments, he won't be able to pretend he can save GM without dealing with the legacy UAW issues and the dealer network.
Does anyone really know how many UAW union employees are actually paid by the auto companies? These are people wwhe were hired to build cars but become union stewards handling grievances, safety, joint committee issues, still paid by the companies but doing nothing to build cars.
These featherbed jobs (they are also useful during local political activities; they are out working for the dems and the companies don't mind because they are not causing in-plant trouble), in addition to extorted wages, benefits and work rules are why the autos can't survive without external revision of the UAW contracts. A "negotiated" resolution is impossible!
"That is the only chance to deal with the structural issues facing the industry, including the dealer network, the union contracts, and the retiree healthcare obligations"
I think the strategery here might be to get congress to lean on the UAW (and others) via strings in any bailout deal, which will give UAW leaders cover and "adjust" things much faster than the courts will. As for benefits, bear in mind that if their pension plan becomes insolvent, you're already on the hook for that (if you're a US taxpayer).
As distasteful as it is, one has to look at this throught he prism of pure politics, and who is calling the shots right now. The unions are too important a constituency to the Democrats to let the Big 3 go into liquidation mode. That is why something like DIP financing will happen. Again, who will control the equity post-bankruptcy? I think the unions emerge with de facto control. This doesn't solve the underlying economic or product quality issues, but it kicks the can down the road. That seems to be the American way now -- no "come to Jesus" or "Day of Reckoning." Failure is literally not an option. People might have their feelings hurt then, and they'd have to go on Oprah to talk about it.