It look to me as though a decent compromise solution for GM and, possibly, the Detroit automakers generally is emerging. In this morning’s Wall Street Journal, Michael Levine makes an argument similar to the one I’ve been making here for some time, namely, that Chapter 11 bankruptcy is the appropriate solution:
Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM’s viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn’t be easy but, unlike trying to bail out GM as it is, it wouldn’t be impossible.
The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it’ll be just as large and there will be less money to soften the blow and even more blame to go around. The PBGC will probably need money to guarantee GM’s pensions for its white- and blue-collar workers (pension support is capped at around $40,000 per year, so that won’t help executives much). Unemployment insurance will have to be extended and offered to many people, perhaps millions if you include dealers, suppliers and communities dependent on GM as it exists now. A GM bankruptcy will make addressing health-care coverage more urgent, which is probably a good thing. It would require job-retraining money and community assistance to affected localities.
But unless we are willing to support GM as it is indefinitely, the downsizing and asset-shedding will have to come anyway. Even if it builds cars as attractive and environmentally responsible as those Honda and Toyota will be building, they won’t be able to carry the weight of GM’s past.
Yesterday James Wood outlined a prepackaged bankruptcy that sounds like the right tack to me.
However, I do find the argument that some are making, that in the current credit situation GM would be unlikely to get the bank loans it needs to continue operations, compelling. That’s where the federal government comes in. The Congress appears bound and determined to bail GM out anyway so why not do it in the context of a Chap. 11 bankruptcy that would give the company a chance to create a new, sustainable footing for itself?
GM should enter into a prepackaged bankruptcy and submit a business plan for three or five years under which the company rights itself. The federal government can guarantee loans for the company in a fashion similar to the Chrysler bailout of 25 years ago albeit much larger. Bankruptcy and bailout.
The agreement shouldn’t be gunked up with a lot of fru-fru which certainly seems to be what the Congress is aiming for at this point. You can’t legislate a viable market. You can legislate losses and, unless we’re willing to support GM’s mammoth costs indefinitely, that’s what anything but some sort of orderly, market-based transition would do.
Update
And there plenty of fru-fru appearing in the Congress’s plans:
A measure to speed $25 billion in emergency aid to the nation’s automakers will include provisions designed to protect taxpayers, congressional Democrats said yesterday, including a ban on bonuses for employees who make more than $200,000 a year and a government oversight board with power to veto corporate decisions.
The oversight board is expanded on a little here:
Yesterday, Frank said he plans to go further in the auto bill, adding bans on dividends and bonuses for highly compensated employees. Frank said he also would create a “very tough oversight board that, among other things, could veto ventures that would take some of this money and maybe put it overseas.”
That board would be composed of “the leading executive branch officials who have jurisdiction,” Frank said, listing the secretaries of labor, commerce, energy and the environment.
Why not the Secretary of Defense, too? Both GM and Chrysler manufacture armored military vehicles so I’d say there’s some jurisdiction there, too.
However, what flashed through my mind when I read that was a prospective want ad that the Obama Administration might run: Wanted: Secretaries of Labor, Commerce, and Energy. Must be able to read, understand, and evaluate business plans for multi-billion dollar automobile manufacturers. Ability to do the jobs they are actually being hired for a plus.
If I’m being too oblique in that comment, I think that being Secretary of Labor or Commerce is a big enough job without being asked to be a Commissar of Automobile Production as well.
Update 2
Jeffrey Sachs makes the argument for bailout without bankruptcy. The problem I see with this is that of itself it does nothing to reorganize the industry in a sustainable fashion. How long will it take GM to develop what Mr. Sachs envisions as the new, improved flagship product, a car that gets 100 mpg.? At the rate that GM is burning through cash it would take hundreds of billions of dollars to keep it afloat.
What’s needed is a business plan that puts the company on a firm basis within three to five years and, frankly, I don’t think that’s enough for Mr. Sachs’s dream. I don’t think it’s possible to put the company on solid financial ground without bankruptcy protection.
Update 3
There’s more evidence that an idea somewhat along the lines of what I’ve suggested here is beginning to catch on. If I interepret Felix Salmon correctly, he’s saying much the same thing that I am:
Such a plan would involve working out the details of a bankruptcy in advance: there are large dangers involved when a company the size of GM enters bankruptcy without any clear conception of how it might exit. So there would need to be serious negotiations between all of GM’s stakeholders and the government — negotiations which, I’ll concede, would be all but impossible during this uncomfortable interregnum between the election and the inauguration. Even if GM can somehow muddle through until January, it can hardly expect such negotiations to be concluded in a matter of weeks. So there’s a timing problem here, given that the present administration has demonstrated zero inclination to help out Detroit.
But I still think that it would be useful to stop thinking of a bailout as an alternative to bankruptcy, and start thinking more imaginatively about the different mechanisms, including both government funds and bankruptcy, which could help put Detroit on a more sustainable footing.
Update 4
I think this entire mess is likely to get us into serious WTO problems. If this bailout really comes to pass, expect overseas competitors, particularly those with whom the Detroit automakers are competing successfully in their home markets, to file complaints.
I support Chapter 11 too, but I think the downsides should be fully considered. Wood proposes a prepackaged bankruptcy, the precondition of which would be the agreement of the creditors, which I would expect to be the unions, the dealerships, the banks, etc. The prospect of broad agreement is difficult, and possibly any such agreement may not result in the drastic changes needed. Plus, so long as a government bailout appears likely or possible, some factions might hold out. Ultimately, I think the situation is drastic enough that a bankruptcy court might be required to force the creditors to realize the lack of resources.
Wood prefers the prepackaged route because it will addresses consumer confidence issues, primarily the problem of maintaining the auto maker as a going concern without confidence of rebates. I opposed the Chap 11 route for financial institutions since I believe their stock and trade is primarily confidence. Purchasing a motor vehicle is a significant long-term investment, so there are confidence issues here as well. If the prepackaged route doesn’t work, I think the government might consider guaranteeing the rebates (with subrogation rights) until the bankruptcy court can fund some sort of protected warranty pool.
Also, bankruptcy is not for reorganizing a company into a public purpose charity. It’s about getting creditors paid or at least developing a plan that shows how they might get paid more than from a liquidation. That has very little to do with the public’s interest in futuristic cars. That is something that the government can do through tax and subsidy policies.
Chapter 11 reorganizations don’t always work, so they get converted to Chapter 7 liquidations. So it’s not obviously a good option, but I believe its better than the straight bailout option.
Update 3: I’ve heard that G.M. runs out of money in February. I’m not sure that the government is a stakeholder required to be involved in any negotiations. Negotiations among creditors is the main issue. And as I suggested before, I think clarity from the federal government would go along way to furthering negotiations.
Update 4: The Congressmen from Michigan are saying that all of the other countries are going to bail out their automakers, so the U.S. is at a disadvantage if they don’t. I don’t know if this is true.
I also notice the effect of the Japanese strategy of placing car and parts manufacturers in different states to maximize legislative pull. Is it surprising that Sen. Shelby of Alabama is the leading opponent of any bailout?
The PBGC will probably need money to guarantee GM’s pensions for its white- and blue-collar workers (pension support is capped at around $40,000 per year, so that won’t help executives much).
This is an excellent point. Congress seems hell-bent on saving the Big 3 to protect union workers, but they will also be protecting many executives. Congress might be able to legislate against Golden Parachutes, but SERP’s will likely remain. (And those are more important to more executives anyway.) Let the company go into Chapter 11 and those SERP’s will be the next-to-last thing to be saved – which in this case means they will be toast. That will provide plenty of ‘punishment’ to executives past & present.
China will help their auto industry..
See NYT Nov 19..
http://www.nytimes.com/2008/11/19/business/worldbusiness/19chinaauto.html?ref=business
Chinese executives are now telling the government here that they also need emergency measures. They are seeking lower taxes on new cars, lower fuel prices and increased grants for research into hybrid cars and new technology.
“The Chinese government will undoubtedly support us,†said She Cairong, the general manager of JAC Motors, adding that state-owned Chinese banks had already become more willing to lend money to Chinese automakers in recent weeks as bank regulators have eased restrictions on loans to heavy industry.
I think we should take what a Chinese auto exec says about what the Chinese government will or will not do with a grain of salt. I’m pretty sure I could produce quotes from U. S. auto exec’s saying much the same thing about the U. S. government.
On the point: “How long will it take GM to develop what Mr. Sachs envisions as the new, improved flagship product, a car that gets 100 mpg.”
That suggests that getting that car built would be enough to save GM. To know if that would work, you also need to know: How fast will GM’s leaner, meaner competitors build such a thing, and how much cheaper can they build it from GM. “The enemy” – you know, the guys who employ so many people in the southern part of America – can innovate, too, and they’re a lot more accustomed to doing it that GM has become.
If you fast forward ten years from now, and GM’s cars cost half as much to run as they do now, but so do Toyota’s, GM still loses if nothing else changes. I’m pretty confident saying that since all cars cost about half as much to fuel now as they did six months ago, and GM’s still dying. (That, and I’d think it’s common sense, but maybe sense isn’t that common anymore).
Two other thoughts:
IMHO, the only way that GM might, possibly, have a chance is if the demographics of their retirees indicate that they’ll stop having to pay so many expenses in the near future. If they got a bailout that kept them operating until that happened, they’d stop losing quite as much money per car. Perhaps not enough to matter, but it’s one place where the waiting game could help them.
The CEO’s primary interest is supposed to be protecting shareholder value, not protecting the GM brand (or their own pockets). If bankruptcy will destroy shareholder value more than a bailout, even if it’s a good thing for GM or the USA, the CEO’s are not supposed to argue for it at the risk of raising the ire of their shareholders. (Assuming anyone who still owns stock in GM is conscious enough to notice and file suit).