Un bel di (Updated)

In fairness to the top executives of the Big 3 auto makers and the tens of thousands of people working in the auto industry whose jobs are on the line if the Big 3 should go belly up, perhaps I should say affirmatively what I think should be done rather than just complaining about the shortcomings of the plans they’ve submitted to get their handouts from Congress. How about a task analysis?


The members of Congress need to decide what their objectives are in offering loans to the auto makers. They should abandon conflicting or poorly formed objectives. The auto makers are facing a near term crisis—according to the reports GM and Chrysler may not make it to the end of the year and the end of the year is near at hand.

If the objective is to save jobs, how many jobs is $25 billion worth? The accounts I’ve read of the plans that have been submitted indicate they call for massive job cuts, both in the auto makers themselves and among their dealer networks.

If the objective is to keep jobs in the United States, there need to be conditions which prohibit the auto makers from increasing investments in overseas plants. I see no sense whatever in giving the auto makers $25 billion to move their operations to Brazil (for example). It’s not clear to me how you’d write such a requirement.

If the objective is to force the auto makers to make cars with technical requirements the auto makers don’t know how to achieve and can’t be sold profitably at a price that U. S. consumers are willing to pay, that’s not a well-formed objective.

Top management of the auto makers

Simply stated the auto makers need to produce a plan under which their revenue over the term of the loans is high enough to pay their operating expenses over the term of the loan plus their long term commitments and to repay the loan plus interest. Tigerhawk, among others, is skeptical that they’re capable of producing such a plan:

Why haven’t they been working on it — never mind executing it — for months, years, and decades? Any plan to restructure General Motors that was not available two weeks ago but is now simply cannot be worth the paper it is written on. Is there no better evidence that the managements of the Detroit Three need to go than this?

The plans produced by the auto companies need to be based on things that their management can control. Assuming sales that go back to the halcyon days of the 1970’s they held the lion’s share of sales in the United States isn’t within their control. Assuming that the financial industry gets its house in order over the next couple of months or even years isn’t within their control. Assuming that they can get concessions that the UAW hasn’t committed to isn’t within their control. Assuming some sort of impossible technology is invented that saves their bacon isn’t within their control. Assuming that low cost Chinese or Indian cars won’t come into the U. S. market isn’t within their control.

If the accounts in the media are to be believed, the plans that the auto makers have submitted preserve current management at taxpayer expense. They are Madama Butterfly plans. One good day our ship will come in. One good day the U. S. consumer will return to us. One good day all of our problems will magically be solved.

But these guys aren’t Cio-Cio Sans. They aren’t innocent victims and they’re not planning on disemboweling themselves over this, in fact it looks to me as though they’re going to great lengths to save themselves first. They are at the very least Sharpless, the faithless lover whose callousness foments the tragedy. They need to be kept on the hook for the problems they’ve caused or allowed to happen.

The U. S. government taking an equity stake in the auto companies is fatuous. We should be taking bonds with a fixed term and payable at a fixed rate when they’re due, personally secured by the auto makers’ top management (including their boards), their families, spouses, trusts to which they’re parties, and so on. Stocks put the taxpayer on the hook for future putative loans to preserve dwindling value of the previous investment; bonds put the executives on the hook.


Evan Newmark of the Wall Street Journal has examined GM’s plan and concludes that GM is doomed:

Ask yourself how long it will take housing to hit a bottom and you’ll understand why the GM restructuring plan ain’t gonna cut it.

Oh, it will work in Washington this week. But by next year, the U.S. taxpayer will be left holding the bag.

I’ve skimmed the plan and to my eye it appears, contrary to what I’ve written above, to include a lot of things that aren’t within the control of GM’s management and a lot of wishful thinking. GM’s market share and units sold have been dwindling for decades. I see little in the plan that will change that.

And GM’s managment is insufficiently on the hook. I repeat: bonds not stock and the bonds need personal surety guarantees.

3 comments… add one
  • PD Shaw Link

    My quick scan shows that 50 GM employees associated with its corporate jets have just lost their jobs. Thanks Congress!

    I’m not sure how GM can square the competing interests here. GM is closing about a quarter of its dealerships. That means a loss of employment in most, if not all, Congressional districts. GM is planning to reduce overall employment by about a quarter as well.

    The WSJ blog opines that it’s not enough. I assume they see a GM that is no more than half of its current size. Is that a plan Congress would love to pay for?

  • Yeah, that’s much the point I’m making PD. If the objective is to save jobs, how does a GM that sheds half its jobs accomplish that? Because it saves the remaining half? For how long? The cost per job saved starts to rise very fast.

Leave a Comment