Bailout for GM?
The situation for General Motors (GM) is dire. The company says it will run out of cash possibly before the end of the year and definitely by next June without raising more capital. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid wrote Saturday to Treasury Secretary Paulson to ask the administration to expand the $700 Billion bailout program to include the automakers.
Here are some things to think about before we bail them out.
GM, Ford, and Chrysler are looking for about $50 Billion in new financing, on top of the $25 Billion passed in September. The rationale for this money is to help them "retool" for the future. But if the automakers had a credible plan to retool – a plan that produces cars that customers want to buy and also generates a profit for shareholders, they would have no problems finding investment. Stock and bond investors already understand this grim reality. GM's stock market capitalization is now down to $2.5 Billion, GM has a credit status of "junk", and GM debt is trading for 20 cents on the dollar. Private investors are not willing to put their money at risk to finance the automakers because they understand these issues, so why should we as taxpayers?
Think about it this way: As part of the financial bailout, the US Government is putting $250 Billion directly into major banks so that they can begin lending again. So instead of the government, why aren't these major banks lending to the automakers? Because the banks aren't stupid. The banks know that if they put that kind of money into the automakers, they will never see it again. Their shareholders would rightfully fire them. Yet our government is about to do what no private investor will do.
If the idea of bailing out the automakers doesn't make you angry as a taxpayer, it should make you angry as a consumer. Imagine going into your favorite restaurant where they provide a wonderful meal and great service. When you get the bill, there is a surcharge at the bottom that says "subsidy to help the bad restaurant down the street stay open." When you ask the waiter about the restaurant down the street, he tells you the food is not nearly as good as it once was and they pay their workers much more than market value. Not only that, they have a bunch of workers who get paid for doing nothing. They are losing customers and losing money, but you need to pay this surcharge so they can stay open. As a consumer, I doubt that you would appreciate that at all.
If you buy a Honda or Toyota, made right here in America, then a bailout of Ford, GM, or Chrysler is the essentially the same thing. You are paying more as a customer, indirectly through your taxes, to keep these weak companies alive. You are paying for the General Motors Job Bank, which keeps thousands of employees on the payroll for doing nothing. I have a Honda Accord that is ten years old and runs great. I recently got rid of a new Chrysler minivan after just four years due to poor quality. My next car will not be a Ford, GM, or a Chrysler. As a consumer, I resent having to pay more, indirectly through a bailout, to keep these companies going.
Isn't the bailout necessary because of the economic crisis? No. Certainly the economic downturn is hurting all automakers, not just Ford, GM, and Chrysler. Toyota's sales are down, but not as much as GM. In other words, Toyota continues to gain market share. Customers know quality when they see it.
The problems of GM, Ford, and Chrysler have nothing to do with the current financial crisis, so no government bailout is warranted. They all have fundamental problems with their business models, in that they have labor agreements that make them uncompetitive in the global marketplace. They all pay too much for labor relative to the productivity of that labor. They all have obligations to retirees that they cannot fulfill. These problems have been evident for years and the current economic downturn has merely further exposed these fundamental structural weaknesses.
Rick Wagoner, CEO of GM, has said that "bankruptcy is not an option." But bankruptcy is how you finally admit that you cannot keep your promises made in the past. GM, Ford, and Chrysler cannot keep their promises to employees, retirees, customers, and investors at the same time. Something has to give. Today, Circuit City filed for bankruptcy. Where are the calls to bail them out? We aren't hearing them. Once a powerhouse in their industry, they are no longer able to compete with Best Buy and Wal-Mart, so they must restructure their business. It is past time for GM, Ford, and Chrysler to do the same thing.
The Center for Automotive Research has been quoted as saying that 2.5 million industry jobs would be "lost" if the automakers file for bankruptcy. Yet these are jobs that are drastically overpaid. There is no viable business model for GM, Ford, or Chrysler which maintains current union pay scales, job security rules, and benefits for employees and retirees. Perhaps many of these jobs would remain under restructured labor agreements that pay about half of current rates. Sure, it sounds bad to lose your high paying job to do the same job for half the pay, but you were overpaid in the first place. Would you rather have a lower paying job where you and your employer have a future, or a high paying job that goes away forever at the end of the year?
Who suffers the most in this situation? Clearly it is employees and retirees who will not receive what they were promised. Unfortunately, they have been let down by three failures of leadership over several decades. First, management failed them by not standing up to their union leaders and agreeing to labor contracts which are unsustainable. Second, labor leaders failed them by pursuing these contracts with guaranteed job "security" and health/pension benefits. These short term labor victories made their employers uncompetitive, ultimately reducing long term job security. Third, politicians in Michigan have failed them by making their state extremely unfriendly to business. All three groups have failed to grasp the reality of what it takes to compete in the global marketplace, and employees will suffer as a result. Leadership which sacrifices long term health for short term gain is not leadership at all.
Speaker Pelosi and Senator Reid are arguing the importance of a healthy auto industry. But we do have a healthy auto industry in the southeastern United States under the leadership of Toyota and Honda. What we have in Detroit are three very sick companies. We must allow sick companies to fail for the overall health of our economy to revive.
If we must bailout the automakers, here's what I propose. Ford's market cap is $4.6 Billion; GM's is $2.5 Billion. Chrysler is now private, but assume their market value is $2.5 Billion. So instead of investing another $50 Billion in a bailout, invest $10 Billion to buy all three companies outright. Then shut them down and liquidate the assets. Let new companies arise from the ashes which can be much healthier in the long run.
