Bankruptcy is the Right Medicine for Automakers

Look at the bright side – GM stock
only has $3 farther to fall. (From Yahoo Finance)

The more I read and think about a potential further bailout of the auto industry, the nuttier the idea sounds.

Michael E. Levine is a former airline executive, so he knows about bankruptcy. He puts it this way in today’s Wall Street Journal:

General Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.

Even one of the auto industry’s hometown papers, the Detroit News, said in an editorial Friday that bankruptcy might be preferable to the appointment of an automotive “czar,” an idea that has been floated by the Obama transition team.

It’s also been suggested that the government will take an equity stake in the companies and demand seats on their boards. That would almost certainly restrict the ability of the automakers to shut plants and lay off workers.

For all practical purposes, these moves would nationalize the auto industry and make its return to profitable, independent operation even more of a long shot. Presumably, an automotive “czar” could manage all of this meddling.

If that’s the case, Detroit’s automakers might want to rethink whether it’s safer for them to be in the bankruptcy courts than beneath the oppressive wing of a federal overseer.

Bankruptcy doesn’t mean GM goes out of business, and it certainly doesn’t mean the entire American car industry goes out of business. Bankruptcy protection would allow GM to reorganize, shrink substantially, and renegotiate its ruinous contracts with unions and dealers.

Levine describes the problem:

Foreign-owned manufacturers who build cars with American workers pay wages similar to GM’s. But their expenses for benefits are a fraction of GM’s. GM is contractually required to support thousands of workers in the UAW’s “Jobs Bank” program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it’s not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.

But GM can’t continue to be what it is. The beauty of the bankruptcy system is that it would give GM leverage to pursue cost-cutting more aggressively than would otherwise be possible. The longer that corrective action is delayed, the more traumatic the eventual restructuring will be.

Yes, there’s a perception issue involved in bailing out the “Wall Street fat cats” while refusing to help manufacturing industries and their blue-collar workers. That’s why it’s a bad idea for government to get involved in picking winners and losers in the first place. But the financial industry is special a special case, because of its critical role in making the entire economy function. The purpose of the rescue plan was not to bail out financial firms, but to unfreeze the credit markets, the lifeblood of the entire economy. Any proposed bailouts of other industries have to be held to a much higher standard

2 thoughts on “Bankruptcy is the Right Medicine for Automakers

  1. Kirk,

    The financial industry is “special?” Are we in kindergarten now?

    It’s special, all right. For so-called financial experts, its constituent parts have found more ways to put more people into more trouble than we’ve seen in decades. The “financial industry” bailout has gone from putting a floor on “troubled assets” to shoveling money to failed firms so they can buy out other banks and pay promised bonuses to their executives.

    Even as we run the risk of debasing our currency by printing trillions of dollars for bailouts of bailouts.

    No to the rest of the financial industry bailout, no to the auto industry bailout, no to the consumer bailout.

    No, no, no.

    Let the market work. It has with energy. It is with interest rates … now rising for deposits to attract needed capital and ultimately, liquidity (the original rationale for the bailout). It will for the auto industry … badly run companies burdened by outrageous labor contracts and legacy obligations should and will fail. And it will for housing … the bubble has burst, prices are falling, housing is becoming more affordable, people will find and buy bargains, reviving the market.

    Catch you later.

    Bob

  2. Curse you, Bob… now I can’t get the Church Lady out of my mind.

    The phrase I was looking for is, “finance is a special case.” The auto industry is important, but the financial industry is the underpinning of the entire global economy. As I’ve argued before, it has nothing to do with whether Wall Street is “deserving” of a bailout. It has to do with keeping the economy from seizing up like an unlubricated engine.

    I’m strongly in favor of letting markets work — but there has to be a functioning marketplace. Bankruptcy itself is not a “pure” market force, but rather a complicated and highly regulated legal construct designed to overrule market forces — in special cases.

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