Auto Bailout -- Four No Votes
It is a bit discouraging to see how Washington views the proposed auto bailout. The Democrats say let's give them another $25 billion or so. The Republicans say we already passed a bill to give them $25 billion, but let's let them use it to try to get back on their feet instead of using it for new technology.
Two articles in The Wall Street Journal provide interesting viewpoints on any bailout, and both are worth reading -- Why Bankruptcy Is the Best Option for GM appeared today, and Just Say No to Detroit appeared in the Weekend Journal.
The first article notes that any path will be grim, but the bankruptcy one has the best chance of long-term survival and prosperity for the company and as many workers as possible.
GM's solution is to ask the federal government for the cash that will allow it to do all of this piece by piece. But much of the cash will be thrown at unproductive commitments. And the sense of urgency that would enable GM to make choices painful to its management, its workers, its retirees, its suppliers and its localities will simply not be there if federal money is available. Like AIG, it will be back for more, and at the same time it will be telling us that it's doing a great job under difficult circumstances.
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.
In the "Just Say No" article, NYU Professor David Yermack says "We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future."
Excerpt:
Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998. As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.
Two other excellent articles appeared on Friday on the proposed auto bailout. "A Lemon of a Bailout" by Charles Krauthammer and "Bailout to Nowhere" by David Brooks.
