Tariq Nelson

Some are making a compelling argument for NOT bailing out the Big Three Automakers

The problem with using taxpayers’ money to bail out the auto companies — as they are presently structured — is that their high costs of production will be left intact and North American cars will remain uncompetitive. In short, it’s not a long-term solution. Foreign manufacturers will continue to eat their lunch and there will be a need for more bailouts down the road.

The real solution is to get costs down and productivity up. The best thing then for the auto industry, taxpayers, and consumers – indeed, just about anybody not working on an auto assembly line — would be to let the car makers file for bankruptcy protection. Then they can be released from the crushing weight of their labor costs to start over in a more competitive position.

The Heritage Foundation made these suggestions:

• First, it’s really not so radical, in terms of magnitude. Yes, shareholders would stand to lose out, but with GM’s current market capitalization of just $2.5 billion, they wouldn’t lose much. Apple, by comparison, is worth $87 billion.
• Second, reorganization would put the automakers on a sustainable course. Key are labor costs: Gold-plated salaries and benefits packages for union workers mean the automakers lose a bundle on most cars sold. There’s no incentive to renegotiate when government dollars to pay those contracts are a real possibility. With a bankruptcy judge’s approval, collective bargaining agreements can be reformed to fit economic realities.
• Third, bankruptcy is the only way to restore innovation to the U.S. auto industry. In the end, the automakers make money by producing vehicles that consumers want. But any government money is sure to come with strings attached. Pelosi, for example, said the government would exact a “recoupment” for any investment of taxpayer funds — specifically, a say in what kinds of cars it produces. That’s a recipe for certain failure and future bailouts. Bankruptcy, in contrast, strips a company down to its valuable assets and then sets to putting those assets to work in the marketplace. Whether it works or not, it’s the best chance for success.

However, the problem with the above is that they are assuming that the Big 3 will be able to file for Chapter 11 bankruptcy (reorganization) and not fall into Chapter 7 (closure), which is what many experts are fearing. THAT would be a disaster. The other side of the argument states:

Let’s be clear. The alternative to government cash for GM is not a dreamy Chapter 11 filing, a reorganization that puts dealers and the UAW in their place, ensuring future success.

No, even if GM could get debtor-in-possession financing to keep the lights on (which it can’t), Chapter 11 means a collapse of sales and a spiral into a Chapter 7 liquidation.

GM’s 100,000 American jobs will die. Health care for a million Americans will be lost or at risk. Hundreds of GM’s 1,300 suppliers will die. Their collapse could take down Ford Motor Co. and Chrysler LLC, perhaps even North American transplants. Dealers in every county of America will close.

The government will face greater unemployment, more Americans without health insurance and greater pension liabilities.

Criticize Detroit 3 executives all you want. But the issue today is not whether GM should have closed Buick years ago, been tougher with the UAW or supported higher fuel economy standards.

In the next two to four months, GM will run out of cash and turn out the lights. Only government money can prevent that. Every other alternative is fantasy.

And Jonathan Cohn argues

GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM’s business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation’s assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.

Restaurants, gas stations, hospitals, and then cities, counties, and states–all of them would feel pressure on their bottom lines. A study just published by the Michigan-based Center for Automotive Research (CAR) predicted that three million people would lose their jobs in the first year after such a Big Three meltdown, swelling the ranks of the unemployed by nearly one-third nationally and leading to hundreds of billions of dollars in lost income. The Midwest would feel the effects disproportionately, but the effect would reach into every community with a parts supplier or factory–and, to a lesser extent, into every town and city with a dealership. In short, virtually every community in the country would be touched.

It seems that the Bailout needs to happen, while allowing for some sort of reorganization that gets the out of control “gold plated” salaries and benefits for executives under control. Plus, Detroit is already a big enough mess as it is

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