Auto Industry Bailout - Nyet Comrade!

Kudos to the Senate for standing strong on the auto bailout, and shame on the UAW for not agreeing to cut compensation next year to the hardly unreasonable level of their Japanese competitors. I guess unions feels they need all the money they can get their hands on in order to keep buying political appointments (ok, low blow). This is clearly (well, clearly to me) an instance of the UAW giving the finger to the American taxpayer. The UAW is calling Congress’s bluff. Unfortunately, with weak-kneed politicians as their opponent, they’re likely to win.

The autos are in trouble for a number of reasons, one of which is the cost of their labor force. It’s difficult to have too much sympathy for overpaid union workers who aren’t willing to step up and share the pain. Unfortunately, it’s hard to imagine that some form of congressional compromise, executive action, or Fed intervention still won’t occur to bail out the auto industry.

I’ve had a number of questions about what I think should happen with the autos. I have my idealistic answer and then my slightly more realistic answer. Ideally, the government would just step out of the way, and let the market choose the winners and losers. GM (GM) and Chrysler would likely fail and be liquidated (in a perfect world). People would still buy cars, but now there would be more business to be spread among the survivors, including Ford. This would help accelerate the shift of industry capacity to the new reality of demand. (It’s critical to understand that the level of demand for autos can only support an auto industry of a certain size, and at the moment, the auto industry has more plants, workers, and debt than demand can support.) It’s likely that the surviving auto firms would even have to hire some of the ex-GM and Chrysler workers and buy some of their facilities, especially once the economy begins to improve. This is capitalism. The weak are destroyed, and the strong benefit. The industry as a whole would be stronger.

Of course, we don’t live in a capitalist society, and this isn’t going to happen. In light of that, I think the best likely solution would be for the government to provide debtor-in-possession (DIP) financing to whichever of the (shrinking) Big 3 file for bankruptcy. This would enable them to continue operating, their equity holders would be wiped out, and the firms would be able to more quickly slash operating costs, reduce debt, rationalize capacity, and renegotiate absurd labor contracts. The government would be providing the bailout, but at least we would be first in line with our claim on assets when they eventually fail.

If you really want the U.S. auto industry to have any chance of surviving and prospering then capacity needs to be reduced further and labor wages and benefits should be reduced to levels below those paid by the Japanese automakers to their U.S. auto workers. The debt needs to be eliminated or substantially reduced. The unions should be abolished, corporate jets sold, and executive cash bonuses eliminated. We should not have a bureaucratic “Car Czar” overseeing the industry. A prepackaged bankruptcy with the government providing DIP financing is the only realistic means to effect these changes. Ideally, a consortium of private banks would step up and provide the DIP financing, but that’s not likely in this environment.

Of course, none of these actions would guarantee success — they are necessary but not sufficient. The auto companies would still need to produce products that people want to buy and that can compete with the Japanese. However, without drastic changes to cost structure and the balance sheet, the autos stand little chance of surviving.

Unfortunately, the government is still likely to approve a bailout without demanding the drastic measures really needed. The tune will be familiar. We start with the modest mid-teen billion dollar “loan.” Next year, Obama’s administration will spearhead a much larger bailout package. Later in the year, once it becomes apparent that more is still needed, more will be provided.

It would be far cheaper to have these companies declare bankruptcy today with the government providing DIP financing than to keep approving serial bailouts. Besides, if after 100 years, an industry hasn’t figured out how to make money, is it really worthy of taxpayer dollars? The Rubbernecker says “Nyet, comrade.”

[As I'm getting ready to send this I see that GM has gone from -40% in the pre-market to down only 4% as talk escalates of the White House bypassing Congress and tapping the TARP funds to provide the first leg of this bailout. Hardly surprising.]

Disclosure: The Rubbernecker is long liquidation and short overpaid, out-of-touch, selfish union “leaders” and short-sighted politicians.

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Comment by Bill M.

2008-12-12 14:55:57

I am all for innovation and capitalist organic growth, if you build good things efficiently, there will be buyers, if you build crappy overcharged products, you will fail and give place to more efficient business models.

Clearly, the American Auto Industry has too many debt obligations and the only way to get rid off them is go through bankruptcy, break up the company and make them compete amongst each other. The strongest and most efficient will survive.

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Comment by Gwmc7e

2008-12-12 16:30:13

Let’s not speak of what is ideal, as its not realistic given the current and near future political landscape. Here is what will happen. The Bush administration fearing one or two of the big 3 will go bankrupt under their watch will provide bridge financing that will last till March.They will attempt to look tough maybe, but all will be dependent on where the Dems want to go with the future of the UAW….I mean the big 3. I expect they will likewise attempt to look tough for political reasons but will produce a series of bills that I will call paper tiger bills. They will pass ‘card check’ which will empower all labor unions in the country but especially the UAW. Armed with card check the UAW will conduct a full-court press on the foreign transplants. They will meet a certain level of success which will enable them to level the playing field with most if not all of the auto manufacturers in this country. Foreign transplants will begin to outsource an ever larger proportion of larger assemblies. Come 2010 as the economy starts to slowly emerge, China will start to export automobiles that will greatly undercut all other U.S. auto manufacturing. The UAW will press the Obama administration to introduce various trade quotas and other tactics designed for blocking of free trade which may possibly lead to a trade war. In 2012, Barack Obama will follow in Jimmy Carter’s footsteps as a one term President with a chip the size of America on his shoulder.

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