Tuesday, November 18, 2008

Let the Automakers Declare Bankruptcy

Today, the chairmen and CEOs of General Motors, Ford and Chrysler and head of the United Auto Workers union testify to the Senate Banking, Housing and Urban Affairs Committee in an effort to receive a $25billion rescue package. As expected, the bulk of Democrats are in favor, the bulk of the Republicans are not.

The Democrat leaders are in favor of tapping the $700B + $150B Troubled Assets Relief Program (TARP) for the auto manufactures. Republican leaders are not are sold on this plan. Neither is Treasury Secretary Henry Paulson, the sole manager of the TARP.

The sky is falling diatribe coming out of Congress and certain industry insiders is that they think failure could be cataclysmic because there are so many companies that are tied to the auto industry. Nobody said solving the problem would be easy. They have taken decades digging their grave, Congress is not going to solve their problems with a short-term $25 billion loan.

Bankruptcy would be a far better option.

Bankruptcy does not mean liquidation. They will still manufacture and sell cars and parts. Repair services will continue. Certainly there will be massive layoffs and plant closings -- for the car companies and the supporting services -- but the end result will be that each will be leaner, more efficient and more competitive.

It makes no sense to continue executing the same failed business model, despite the pain it will cause.

In yesterday's WSJ, Michael Levine's Why Bankruptcy Is the Best Option for GM describe many of the key reasons why bankruptcy is preferred.

-- GM has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer); Toyota has three; Honda has two.

-- GM has about 7,000 dealers; Toyota has fewer than 1,500. Honda has about 1,000. Dealers are protected from termination by state laws; eliminating them and the brands they sell would be expensive.

-- Foreign-owned manufacturers build cars in American workers with wages similar to GM's, but GM's benefit expense are huge -- health coverage for union retirees; support thousands of workers with nearly full wages and benefits for workers who lose their jobs due to automation or plant closure; supports more retirees than current workers; owns or leases enormous amounts of property for facilities it's not using and probably will never use again.

[It is interesting that the American car companies do not have a similar competitive problem outside of the U.S.]

What would the government cash do? It would be used to continue support these inherit business inefficiencies. It would fail to address their underlying problem: their cost and business structures are uncompetitive in today's environment. $25 billion would postpone the inevitable. They will be back in 6-12 months asking for more. GM, and perhaps Ford and Chrysler, is going to fail.

A reorganization under Chapter 11 of the bankruptcy code is GM's (and the taxpayers') best option. All of their handcuffs would be removed -- all options would be put on the table.
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 Corporation. 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.
The government will be involved but will be part of a plan that will give the companies an actual fighting chance.

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