Too Big To Let Fail

The phrase that started it all. First AIG then the rest. The Big Three are about to become U, S, and A. The UAW and the Congress killed the Big Three, now we’re going to own them.

Let’s assume that the powers in Washington — the Bush team now, the Obama team soon — deem GM too big to let fail. If so, it’s also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver — someone hard-nosed and nonpolitical — should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

So first shareholders take it in the shorts, then taxpayers.

In the Washington mind, there are two kinds of private companies. There are successful if “greedy” corporations, which can always afford to pay more taxes and tolerate more regulation. And then there are the corporate supplicants that need a handout. As the Detroit auto makers are proving, you can go from being the first to the second in the blink of an election.

For decades, Congress has never had a second thought as it imposed tighter emissions standards on GM, Ford and Chrysler, denouncing them for making evil SUVs. Yet now that the companies are bleeding cash, and may be heading for bankruptcy, suddenly the shrinking Big Three are the latest candidates for a taxpayer bailout.

…Senator Debbie Stabenow (D., Mich.) wants another $25 billion, this time with no strings attached.

Barack Obama implied at his Friday press conference that he too favors some kind of taxpayer rescue of Detroit, though no doubt he’d like to have President Bush’s signature on the check so he won’t have to take full political responsibility.

Why would there be a political liability for bailing out our automakers? Is it possibly because most Americans are against it? Think about that for a second. Our government is increasingly acting as if it is no longer accountable to it’s citizens.

A bailout might avoid any near-term bankruptcy filing, but it won’t address Detroit’s fundamental problems of making cars that Americans won’t buy and labor contracts that are too rich and inflexible to make them competitive.

While GM has spent billions of dollars on labor buyouts in recent years, they are still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.

Sounds like good money after bad to me on the surface, but the government, along with the unions are culpable. This scenario is an example of the effect of overarching regulations. CAFE standards force automakers to flood the market with cheap, poorly-conceived high-mileage models to bring down the Corporate Average Fuel Economy, forcing automakers to manufacture a higher percentage of a certain model than the market demands from that particular manufacturer. This along with an inflated labor cost destroys profitability, in turn forcing Ford, GM and Chrysler to come to the government with their hands out.

The Japanese have proven that there is a stong market for small, efficient cars but since they don’t make large vehicles, which are also in demand for certain consumers, they aren’t forced to dump smaller cars on the market at a loss to meet CAFE standards.

We need to allow the Big Three to shed themselves of union extortionists and at the same allow the free market to determine how many small cars people want to buy and from whom.

Otherwise, expect the government to have to bail out (what’s left of) the domestic auto industry every few years.


Why GM can’t survive bankruptcy

Does this mean I get to keep my Suburban and not make the lease payments? Mr. President elect? Hello?

5 thoughts on “Too Big To Let Fail

  1. UAW gives millions to Democrat candidates. Then Democrats get total control of the gov’t, and then vote to spend billions that will go to give UAW members all kinds of free stuff.

    How is this not corruption?

  2. The scenario you desire– abrogation of current labor, pension and supplier responsibilities and restructuring of the company– can all be obtained at ZERO cost to the taxpayer. You simply allow GM to declare bankruptcy (if necessary). Of course, this doesn’t allow Congress to nationalize the auto industry which, as we all know, is a specific Constitutional duty of government.

  3. Recall Bethlehem steel……they promised the universe to their employees in the 50s and 60s. When the 80s rolled around, it sufficated the company into liquidation. Should the taxpayers pay for Big Auto/Big Unions poor decision making skills?

    Sympathize with the supplers, the railroads, the spin off businesses, the retirees who thought they were going to live on easy street, but we can’t play parent for every company that screws up.

    But on the other hand, is it a case where they are “too big to fail”? A NRO commentator said that because we allowed so much of our other old industry to move to other countries, that we need the auto industry to survive domestically.

  4. Short version: cars are capital investments that last. Bankruptcy lessens the value of those assets by making the availability of spare parts, warranty work, etc questionable. That makes cars from those makers attractive to fewer folks, which lowers sales of a potentially bankrupt car maker farther. Chapter 11 bankruptcy for GM may well be just a short precursor to Chapter 7.

    That said, a massive restructuring in return for a capital injection isn’t unwarranted, it’s just extremely unlikely since the UAW would be the most negatively affected party so the Dems will make it so GM sucks off the government teat for the indefinite future. So rather than a revamped auto industry in a few years, we’ll instead shoot for a total collapse in a decade or so.

    I knew many Detroit refugees who worked for Honda in Marysville, OH. Not one regretted making the trip away from the UAW and most refused recalls when Detroit got fat and happy again. (Of course, that was a pretty happy place. One of my friends father was a rising star junior VP assigned there. When Honda tried to recall him and push him up the ladder he was inclined to go but his wife and kids nixed the plan. It turned out to be the “black hole” of Honda management — managers left Japan and didn’t return. Happy workers, good living conditions, etc.)

  5. It’s bizaare to me that nobody at the UAW or Detroit 3 ever bothers to listen to the actuaries…..of course, if nobody at Socialist Insecurity or Medicscare ever bothers to do this, why on earth would the UAW?


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.