BASH THE BIG 3!

GM is in danger of running out of cash by the end of the year. Ford’s cash should hold up a few months longer, but it is in a similar predicament to its hulking, rusty ol' Detroit triplet. Shareholders have been wiped out as stock in GM is practically worthless. And it would appear as of today that Democrats will not have enough votes in this lame-duck session to get a rescue plan enacted before the end of the year and, it would appear, the fall of GM.

There are more than 7, 300 employees at Ford and GM’s Kansas City-area assembly plants.
“For every United Auto Worker manufacturing job in our area, there are between seven and 14 people affected — everything from a glass plant to tires to parts,” said Jeff Manning, president of UAW Local 31 at the GM Fairfax Assembly Plant in KCK. GM will start laying off 370 from its 2,750 employee workforce at the Fairfax plant Feb. 2, although sales of the Chevrolet Malibu and Saturn Aura, which are assembled at the plant, have been up.

GM has announced it plans to layoff 5,500 workers total at parts stamping, engine and transmission factories in North America.

Ford announced cutbacks at its Claycomo plant for about 3,000 workers who make the Ford Escape and Mercury Mariner starting the week of Nov. 17 and following on the weeks of Dec. 15 and Dec. 22, just in time for the holidays. The layoffs will not affect some 1,000 workers who make the F-150 pickup truck because although sales of the vehicle are down, the company introduced a new F-150 model this fall.

I thought I would take this opportunity to present various arguments for and against the bailout proposals made by President-Elect Obama and congressional Democrats.

Arguments Against a Federal Bail-out

1. "Every dollar sent to Detroit buys a yard of steel, a reel of copper wire, an hour of labor that now cannot be consumed by a business that actually produces a profitable, desireable product. It's not right to strangle those businesses in order to steal some air for the dying giants of an earlier day." The free trade economist would argue that more efficient companies like Honda and Toyota that produce cars at non-unionized facilities in southern states would face subsidized competition.

2. Think of all the money the Big 3 spent lobbying in Washington to protect their SUVs and prevent Congress from enacting fuel efficiency standards on those gas guzzlers when they could have been spending that money on innovations for more fuel efficient vehicles. Bob Lutz, Vice Chairman of GM, was quoted in D Magazine of Dallas harping that global warming “is a total crock of shit.”

3. Not all car companies are doing poorly, in fact Honda and Toyota are building new plants in North America and these companies will swoop into the market and pick-up the slack, employing a lot of the workers GM will lay-off, although without the sweetheart UAW pension plans.

4. The legacy costs are unsustainable and were forged in the years before international competition when the Big 3 ran an oligopoly. No other companies provide the type of health care benefits for their retirees. The UAW leadership has proven that they are unwilling to budge on these conditions, and bankruptcy would force them to do so.

5. The company is crippled with too much debt and the solution is not to loan the company more money to pay off the interest to creditors who loaned them money a few years back. Bill Ackman, a hedge fund manager of Pershing Square Capital Mgmt., argues that the company should reorganize through bankruptcy and then emerge as a leaner, healthier company. He goes on to argue that the government’s money would be better spent retraining the laid-off workers to do other jobs; for example, welders could be put to work improving the infrastructure of the country rather than working in vain for an insolvent company. He argues for a prepackaged bankruptcy that could help the company compete in a global system. [Thanks Mae$e for the link to this informative Charlie Rose interview.]

6. The Detroit car companies have been at overcapacity for years, artificially creating demand for new cars by offering cheap financing just to keep factories running at full capacity. The average age of the car on the road has fallen considerably, but during recessions people will be just as happy driving their slightly-older-but-no-less-reliable cars.


7. Bottom line, this package will reward failure when management has shown time and again that they are inept and completely unable to compete on a level, global playing field. When the federal government bailed out Chrysler way back in 1979, then-CEO Lee Iacocca promisedto gullible lawmakers that "you will see better cars, better service and better quality," and now we hear a similar line coming out of Detroit again about how they can produce innovative, fuel efficient cars if the government would just infuse them with enough capital. Have we learned our lesson?

Arguments For Bail-Out

1. A federal bailout package would include stiff requirements for restructuring like firing management, meeting financial goals and creating a leaner, more competitive company without the stigma of a bankruptcy filing. Consumers may not purchase cars from a company going through bankruptcy because the assurance wouldn’t be there for repairs and warranties by the factory. Used car values would decrease, and dealers would go out of business. Consumer surveys suggest that 80-90% of consumers would abandon the car company’s products if it filed for bankruptcy.

2. UAW workers could strike if “a bankrupt G.M. asked a court to throw out its labor contracts."

3. From the Economist: "David Cole of the Center for Automotive Research, which sounds like a industry-financed think tank, has “ modelled a scenario in which Detroit’s production falls by 50%. He estimates that in the first year that would cost 2.5m jobs: 240,000 from the carmakers themselves; 795,000 from suppliers and 1.4m from other firms indirectly affected. The cost in transfer payments and lost taxes would exceed $100 billion over three years. Some of Mr Cole’s assumptions are likely to be too pessimistic, but his blood-curdling forecast and others like it have helped to convince legislators that the $50 billion of help that the carmakers are asking for would be cheap at the price.”

Daniel Gross of Slate lays out a case here that says GM's Chapter 11 Bankruptcy would be too complex and costly because the company's many creditors would demand assurances on their share of the assets. He says this is a problem only the government can solve, which no doubt turns the stomachs of any principled conservative or libertarian.


Best Quote: There is a rich irony in that, less than two months ago, six of eight representatives in the Detroit area voted against the first iteration of Tarp. Only too happy to play a game of chicken with the global financial system by scoffing at the concept of “too big to fail”, they make precisely that justification for rescuing car manufacturers and the dozens of suppliers and millions of jobs linked to the big three, whose “collapse” would be unacceptable.