Posted on 11/13/2008 5:11:30 AM PST by King of Florida
DETROIT — Momentum is building in Washington for a rescue package for the auto industry to head off a possible bankruptcy filing by General Motors, which is rapidly running low on cash.
But not everyone agrees that a Chapter 11 filing by G.M. would be the disaster that many fear. Some experts note that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay, at considerable cost, the wrenching but necessary steps G.M. needs to take to become a stronger, leaner company.
Although G.M.’s labor contracts would be at risk of termination in a bankruptcy, setting up a potential confrontation with its unions, the company says its pension obligations are largely financed for its 479,000 retirees and their spouses.
Shareholders have already lost much of the equity that would disappear in a bankruptcy case. Shares of G.M. rose 16 cents Wednesday, to $3.08, but they have fallen 90.5 percent over the last 12 months, amid sharply lower auto sales and fears about G.M.’s future.
And as companies in industries like airlines, steel and retailing have shown, bankruptcy can offer a fresh start with a more competitive cost structure to preserve a future for the workers who remain.
(Excerpt) Read more at nytimes.com ...
Most proponents of a gov’t bailout falsely paint the picture as a choice between shutting the companies down or bailing them out.
As most know, that’s not the case. Since these companies have ongoing operations, they would file for reorganization, not liquidation. What I don’t know about bankruptcy law fills volumes. But, in Ch 11, the operations (and jobs and supplier contracts...) continue. Maybe at reduced levels (which will happen either way), but they continue. Shareholders probably get wiped out, creditors end up with some cents on the dollar settlement, the pension plan assets and obligations probably end up with the PBGC, labor contracts get renegotiated, management bonus pools get zeroed out, and so on.
Because the company’s cost structure gets reduced, it’s entirely possible a bankruptcy proceeding would result in fewer job losses than gov’t intervention.
Unless we’re going to institute permanent gov’t subsidies, the same basic steps need to take place for the companies to become competitive, viable enterprises. The only question is who pays for it.
We have bankruptcy laws for precisely the situation the automakers are facing. Other companies have gone through bankruptcy and come out stronger while maintaining operations. We have a process for this, it needs to be allowed to work.
Note the taxpayer is still on the hook for some costs if they declare bankruptcy. If the pension shortfalls exceed PBGC’s capital, taxpayers would be on the hook for the difference. And, with all the loan guarantees and Fed commercial paper programs, money market insurance, etc., at least of automakers debt is probably insured by the gov’t.
See, I had a Ford as my first car. Pretty good until I bought a new Chevy. It lasted 3 years before so much work needed to be done that it made more sense to trade it in upside down.
I had a Datsun for a while after my Ford (which was pretty good, but it was a 72 model) and that thing didn’t have a floorboard, but ran and ran and ran. So I bought a Nissan and never bought anything else.
My sister in law bought a Ford Focus. She went to trade it in at five years old. Bought it for $11,000 new and they wanted to give her $1,200 for it. In five years!
She never bought another Ford since this was the FORD DEALERSHIP she was trading it in at that basically told her that her car was crap.
Oh yeah, and even the paint jobs are better!
You see Chevy’s with stripped paint and such, but most Lexus (Toyota), Nissans, Hondas, and so on usually hold a nice paint job up to 20 years.
Not everyone of course, but most.
1.) With the "VEBA" (google it) coming on line in 2010 the long term legacy cost will be shifted to the UNIONS.
2.) The latest labor contract has dramatically changed plant work rules to be more "Toyota-Like" and the labor rate off any new people in the plants will be at Parity with Toyota i.e. $48/hr. The fly in the ointment is getting more plant guys to take packages, so more of these 2nd tier employees make that $48 more universal.
Bailout no, bridge loan to stay capitalized until these things kick in 2010 when a host of new product is coming yes.
I cannot understand why bailing out anyone makes sense. If a company is losing money why would more money help. It is like pouring water into a bucket with a hole in it. Let them go bankrupt and fix the hole that is preventing them from being profitable. They will emerge much stronger or they will be broken up and consumed by profitable automakers (Toyota, Honda, etc) and we will all be better for it.
Sorry. NO to that as well!
Let them die the death they deserve. No one FORCED them to kow-tow to unions for the last 4 decades. The chickens, as they say, are coming home to roost.
If their burn rate is that high and sales are that low - as a former CFO, the first thing that needs to be done is eliminate the second shift. Don’t built crap that isn’t selling.
“Bankruptcy vs. a Bailout”
Don’t worry, under Obamb, Pelousy, Reid, etc, we will likely have both.
2010 is a long way away in their current condition. While I'm happy to see the changes you mention, I wonder if the sour economy might still do them in.
Nobody's suggesting that they completely close up shop and completely stiff pensioners. Or at least I'm not.
This is all about union power.
Bailout = power for unions protected
Bankruptcy = POWER TO THE TAXPAYER.
say NO to the jobs pool.
You left out the new Harley
Exactly...if Walmart had problems tomorrow and was in danger of declaring bankruptcy, would the government offer a bailout, heck no.
Right now in our area there are a couple chains going out of business, Circuit City being the most notable, but Linens and Things, and a couple others have also filed for bankruptcy. Any government bailout for them? No because there’s no UAW...it’s all about the relationship between the unions and the politicians, IMHO.
Bingo! The unions have choked Detroit since WW2, and now the chickens are coming home to roost. Let the companies go into bankruptcy - they'll continue to be operated by a bankruptcy trustee until all of the debts are renegotiated or forgiven, and they'll emerge with far stronger balance sheets and a better base for healthy (read: "profitable") operations.
Eff the unions - they waxed rich for decades, had no interest in the health of the enterprises they were looting, and now they want the already oppressed and ripped-off taxpayers to bail their lazy, corrupt asses out of a jam? No way!
The financial industry is one thing - without some kind of bailout, we'd likely already be in a 2nd Great Depression...and, of course, I think that a lot of people should either be forced to resign their positions or go to jail because of it. However, in more traditional manufacturing or service industries, the bankruptcy code provides for relief. Let capitalism work - otherwise the airlines, retailers, etc. will be the next bunch banging on the doors of the public treasury. We have to decide - NOW - capitalism or socialism. There's no room anymore for a middle ground. If it is the latter, I want to hear the next POTUS say it, in plain language - and let him deal with the consequences (though, of course, I want the former - we'll all be better off, even Obama).
When I say 2010 I mean model year, i.e. fall 2009 for new cars (the Volt if not delayed 12/31/10). The VEBA is sometime (early?) 2010, (I had an accounting teacher that was transfered from Sarbanes Oxley duty with big 3 CEO's to the VEBA.)
Right now the cash "burn rate" with the economy in the tank has exacerbated them burning through cash. These loans give them money (Ford in particular) for plant retooling of new or Euro-model transplants while they burn through what cash they have left. FWIW Ford is more liquid than GM...
Looks to me like they should go Chapt 11, get their labor costs under control, and be in the business of building trucks and nothing else - hard to see how the auto operations ever be competitive with the Japanese owned US production even at the same wage rates - all that overcapacity has just got to go.
As for union wages in the auto industry: unsustainable, but keep in mind that what you are seeing the collapse of the last major bastion of a “middle-class” lifestyle for industrial labor, and what that means is increasing and probably irresistible political demand for increased redistribution of income to provide medical care, etc. that is no longer available through employment.
GMAC is 51 owned by Cerberus Capital - the fine folks that own Chrysler. Their recent attempts to merge or join with GM were really an effort to get the 49% of GM still held by GM, which, combined with the 51% that Cerberus already has - would give them the whole enchilada. Then Cerberus would be applying to the Treasury for TARP funds ASAP. But that plan didn’t work - GM is in such tough shape that no combination with Chrysler made sense.
“DETROIT — Momentum is building in Washington for a rescue package for the auto industry to head off a possible bankruptcy filing by General Motors, which is rapidly running low on cash.”
Seems like only 12-18 months ago (or was it even more recently?), that the possibility of a GM bankruptcy was raised right here of FR - and folks laughed it off. How could the backbone of American manufacturing go belly up?
Looks like “the impossible” has happened - and not only with GM.
I don’t see how the democrats can “fix” this by propping up a teetering colossus with bailouts. Ultimately, the bailouts will only prolong and perhaps exacerbate the mistakes that brought GM to where it is today. Perhaps in this case, an actual bankruptcy becomes the only real option, the only pathway from which the company can take the necessary actions from which to restructure itself.
However, “democratic logic” (an oxymoron) won’t permit this. Thus, we must have a “bailout”. Even worse, GM may end up as a government-owned corporation. Think Trabant writ large.
It’s not GM that will be bankrupted, but the taxpayers who will be forced to subsidize their [continuing] failure.
- John
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