Automaker bailout deal close–Where will it end?
In spite of the opposition to such an agreement, it appears a deal is close to give General Motors, Ford Motor Company, and Chrysler $15 billion dollars to make ends meet, at least for now. President Bush, who has been against such a bailout for the Big Three, managed to get Speaker of the House, Nancy Pelosi to agree to use funds already set aside to help the three automakers produce more fuel efficient vehicles. From CBS:
After weeks of tense discussions with the heads of the U.S. auto industry, Democratic Congressional leaders have reached an agreement that may just clear the way for the Big Three to get the money they need to survive … for now.
CBS News correspondent Kimberly Dozier reports that significant progress came Friday night, when Democrats from both the House and Senate agreed to bail out the struggling General Motors, Chrysler and Ford with federal funds.
Several officials say the White House and congressional Democrats have agreed on $15 billion in loans, which is less than half of what the car chiefs were seeking.
They say the breakthrough came after House Speaker Nancy Pelosi bowed to a demand by President Bush that any aid come from a fund that had been intended to help Detroit produce more fuel-efficient cars.
Pelosi said the House would consider legislation next week to provide “short-term and limited assistance” to the U.S. auto industry.
I am still not convinced bailing out these companies is the way to solve the problems they are having, but at least it looks like the money is going to come from funds already set aside, instead of the remainder of the $700 billion bailout package. There is also a question that begs to be answered, asked by Representative Jeb Hensarling, Republican from Texas. Again, from CBS:
Facing the automakers who returned to Capitol Hill seeking money, Rep. Jeb Hensarling, R-Tex., said, “Can you name me three industries in this economy that aren’t hurting that couldn’t use $34 billion? Name one that couldn’t use it.”
Yeah, what he said. There are a lot of companies who are hurting in this country, a lot of small businesses who could use that kind of money to survive this recession. Where is the federal government going to draw the line?
Speaking of questions, here is another one. According to the Big Three, the bankruptcy card is not even in the deck. From the CBS article:
The bosses of Chrysler, Ford and GM say bankruptcy just is not an option.”It’s going to cream our revenues, said GM CEO Rick Wagoner. “And if our revenues go down like this, we will never be able to cut costs enough to get ahead of that.”
Explain to me why bankruptcy is not an option. To start with, having made such outrageous conceptions to the labor unions is part of what got the automakers into this mess. It appears to me that bankruptcy would allow the automakers to continue to operate and force the kinds of changes that would prevent this kind of thing from happening again. Let me point you to the airline industry as an example.
After the attacks on September 11, 2001, the airline industry was faced with a terrible downturn of revenue, through no fault of their own. Congress passed and President Bush signed into law, a bill providing $5 billion in cash and $10 billion in loan guarantees, trying to prevent further damage to the industry, trying to prevent further job loss and trying to prevent the airline companies from going completely out of business. There were questions then about the validity of such a bailout, rightfully so, and some of the same questions exist today, with the Big Three. As Evan Sparks says, the airline companies had restrictions placed on that bailout money and some of them were forced to go through the bankruptcy courts, for good reason.
I bet you’re thinking, how would a bailout of the “big three” U.S.-based automakers — General Motors, Ford, and Chrysler — affect a bailout of the airline industry? Tellingly, a few observers have compared the situation with the car-makers (Scene: Washington. Detroit: Give us big money money; our bankruptcy is your DOOM. Congress: Sure, always happy to help the UAW, but let’s install a car czar to apply industrial policy and oversee green car production.) with the airline bailout in 2001.
The travel industry disintegration after 9/11 was an unexpected external shock, but for airlines like United, it unmasked the unsustainable labor obligations and management decisions that were obscured in the heady boom time of 1999-2001. Some airlines, the ATSB determined, could do with a small loan guarantee in order to get through a rough time not of the airlines’ making. But for legacy carriers with legacy cost structures, a bailout would only postpone the reckoning to come, possibly making the pain worse later. United, Delta, and Northwest all needed a run through bankruptcy court. (I’ll say that United did not do enough to help itself in bankruptcy court. For example, management threw out silly ideas like Ted and didn’t simplify its fleet sufficiently.)
So where does that leave the big three? Exactly where legacy airlines were left: in bankruptcy court. Michael Levine — an aviation policy expert, natch — points out in today’s Wall Street Journal, “GM as it is cannot survive without long-term government life support. If it gets that support, it can’t change enough and won’t change fast enough. Contrary to [GM CEO Rick] Wagoner’s brave declaration, bankruptcy is an option. In fact, it’s the only option that merits public support and actually has a chance at succeeding.”
While I am certainly no expert on these kinds of things, I have to agree with Evan. Bankruptcy seems to be the only viable option here, an option that will force the automakers to make the kinds of changes that will help them survive. A lot of companies in our local area, such as Trane, Rheem, and Whirlpool are all having to make changes to stay alive. Why should the Big Three automakers be any different? Again, where will it all stop?
That’s my take!
Larry
