Let G.M. go bankrupt

G.M. is in trouble, according to the latest news.  The company has some contracts and other obligations that it can’t afford.  What can the government do to help?

Answer: The government has already done everything that it needs to in order to help G.M.  The government established bankruptcy courts so that a company like G.M. can go through a Chapter 11 reorganization.  During the Chapter 11 process, a judge has the power to adjust the company’s obligations so that they can be paid from the company’s likely future revenue.  Chapter 11 was designed specifically so that employees can keep their jobs, albeit possibly at lower salaries, while shareholders and creditors suffer and/or are wiped out.

The stockholders, creditors, and employees of G.M. do not deserve to be spared the pain of the recession.  The rest of America will be taking pay cuts, losing jobs, giving discounts to customers, etc.  What is special about G.M. that they should be able to live as though 2008 never happened?

[Note that the current market capitalization of G.M. is only about $2.8 billion (compare to over $100 billion for Google).  The shareholders have already lost almost 100 percent of their investment.  The world won't come to an end if these shareholders go from losing 95 percent to losing 100 percent.  An evaporation of $2.8 billion will barely register compare to the losses that the S&P 500 holders suffer nearly every day.]

54 Comments

  1. ex detroiter

    November 8, 2008 @ 2:19 am

    1

    Bailing out GM is not about the stockholders, creditors, or even employees. It’s about the retirees. GM has 2.5 retirees for every employee. The pension plan is guaranteed by the Pension Benefit Guaranty Corp, a US government agency. So, if you let GM go bankrupt the government is going to have to pick up those pensions.

    IN addition to the pension, there are the healthcare costs. GM paid about $5.5 billion in 2005 for health costs of its retirees, that’s in addition to the pension. It’s just killing the company.

    A good article explaining how they got into this was in the Washington Post
    http://www.washingtonpost.com/wp-dyn/articles/A64599-2005Apr18.html

  2. Nathan Bowers

    November 8, 2008 @ 3:59 am

    2

    To work, capitalism requires the feedback mechanisms of loss and failure. The more “too big to fail” a firm is, the more likely it is that letting it fail so its resources can be recycled back into the economy will be a net win.

    Plus, when is enough enough? We’ve already bailed out Chrysler once before.

    How about this Detroit: we’ll bail you out if all your executives cut off their own pinkies Yakuza-style. Gotta have some accountability right? ;-)

  3. thrill

    November 8, 2008 @ 11:07 am

    3

    What’s so special about GM is they epitomize union strangled companies that donate fiercely to Democrats. “Save” them and it’s extra ammunition to use to keep other companies unionized. What could be better from the Democratic perspective than to be able to use taxpayer (i.e. -everyone, regardless of political persuasion) money to give to someone who will then vote for *you* and work tirelessly to, ah, persuade others to do so too..

  4. Shimon Rura

    November 8, 2008 @ 11:21 am

    4

    What’s special about GM is that they have a TON of unionized employees, who will all be pissed off when their union’s continued squeezing of GM turns out to be enough to kill the company. This is pretty similar to farm subsidies, and I worry a little that we’ll wind up in a similar situation eternally subsidizing an inefficient auto industry.

    What I’d rather see is, instead of a GM rescue, a government lifeline of some sort for soon-to-be-ex GM employees. Hell, it would probably be cheaper to buy each of them a retirement home in Florida than to prop up GM for the next 40 years.

  5. Charlie Evett

    November 8, 2008 @ 12:32 pm

    5

    What is really needed is some kind of financial vision for creating American start-up car companies that can design, build, and market cars that people actually want.

  6. David Magda

    November 8, 2008 @ 12:43 pm

    6

    Note that the current market capitalization of G.M. is only about $2.8 billion (compare to over $100 billion for Google).

    Yes, and GM employs 266,000 people and has revenues of US$ 180B, while Google has 20,00 employees with US$ 20B revenue. IMHO GM is much more linked into the economy, and it’s failure would have more serious repercussions than a similar failure of Google–especially since manufacturing in the US is already struggling.

    Personally I’m not so much worried about the shareholders (a Chapter 11-protected restructuring would probably be a good thing), but using the market capitalization of a company to determine it’s effect on the economy seems a bit simple.

    Your general point of no company being special is true, but a company of GM’s size connects to a lot of things and its failure could make things messy (more than they already are).

    Given that there all these large companies in the financial sector (AIG) and elsewhere (GM, Enron) can be so influential when they do get so big, perhaps there should be limits on the size and market share that companies can get. After all, wasn’t that the original purpose of anti-trust laws? To make sure no company got too big and controlled too much?

  7. Matthew Kosterman

    November 8, 2008 @ 1:11 pm

    7

    Agreed. What happened to the “free market”? The government owes the carmakers nothing. The fact they could not wean themselves from their profitable, but fuel-guzzling, SUVs and trucks in the face of overwhelming evidence that unabated demand for such products would not, could not, continue forever should not be the government’s (and by extension – my) problem.

    As for the myriad suppliers who hitched their collective wagon to the myopic vision of the US auto industry – tough beans. Necessity is the mother of invention. Perhaps losing their perpetual gravy-train would force them to invent something that people actually want to buy.

    Life’s a b*tch.

  8. dominik

    November 8, 2008 @ 1:19 pm

    8

    But Philip, to paraphrase: “What’s bad for GM is bad for America.” I jest.

    Peter Schiff of Euro Pacific Capital agreed with you on CNBC. See this video at 3:18 onwards http://www.youtube.com/watch?v=E4sLx5O_3M0 Most CNBC’s other commentators disagreed with him, however.

    He makes your point that helping GM has an opportunity cost of not helping someone else at 8:10. “Every GM job they save destroys a job somewhere else.”

  9. Chris

    November 8, 2008 @ 1:22 pm

    9

    Amen! Chapter 11 would also allow the court to handle union contracts that have hamstrung the automakers for years. I support unions, but the UAW has become an anchor tied to the feet of the Detroit Three.

  10. GadgetGav

    November 8, 2008 @ 1:56 pm

    10

    Absolutely..!
    They have no-one to blame but themselves for the mess they find themselves in. The same could be said of the banking industry, but that is more fundamental to the whole system.
    Airlines have been through Ch11, why not GM. Heck, there used to be a lot of smaller car companies that The General swallowed, why shouldn’t GM get bought by Hyundai..?
    The UK went through this years ago; all the small companies merged into British Leyland, it was nationalized, sold of, and eventually crumbled to the point where what was left was bought and moved brick by brick to China. That’s what it means to play in the global economy. Our taxes shouldn’t be used to try to hold back the tide.

  11. jwoodruff

    November 8, 2008 @ 2:10 pm

    11

    Being one of the few non-autoworking residents of Michigan, I disagree with you.
    I am, of course, angry at the automakers for their short-sightedness, for abandoning their turn-of-the-century hybrid projects, for killing the electric car and instead putting all their eggs in SUV sales. But if you think bankruptcy of GM won’t completely destroy the middle class in this country, just take a look at this map:

    http://www.gmdynamic.com/company/gmability/environment/plants/facility_db/

    With plants in over 60% of U.S. states, plants whose workers earn more than the paltry $6.55 an hour being offered at Wal–mart (that’s less than $14,000 per year) and who buy the televisions, game systems, computers, appliances and other consumer goods that fuel this country’s economy, GM is still the backbone of the American middle class.
    And as for GM employees being spared the pain of recession, they’ve been feeling it for the last 10 or 20 years. Come and visit. Our pot-holed streets, failing infrastructure, and burned out, abandoned buildings may be the new future of the Midwest and South.

    It’s easy for you to sit in your bubble of academia and flippantly conclude they should go bankrupt. But answer me this, wise professor of electrical engineering: Why does Wall Street deserve 700B for fleecing the American public out of their retirement funds, while GM, employer of 300,000 middle class American workers, supporter of 800,000 middle class retirees, should be left to die?

    If GM goes bankrupt, the UAW won’t have a leg to stand on. Autoworker wages will be reduced to shopping-mall salaries. Organized labor may just disappear. Honda and Toyota will, of course, never keep paying their non-UAW U.S. Workers UAW wages. at that point. More labor will be shipped to Mexico or China. The GM retirement fund will be pawned onto the american public.

    GM bankruptcy would be advancement in the downward spiral this country is already in.

  12. Tedious

    November 8, 2008 @ 2:18 pm

    12

    I agree. The status quo likes to tell horror stories, claiming that GM is the only [group of people] capable of building [human-transportation devices].

    The fact that GM abused it’s position and kept any new competition from entering the market should be reason enough to see it fall into the dustbin of history.

    I think the $2.8b should be divided between the top 5 contenders for the 100-miles-per-gallon-in-an-affordable-car-with-a-sustainable-business-model X-Prize.

    Imagine 5 new American car companies, each producing an affordable 100-miles-per-gallon car. It can happen in this decade, if we stop propping up the “Big 3″.

    http://www.xprize.org/auto/press-release/automotive-x-prize-announces-draft-guidelines-for-competition-to-inspire-super-ef

  13. yet another steve

    November 8, 2008 @ 2:46 pm

    13

    The big 3 are the “politically connected” American auto industry. There is another American auto industry that’s doing much better because it has better products and better management.

    I currently drive a BMV z3. It is an AMERICAN car–built by Americans in South Carolina. There are Honda and Toyota plants all over. Meanwhile the so-called “American” auto makers actually only make profits abroad.

    America still makes a lot of cars. It’s just the big 3 that have failed.

    And you’re right–this is exactly what Chapter 11 is for.

  14. Dan

    November 8, 2008 @ 2:55 pm

    14

    I think Steve Jobs ought to buy GM, 2.8 billion is pocket change for him.

    He can give the dinky company to his kids as a learning tool for how you run corporations.

    If they have inherited the touch of magic of their dad, it might even become a shining light in the automotive industry again.

  15. paul

    November 8, 2008 @ 3:22 pm

    15

    Perhaps with the change in administrations we’ll see an end to the nationalization of industries (people can talk about “Obama the Socialist” but the nationalization of investment banks is far more socialist than anything the president-elect has proposed) before the Big Three can make a case for their bailout.

    It has long been the case that the big car manufacturers have been mismanaged: consider the fact that if American workmanship is to blame, why have German and Japanese automakers opened successful plants in the US with domestic workers? I think the republic will survive if one or more of the surviving carmakers follows Packard, DeSoto, Kaiser, AMC and the rest into history.

  16. Arash

    November 8, 2008 @ 3:33 pm

    16

    Hi Philip,

    I found your posting from Daring Fireball, and wanted to comment on it.

    In general, I agree with your comments, but feel that we need to look a bit past the surface to deal with this situation.

    A great deal of the problem faced by the American auto industry comes from the high costs of unions and union labor. Government protection of the American auto industry is really government protection of these unions, which themselves rival the very corporations they fight in executive largesse and corruption. Indeed, the shiny endorsement from the UAW of Mr. Obama was one of the things that worried me about his candidacy.

    I’m all for abandoning any sort of bailout for the likes of Ford and GM and subjecting them to the rules of survival in the “free” market, but in doing so, we need to make sure that we’re not tying them down with regulations that protect the unions and union culture. That would only ensure their demise, and unfairly at that.

    There is no doubt that these behemoths also suffer from corporate and fiscal mismanagement and malfeasance, all wrapped up in a ludicrous bureaucratic hierarchy, but again, that’s their problem to figure out. Heck, they just need Carlos Ghosn to step in and clean house.

    Car culture is a big deal, and it permeates the consciousness of many Americans. Personally, I think that the designs coming out of Ford, GM, and yes, Chrysler, are some of the best they’ve had in many years, and I do hope they survive, but not to merely exist and lumber on as they have been.

    And despite this little outburst, I do not work for the automotive industry.

    I’m sounding more and more like a Libertarian every day, and that really bums me out.

    Regards,

    Arash

  17. Sam Spade

    November 8, 2008 @ 3:40 pm

    17

    No doubt GM will wring its little hands piteously and express its deep-seated concern for the workers in their plants and the communities surrounding these. I agree! We ought to give a bailout directly to the residents of these hard-hit Michigan communities. It would be cheaper and more efficacious for the country as a whole than would be keeping GM on life support so they can continue to build cars which few people want.

  18. Jesse

    November 8, 2008 @ 4:02 pm

    18

    Many things are special about G.M., unfortunately. To cite a couple of examples: first, a failure would likely require the government (via the Pension Benefit Guaranty Corporation, an “FDIC for pensions”) to take responsibility for the company’s outstanding pension liability. Either that or all those retirees lose their primary means of subsistence.

    Second, an unknown, but probably VERY large (even larger than for the investment banks), amount of credit-default swaps (read: bets) were written on GMAC debt, General Motor’s auto-finance arm. If a failure happens, the people holding these swaps will want to collect, creating a giant vacuum sound during an already precarious moment.

    In other words, a GM failure would probably affect more than just their employees, stockholders and creditors.

  19. Jake

    November 8, 2008 @ 4:07 pm

    19

    I’m not disagreeing with anything you are stating and I agree with bankruptcy. However, the suffering will be DRAMATICALLY worse than $2.8B. You are forgetting about the systemic risk that will roil through the markets (think auto part companies that have been split off over the years), the financing arm (GMAC), that will undoubtedly suffer. In addition, you are forgetting about the hundreds of billions of dollars in debt GM has, along with all the investors and entities that own that debt. Yes, it is currently priced at 50-70 cents on the dollar, but this assumes a good chance of a bailout. Without one, this is worth much less.

    Again, I am not in disagreement, but do not think for a second that this will not have profound implications greater than a loss that “the S&P 500 holders suffer nearly every day”.

  20. robert

    November 8, 2008 @ 6:32 pm

    20

    Indeed.

    But where and when does government have a role in propping up industries? Why subsidize certain industries at taxpayer expense? (and possibly at the cost of further propping up a flawed model of food production in the case of farming)

    The auto makers dug their own grave.
    Quality Design is hard but not impossible. The world was their oyster and they chose to eat it instead.

  21. Nathaniel Foye

    November 8, 2008 @ 7:42 pm

    21

    Treasury loans to General Motors, Ford and Chrysler are not going to solve Detroit’s problem of excess production capacity. It is no secret that the Big Three’s U.S. market share has dwindled steadily over the years because of foreign competition. Detroit’s mediocre quality ratings, combined with an obtuseness about anticipating consumer tastes, put it in the position of struggling to catch up with import rivals it once dominated. General Motors, Ford and Chrysler compete for a smaller and smaller piece of the pie, and a bailout isn’t going to correct that problem, just prolong it. Detroit’s excess production capacity will align with demand only when one or two of the Big Three is allowed to succumb to economic Darwinism — in this case, bankruptcy.

  22. Phil McThomas

    November 8, 2008 @ 9:59 pm

    22

    Well said. I read of the potential of a bail-out and started to wonder who *doesn’t* qualify for a bail-out. The reason that GM is failing is because there are better alternatives in the market. By definition, the fall-out will be limited.

  23. Dan

    November 9, 2008 @ 12:33 am

    23

    What’s this obsession with GM? Is it nationalism, or just pandering to Michigan voters? It seems one could make an argument that most of Michigan’s woes in the last 20 years are the fault of an American auto industry that can’t pull itself together. Isn’t it time to clean house and let the market “fix” GM?

  24. john scott

    November 9, 2008 @ 12:36 am

    24

    “The government has already done everything that it needs to in order to help G.M.”

    I don’t know where to begin. You must be young. You are correct that the shareholders have already lost. What remains to be seen is whether the other stakeholders will be spared a similar fate.

    The U.S. Government has been a primary cause of the malaise in the U.S. auto industry. The 1937 Wagner Act gave the UAW monopoly power. With the end of WWII they used this power to swiftly elevate the wages and benefits to levels triple what the free market would pay. The car companies went along and just raised prices; customers had little choice but to pay. This worked fine until the Japanese came along first with imports and then with U.S factories that had no such obligation to pay UAW wages.

    The feds were not done. They made it impossible for a company like GM to import small cars from Brazil or Europe. They got into the auto design business in a big way. The states had their role too. Michigan and other UAW states refused to implement right-to-work laws. Ever wonder why all the Japanese plants are in Tennessee, Alabama, SC, etc. The state also passed franchise laws which prevented the U.S companies from sensibly re-sizing their dealer networks to meet the changing times and changing market conditions.

    Yes, the government has already done a lot. And after all U.S. car companies go broke, they will probably implement tariffs on autos and auto parts to “protect American jobs”.

  25. joey

    November 9, 2008 @ 3:36 am

    25

    Yes, the economy will suffer worse than the cost of $2.8B, but the economy will gain more than anyone can imagine if GM was replaced by a successful car company. Thats the beauty of capitalism, its not based on a finite pot of gold that people play tug of war with. Ideas, when free, can produce unlimited material wealth. They create new ideas, new products, new jobs, find new niches. Nobody even heard of an iPod 6 years ago, now its so big it has it’s own economy. We went from horses to landing on the moon within a decade.

    Lets get rid of GM and see how far we can get in the next decade. Its dead weight on this country.

  26. Anhtony

    November 9, 2008 @ 4:47 am

    26

    UK: overly powerful unions fuelled a crisis in the late 60s, through the 70s and into the 80s. We were called ‘the sick man of Europe’ with raging inflation, devaluing sterling, and an IMF begging bowl.

    The car manufacturers were highly unionised (as were the mines, shipyards, newspapers and other industries) and had too much power over the employers & the government. Mrs Thatcher had the courage to deal with the root cause of the problem – banning ‘secondary picketing & picking fights with the unions – and the result, whilst not pretty, led to a much healthier country all round. Within all this, Rupert Murdoch (that one) took on the newspaper unions. All of it was bitter, none of it was pleasant but it had to happen at some point.

    Now the UK does not have its own volume car industry but foreign companies do open plants here. Union dominance will have to reduce one day in the motor industry in the US – it may not be now, or even use the brutal British approach but it will happen.

    Personal view: unions are essential but there has to be a balance of power between the health of the company and the well-being of its workforce. Arguably the UK has gone too far the other way with a ‘flexible workforce’ being a euphemism for instability and insecurity at home.

  27. Charel

    November 9, 2008 @ 4:54 am

    27

    Food for thought would be that the GM subsidiary in Germany makes a profit whilst being unionized and having health insurance and pension liabilities.

    The problem that no government infusion of capital can solve is the failure of management to manage.

  28. Jason

    November 9, 2008 @ 6:05 am

    28

    GM has been marketing ugly gas guzzling cars that fall apart. GM has been fighting the future, their workers and their community for as long as I can remember. Government money is not going to transform the backwards corporate culture that created this mess. Money will not change much less save GM. GM is a bad investment for the US. Let’s invest in Tesla motors… a US car company with idea’s and a future.

  29. Michael Spencer

    November 9, 2008 @ 8:57 am

    29

    Dunno. In many ways, it looks to me- a liberal if there ever was one- it looks to me like they did it to themselves. Along with John Dingell, they fought higher CAFE standards vociferously for years and continued building the big dumb trucks. As a result, sales have plummeted as the foreign companies built cars for the future.

    Giving them the money wouldn’t change this reality one bit.

  30. GadgetGav

    November 9, 2008 @ 9:49 am

    30

    Thanks to Anthony for providing some context to the UK example. I didn’t want to be too long winded in my first comment. Yes, it did take a big fight with the unions and the elimination of UK-owned volume car manufacturing to come out the other side, but there is still an auto industry in the UK. It wasn’t pretty, but that kind of thing has to happen here. Generally, I’m more socialist than many US politicians, but the UAW has got to wake up to the fact that they are killing the goose that lays the golden eggs. Maybe they already have.

    jwoodruff, I haven’t been to Michigan, but potholed roads and crumbling infrastructure are not unique to your part of the country. It’s happening everywhere. In my small town in the NE a bridge is about to close for 1 year while it gets rebuilt because the maintenance that was identified as being necessary three years ago was never done. Roads and bridges everywhere in this country are being left until the point of collapse before anything is done (sometimes until after the point of collapse). The talk of a new stimulus package based around infrastructure work seems interesting to me. It sounds like it could provide a way to channel govt funds into the economy at the same time as getting vital work done. Of course, the devil is always in the details, but it seems better then $700b in a three page bill to Wall St or $25b to the big three automakers. It could be argued that the wars we’re conducting have brought us to this economic point. It’s time for some post-war thinking in how to get the economy back on track.

  31. GadgetGav

    November 9, 2008 @ 9:57 am

    31

    john scott, One the the feds could do to reverse some of their previous bad decisions would be to bring the US regulations more in line with the rest of the world. Not just emissions, but crash tests, even lighting regulations. That way GM & Ford could bring in smaller, fuel efficient cars from Europe without having to re-engineer them. Of course, it still requires Ford & GM to get their collective heads out of their @sses and believe that there is a market in this country for smaller, fuel efficient cars. There is an Audi A5 in Europe with a diesel engine that gets better mileage than a Toyota Prius. We won’t see it over here though. The Prius is not even a particularly impressive car in Europe for mpg anyway. There are plenty of small gas and diesel powered cars that get 40-50 mpg.
    The protectionist arguments for having different regulations in the US have no basis in the global economy. The best selling cars in America are made by Japanese companies, they’re just slightly different to the equivalent model sold elsewhere, making the whole design & manufacture process more expensive. We need a world car.

  32. bobv

    November 9, 2008 @ 12:18 pm

    32

    Automobiles are technology, yet the ‘auto industry’ doesn’t behave like the tech industry, in terms of companies being allowed to be born as well as die. Asking what GM will do to compete with Toyota is like asking what IBM will do to compete with Google. The answer is nothing, and there’s no reason why it should; other companies are being created to try to do that, while IBM has found a decent niche.

    Philip has made half the case. What is needed is an understanding of what combination of business and governmental factors has combined to prevent new auto companies from starting. These factors have to be torn down. Then innovation will return to the American ‘auto industry’.

  33. patrick giagnocavo

    November 9, 2008 @ 7:01 pm

    33

    I cannot now find the link, however I did read (somewhere on finance.yahoo.com) that the pensions were a separate entity and were fully funded at this point. So assuming I am correct, GM’s (inevitable) collapse would not affect current retiree’s pensions and possibly no one’s pensions.

  34. cryptodemocrat

    November 10, 2008 @ 1:49 am

    34

    The free-market ideologues’ recurrent, fundamental error is to pretend away real-world conditions of monopoly and oligopoly. The auto market isn’t free; it’s dominated by a few large players, one of which is GM. Large corporations are not democracies. It’s the government’s duty to regulate them. Bailout money can shake up management instead of coddling it.

    Depriving hundreds of thousands of people of work, pension or both at a time when capital is not available to re-employ them would be bad, not good, for those deprived and most others in society. The notion that this obvious great harm would be outweighed by some abstract improvement in national efficiency fatuously heralds shuttered, crime-ridden streets and hungry children.

    The free-marketer’s tendency to view workers’, but not managers’ compensation as damaging to the economy reflects class bias, not reason. The truth is that a dollar paid in wages does more good for the country than a dollar paid in salary, because the former circulates through the local community (the benefit muted it’s been invaded by Wal-Mart) while the latter heads overseas to foreign investments and Swiss bank accounts.

  35. Friedrich

    November 10, 2008 @ 3:15 am

    35

    I support the claims of Phillip. Most of the troubles are self indebted. The quality in general is a very poor one, there’s just one positive thing that’s robustness. But I guess others are at least as robust….

    Regards
    Friedrich

  36. Tom

    November 10, 2008 @ 5:26 am

    36

    GM is an HMO masquerading as an auto manufacturer. Its medical insurance
    payments are greater than its steel purchases.

  37. Anders

    November 10, 2008 @ 9:14 am

    37

    The problem with U.S. auto makers is that they don’t understand that they don’t design good cars.

  38. jscan

    November 10, 2008 @ 9:28 am

    38

    It’s obvious you are speaking as an engineer rather than someone versed in finance or economics. The American 3 currently cannot obtain large enough credit lines to help them weather this recession. Since this is the case, how exactly do you expect they would be able to get debtor-in-possession (DIP) financing if they went chapter 11? If they opt for the bankruptcy route, their businesses will be weakened further and any reasonable bank will distance themselves even FUTHER from lending to the American 3.

    This is why the government LOANS, not BAILOUT, are being discussed. For history sake, read up on the government loans to Chrysler in 1979 which Chrysler paid back to the feds with interest, years ahead of schedule.

    Lastly, it humors me how Detroit outsiders sit back and insist they know how to better run these companies. They think tons of other companies have no problems so why are these automakers unique? I’ll tell you why. Manufacturing is brutally capital intensive. Specifically, a new plant to build just one car platform can easily run $1 billion+. Then you need engineers, designers, general business functions, dealers, marketing and the cash flow to support warranty repairs, recalls, etc. If creating a “new” car company was so easy, then why hasn’t anyone on Wall Street backed it?

    Then there is the classic comparison to Honda, Toyota, Hyundai, etc. If you traded GM’s labor overhead with any of these companies the tables would be turned. All the foreign companies have located their plants in right-to-work states where they can avoid the UAW and the benefits it demands for its members.

  39. jscan

    November 10, 2008 @ 9:35 am

    39

    patrick giagnocavo-

    The fund for retirees that you refer to is the VEBA (voluntary employee benefit association) that was negotiated as a part of the last UAW contract. This independent fund is NOT fully funded as GM was given the power by the UAW to delay payments to the VEBA in order to whether the current downturn. Payments scheduled for 2008-09 were supposed to be $1.9 billion.

  40. DaveyJJ

    November 10, 2008 @ 10:04 am

    40

    I wonder why companies like GM, Ford and Chrysler et al are so damn laissez faire when times are good … screaming bloody murder at any mention of government mandated gas mileage or environmental legislation, higher taxes to offset hidden environmental damage, etc … and then are first at the trough for government handouts when times get bad.

    It’s simple … either accept government intervention in business good times or bad, or fail because you build crappy vehciles that no one wants. I’ll be honest … I drive a Toyota (made in Canada btw) because the gas mileage and quality of build far exceed anything made my the “big three.” If Ford or GM built a car that I new would last me 250,000km basically trouble free and got at least 45-55mpg in the city (and at least as good on the highway) I’d buy it, sure. But they don’t. And if you can’t compete, you go under. Tough.

  41. Alex

    November 10, 2008 @ 2:52 pm

    41

    Actually GM makes world class vehicles. The much ballyhooed “superiority” of Japanese and European cars are a myth. I have had dozens of cars from all over the world but so far GM cars beat them all in reliability. 300k miles on a 1998 Pontiac with ZERO repairs. 175K on a 2000 Tahoe, no repairs.
    2002 Toyota – new transmission, brakes and instrument panel
    2005 Infiniti new AC system, brakes
    2004 Mercedes too many to count

    GM is in trouble and the unions are only part of the problem. the company has been run by MBA’s and accountants for way too long.

    Back in the old days management traded off wages for health and retirement benefits knowing that it would increase profits and bonuses in the short run, and the costs would be felt later after they retire. It is typical American MBA thinking to try to make money between now and next month and forget long term thinking.

    GM going bust would not be the end of the world and maybe better for GM in the long run, a reorganized GM could earn back it’s position with the latest vehicles which are head and shoulders above their products 10 years ago and equal at minimum with the foreign brands.

    Like the previous commentator, I also had a BMW Z3, it was piece of crap that costs $300 for an oil change.

  42. Michael Minor

    November 10, 2008 @ 3:20 pm

    42

    At the end of the day, no matter what company it is, the government can not show special interest. The hard line is that companies that rest on their accomplishments, die on their accomplishments.

    GM for so many years made cars that were crap in comparison to other cars. Why? Many reasons, but the simplest is that people were still buying the cars partially out of patriotism… As we can all attest is a horrible reason to buy anything. It lowers the bar of competition in quality control, while the rest of the world still chugs along constantly trying to raise it.

    It also provides shallow pride in the product being built. Employees proud to make a product because it’s made in America, and the quality slowly goes down the tube.

    When it comes to any company, quality product has been the only thing to make a company flow consistently from one trend to another.

    Which brings us to agility. Something GM lacked. Sitting on oil, barely looking at cleaner energy sources, bad designs, cheaper and cheaper materials (cheap as in bad, not in price).

    Honestly, what has GM done with it’s profits to prove it had enough intelligence to get through in the next 20 years? Japan is the one showing leaps in energy and carbon fiber production…

    Let the slow die slowly, let the agile move quickly on changes and grow as a part of it.

    And yes, I understand the larger the company the more mass to move.

  43. cryptodemocrat

    November 10, 2008 @ 4:12 pm

    43

    Regarding quality, it seems to me GM was doing something right in the mid 1990′s. They did produce the EV-1, the first seriously-marketed all-electric car, and Pontiac Grand AM’s produced during that period are still quite common on our streets here in the Midwest.

  44. Steve

    November 10, 2008 @ 4:34 pm

    44

    I disagree about Chapter 11 for GM, not for a political, economic, or philosophical reason, but for a practical one. No auto manufacturer, especially not GM, would be able to sell cars after a bankruptcy. Would you buy a car or truck from a bankrupt company? No Chapter 11 bankruptcy can succeed if the debtor in possession (i.e., the “company”) can’t continue to conduct business. If the reorganization does not succeed — very likely in the current environment (see this article from the Financial Times: http://www.ft.com/cms/s/2/00701a4c-abe4-11dd-aa46-000077b07658.html) — the filing gets converted to a Chapter 7, a liquidation. As a libertarian who isn’t bummed out about his political views, I oppose all government bailouts, but I agree with exdetroiter and JWoodruff. A GM bankruptcy would begin an era to make the ’30s look prosperous.

  45. BA

    November 11, 2008 @ 1:00 am

    45

    As an engineer employed in Detroit in the auto industry, I say: Let them fail.

    This company is burning through 7 Billion a quarter. They will be right back with their hands in the public trough next year for another “fix.”

    This cash burn-rate is completely unsustainable.

    “Just this one time…” Where have we heard that before? Oh yea – it was AIG, who is ance AGAIN feeding in the public trough of newly printed dollars for another 50-or-so billion. I think it’s AIG’s third time back, but who’s counting.

    The company is failing for the same reason Social Security is failing: Totally flawed basic mathematical premise (guaranteed income for life).

    The more horribly managed companies we bail out “just this one time,” the longer and deeper the depression will be in the end, the weaker the dollar becomes, and the worse-off EVERYONE becomes.

    Things ARE going to be tough, there is no panacea, it is inevitable. The longer we delay the inevitable, the worse the inevitable becomes.

    There is no Keynesian economist that is going to come riding to the rescue with some fancy equation making it possible to repeal the laws of economics (though I’m sure they think they can – and I’m sure it will involve trillions more in newly printed dollars).

    Let’s not forget where all this “bailout” money comes from – click this link.

    http://research.stlouisfed.org/publications/usfd/page3.pdf

    Businesses fail for very good reason.

    If we don’t LET them fail, the U.S. dollar fails, now if we want to talk about “systemic risk,” let’s talk about THAT.

  46. george stallsmith

    November 11, 2008 @ 4:02 pm

    46

    I read every single posting above. To me the solution is simple….i look to the group to poke holes in it for me.

    1- the goal agreed by all is to return the big three to health. The government and thereby the people are willing to help because we all agree that the alternative would be catastophically bad.
    2- america is not a socialist country….we believe in private ownership of businesses and markets to value businesses and allocate capital.
    3- then why not do the following:
    a- allow the government to buy the unused and un-needed factory space. this would tighten up the big three, give them cash, and allow them to unburden themselves of useless assets.
    b- Allow new auto startups to come in there and lease these buildings. Leasees must pay for the leases at a reduced rate….this will still require a lot of money and they will have to raise capital to do this. Think of tesla Motors, or the rocky mountain institute who is building carbon fiber cars. There are many more of these companies out there. Many are building batteries (the engines of the future)
    c- Obama is going to do something about health care costs…..there will still be premiums, but they will be lower (if you believe him). This should help with health care costs by the big three.
    d- something is going to have to be done about the retirees….I do not know enough about this to say. I do not advocate f@@king them over.

    Doing the above will reward innovation, re-allocate America’s productive capabilities from the big three who is failing (due to the fact that they cashed in on the short term and now the long term bill is coming due).

    PUMPING IN GOOD MONEY AFTER BAD WILL NOT WORK. Socialism will not work. INNOVATION IS THE ONLY WAY WE WILL WORK OURSELVES OUT OF THIS MESS.

    We all know that kia, hyundai are supported by the government. We know that toyota and nissan and honda were supported by the government and have taken off now to be HUGE. The fact is that to start a car company is too big of a nut for somebody to grow organically.

    When planning remember that America grew because of risk taking, hard work, innovation, and allowing people to fail!

  47. AverageGuy

    November 18, 2008 @ 9:36 pm

    47

    There is no amount of money that can save a company from poor management. The fact that the GM Board of Directors is still supporting the CEO of GM is all the proof that you need that management is broken.

  48. Michael Jordan

    November 19, 2008 @ 1:08 am

    48

    Let GM and the other auto companies go into restructuring. These companies could not make money during good times. Why do they think that by getting loans from government, they are going to be able to make money and survive? These companies have wrong and inefficient business model. Let them go into bankruptcies, restructure the companies and become leaner and more competitive companies. Will it be painful? Of course, it will. Will the America survive if these guys go out of business? Sure, why not. Lending money to these guys without restructuring will just be delaying the inevitable.

  49. Steve

    November 19, 2008 @ 12:10 pm

    49

    Someone please inform Paul (see below) that Obama and 97% of the democrats supported the 700$ Billion Bailout of the banks and the nationalization by the Treasury. As did about 60% of the Republicans. Maybe he was watching MTV when it was being discussed and voted on. No wonder Ron Paul didn’t win. Nobody pays attention and informs themselves. LOL

    paulNovember 8, 2008 @ 3:22 pm
    15
    Perhaps with the change in administrations we’ll see an end to the nationalization of industries (people can talk about “Obama the Socialist” but the nationalization of investment banks is far more socialist than anything the president-elect has proposed) before the Big Three can make a case for their bailout.

    It has long been the case that the big car manufacturers have been mismanaged: consider the fact that if American workmanship is to blame, why have German and Japanese automakers opened successful plants in the US with domestic workers? I think the republic will survive if one or more of the surviving carmakers follows Packard, DeSoto, Kaiser, AMC and the rest into history.

  50. Mr Mack

    November 22, 2008 @ 11:02 am

    50

    I live in Detroit, and was educated in Detroit Public Schools.
    Let the Auto Industry live and die by their own device.
    Detroit once almost 2 million people. People came from all over the country to Detroit for the jobs.
    When the Detroit Auto Industry started investing in other countries, like Mexico and Japan, the jobs started drying up, and people looked elsewhere.
    The Auto Industry have been spoiled by State and National laws that protect them from the fair market environment.
    If they fall, and have to restructure themselves, then it will be a better industry for everyone.
    FYI: My friend that is layed off from Chrysler make 95% of his wage… and does not have to leave his house. How long can an industry survive with setups like that… it is just a matter of time anyway.
    THe US at one point had almost 200 auto companies.

  51. Malik Aziz

    November 27, 2008 @ 2:11 pm

    51

    Part of the problem with GM is that they were stealing from the pension fund. Thats why its underfunded. Gross mismanagement that everyone in the business sector turns a blind eye to; this as well as the corporate greed. Union employees making 25 an hour vs. Salary buffoons with a million dollar bonus and a golden parachute; and people want union employees to take a pay cut?Give me a break! The media makes it look like toyotas and hondas are GOD’s cars. They are small and zippy but I am 6’3″ and I need something to feel comfortable in. The car magazines never have anything good to say about any american car products. Now this is anti-american terrorist activities. This undermines the very hardworking work ethic, work a job- make a better life for you and your family. I go to the auto shows in chicago, indianapolis, and toronto. The american cars have more torque, more power, more room and yes more durability. You have to do preventive maintenance like any other car, and your auto should run for at least 150,000 – 200,000 miles. Remember union employees only work at the plants they do not ” Run the show “. For those who know – Chip cutters make the money for the company, not salary, its an expense. So why do different manufacturing plants have a salary to hourly ratio of 2 to 1, 3 to 1? The overhead at these plants is beyond asinine. GM has been making profit overseas, they have new dealerships and manufacturing in china. They have a deal in the works in russia, so its doing fine in their ventures overseas. On the homefront GM does not care about the american workers, its not that we make too much money, its GM is not making enough profit. Business 101 at Purdue University – Payroll is the least expense of any company but its always the first to be cut because you can readily see a change. Graduate in Aeronautical Technology.

  52. steve a

    November 29, 2008 @ 1:22 am

    52

    To further the prior comments about why helping GM is a problem, in addition to what Peter Schiff (and others) have said about helping to keep a GM job takes away one elsewhere, a case can also be made that by alleviating GMs woes right now and preventing a bankruptcy / liquidation they also deny someone in the market place the ability to buy and better utilize the resources that GM currently uses, so the attack is on two fronts, it keeps bad GM management in place when they’ve done nothing but run the company into the ground AND it prevents the assets from being purchased by someone who could perhaps turn the company (or parts of it) into a profitable entity.

    It’s government interventionism that’s gotten us to this point and for some reason many think that more interventionism will solve the problem…not likely in my view. Government needs to get out of the market and let the mechanisms work properly to eliminate this kind of behavior. By continuing this bailout mentality they’re just creating butt-loads of moral hazard…imo.

  53. Paul P.

    December 6, 2008 @ 10:15 am

    53

    As a (long ago) GM worker… Lets clear up a few points…

    1) The UAW killed itself when it shifted (as did the airlines) from “vested pension contributions” (where GM paid into a fund, and the *union* administered the fund) to “pay retirees out of current cash-flow” (this in exchange for higher wages). Current retirees, depending on when-retired, fit into a number of different pay-categories.

    2) GM killed itself by going along w/the UAW pay-or-strike modus operandi (GM knew “this day would come”)

    I am not anti-union by any means. But, in this case both GM and the UAW are guilty of killing themselves.

    3) The Pension Benefit Guarantee Corporation was a fiasco from the start. It pays *no more than* 60% of anyone’s pension (ask any retired United Air Lines pilot) and the fund is broke. PBGC is more ludicrous than social security.

    4) The gov’t is significantly to blame here. “Rules” prevent technology cooperation (e.g. EPA compliance) with gov’t mandates (leading to massive redundant-expenditures by the Big-3). Japan does not have this problem. Gov’t “laws” (honest) prevent Big-3 CEO’s from even *talking* to each other (the suggestion that Big-3 CEO’s would “carpool” to DC was “illegal” unless pre-approved by the gov’t!).

    I could go on. But (sadly) the auto industry is so hopelessly broken, no “fix” is going to work. What a mess. Let them fail. The point made “already 95% out of business, so-what on the other 5%” is excellent.

  54. Miraj Patel

    June 2, 2009 @ 1:53 am

    54

    If only they had listened to everyone of us who said to let them go bankrupt in the first place- they wouldn’t have wasted billions of our dollars.

    And now they want to subsidize auto purchases- I really don’t understand when they will stop ignoring economics and realize that all of this meddling is only going to make things worse.

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