On December 19, 2008, President George W. Bush announced a $17.4 billion bailout of the Big Three automakers, a deal whose sulfurous stench will permeate the nostrils of every American.
If my tone sounds shrill, it is because I am writing this piece with a metaphorical clothespin attached to my nose. I loathe the Big Three like President Bush loathes Kim Jong-il.
Mr. Bush has done a wonderful job of keeping America safe from terrorist attacks over the past seven years-a feat for which he deserves great credit-but he’s absolutely out to lunch on the auto issue.
According to a December 19, 2008 MSNBC.com report contributed to by Reuters and the Associated Press, GM will receive $13.4 billion and Chrysler will receive $4 billion. Ford has said that it does not need immediate assistance but has been lobbying for a longer-term, multi-billion-dollar credit line from Washington.
The move is intended as a temporary measure to allow the automakers to pay their bills over the next few months and avoid bankruptcy while they restructure. The terms of the plan are similar to a bailout bill that died in the Senate last week. During a 10-minute televised statement, President Bush said that a lack of executive intervention “would almost certainly lead to a disorderly bankruptcy” and “liquidation.” This comment is untrue.
Unlike a Chapter 7 bankruptcy, in which a company is liquidated and its assets sold to pay off its debts, a Chapter 11 bankruptcy allows a company to continue operating while it restructures. A Chapter 11 bankruptcy is overseen by a trustee who reports to a bankruptcy judge. It is neither disorderly nor a liquidation. In most instances, a public company’s stock continues to trade on exchanges.
In his statement, President Bush said that a Chapter 11 bankruptcy was not workable because consumers would not buy cars from bankrupt companies. This position is the GM-Chrysler-Ford party line and absolute nonsense.
An SEC paper on this subject notes that in some Chapter 11 cases, creditors and shareholders negotiate with the company on a reorganization plan before bankruptcy papers are filed. TWA and Resorts International used this method.
The Tribune Company recently filed for Chapter 11 bankruptcy protection, and the earth continued to revolve on its axis. The Tribune Company owns 12 newspapers including the Chicago Tribune and the Los Angeles Times, 23 television stations, and the Chicago Cubs. All continue to operate, although the Cubs are in the process of being sold in order to partially pay off Tribune’s liabilities. The Tribune Company’s debt, $13 billion, is nearly the size of the Bush auto bailout.
The bailout crew argues that any auto bankruptcy will create a domino effect, harming the Big Three’s myriad dealers and suppliers, resulting in up to three million additional American job losses. This fear mongering is designed to terrify a public beset by the worst economic crisis since the Great Depression.
A December 4, 2008 Time Magazine cover story explains that a major reason that GM, Chrysler, and Ford have been rapidly losing billions is because their workers are paid an average of $71 per hour in wages and benefits compared with $49 per hour for the Japanese automakers. The same story also reports that next year, Ford workers will earn an average of $53 in salary and benefits, with similar reductions to be followed by GM and Chrysler by 2011.
That’s lovely, but the Big Three only got religion after running their businesses into the ground and making inferior cars for decades. The president has now rewarded them for their incompetence with over $17 billion, which is coming out of your pocket and mine.
I don’t blame the UAW in all of this. It was just doing its job. Unions exist to get the best wages and benefits for their workers. Nobody told GM, Ford, and Chrysler to roll over for the UAW. In order to avoid difficult negotiations and possible labor unrest, they took the easy way out. And now we’re all paying for it.
By contrast, a Chapter 11 bankruptcy would allow the automakers to shed their onerous labor contracts immediately and sharply reduce their $62 billion debt, thereby facilitating restructuring and greatly increasing their chances for profitability. Yes, bankruptcy is a black mark, and complications are possible, but it’s the best way to help an ailing industry while holding its leadership accountable for its misdeeds.
In an interesting December 19, 2008 New York Times column, Paul Krugman opines that the gross mishandling of toxic mortgage securities by financial institutions and the $50 billion Ponzi scheme perpetrated by Bernard Madoff produced the same result: worldwide economic chaos. The same could be said of the horrendous mismanagement of GM, Ford, and Chrysler. I’m surprised that Big Three shareholders haven’t sued their officers and directors for malfeasance and breach of fiduciary duty.
And what about those bonuses? Like their counterparts in the financial sector, the Big Three CEOs and many of their underlings have received handsome bonuses while dumping their companies into the fiscal toilet. According to a November 18, 2008 Wall Street Journal article, GM CEO Rick Wagoner was awarded $1.68 million in stock earlier this year, even though GM reported a loss of $38.7 billion in 2007. The same article reports that Ford CEO Alan Mulally received a $4 million bonus and $11 million in stock options in that year. According to The Journal, compensation information is unavailable for Chrysler CEO Robert Nardelli because that company is privately held, but a Chrysler spokesperson has said that multi-million dollar bonuses promised to executives in 2007 will be paid out as scheduled in August 2009.
After paying themselves millions in bonuses during disastrous years, the CEOs have now successfully extorted billions from the federal government. President Bush has apparently bought into the notion that if “the autos”-as he calls them-aren’t bailed out, economic Armageddon will follow.
This idea of being “too big to fail” is offensive on many levels. It’s similar to allowing a wealthy, powerful mass murderer to go free because the loss of that person would be too painful for society to bear. Exactly how big is “too big?” Nobody knows, and, therefore, any standard is arbitrary. In the financial sector, storied Lehman Brothers was allowed to go belly-up, yet profligate AIG was rescued by Uncle Sam. Individuals and companies-even big ones-can go to hell, but the giants must, by all means, be propped up Weekend-At-Bernie’s style. By that logic, President Wilson should have rendered massive financial aid to horse carriage makers to prevent them from being eclipsed by automobiles after World War I.
The sentiments of this writer are beautifully encapsulated in a mock advertisement on Buffalobeast.com. Because I am a classy character, I try to avoid scatological references, but the one contained in this ad is irresistible.
For years, the incredible shrinking Big Three have resisted all forms of emissions standards and alternative technologies. Now, with their backs to the wall, they’ve suddenly gone green. Bravo.
Nobody likes to see people laid off, especially these days, and bankruptcy should be avoided. But even before the bailout, the automakers were downsizing. According to the MSNBC report, Chrysler, Ford, and GM have, for some time, planned to close plants for extended periods this winter. Bankruptcy or not, worker pay will be cut, rank-and-file jobs will be lost, and lives will be ruined.
With breathtaking chutzpah, the three stooges, um, CEOs, of GM, Chrysler, and Ford- Messrs. Wagoner, Nardelli, and Mulally-first came to Washington with outstretched palms via luxurious private jets requiring fares of $20,000 per passenger. That club-footed approach prompted Rep. Gary Ackerman (D-New York) to compare the CEOs to decked-out patricians holding a “tin cup.”
In round two of their begging session, the three men wised up and came to the Capitol in fuel-efficient cars. But during both visits, they displayed utter contempt for the American people by not even bothering to outline a restructuring plan. This outrageous behavior prompted a Southern Republican senator to characterize the pay-me-first-approach as “ass-backwards.”
In lock step with the tone-deaf CEOs, the Bush agreement requires the Big Three to show plans for profitability only after they’ve received billions of dollars. Worse yet, under questioning in House and Senate hearings, Wagoner, Nardelli, and Mulally refused to say that they wouldn’t be back for more. That was a major reason that the bill died in the Senate and why Bush should never have resurrected the scheme. According to some estimates, the ultimate cost of returning the Big Three to profitability could exceed $100 billion.
Moreover, Bush’s December 19 statement was inconsistent. After characterizing Chapter 11 bankruptcy as unworkable, the president then said that, under the agreement, the automakers have three months to restructure. If they do not do so within that time, the balance of the loan becomes payable, effectively forcing them into Chapter 11 bankruptcy. In adding this provision, Bush is tacitly admitting that Chapter 11 really is workable.
The Big Three are not indispensable. They’ve been losing market share for years and now account for only slightly over half of U.S. car sales.
On a recent broadcast of “Money Talk” on WABC Radio in New York, host Bob Brinker said that American cars are now “every bit as good” as foreign automobiles. I question that statement on the basis of personal experience.
A few years ago, I stupidly bought a used Ford Taurus, one of the worst cars ever made. After spending several times the purchase price on transmission and other repairs, I had to junk it.
My late father, who bought Chevrolet Impalas for over 40 years beginning in 1950, found recent models inferior in appearance and handling. He then bought an Oldsmobile, which when stopped in traffic, suddenly accelerated, causing him to nearly rear-end another driver.
The anecdotal experiences of two people are obviously not representative of an entire industry, but whether it’s because of bad quality, poor marketing, mismanagement, an inability to adapt to the exigencies of the 21st century-or some combination thereof-the Big Three are utter business failures.
In an excellent December 15, 2008 New York Post column, Andrew Redleaf and Richard Vigilante argue that a Chapter 11 bankruptcy would be better for the economy than continuing to shovel billions down the insatiable gullets of arrogant automakers. Redleaf and Vigilante observe that suppliers of the Big Three do most of the manufacturing of today’s American cars.
According to the column, many of these suppliers have gone bankrupt over the last 20 years, and, therefore, GM, Ford, and Chrysler have been outsourcing both their manufacturing and bankruptcies. The authors say that “the auto industry didn’t stop, or even pause because of them, and on balance most of the suppliers are better off.”
Most disturbing of all is how easily the president did an end-run around Congress. As stated earlier, the Bush plan isn’t much different than the bill rejected by the Senate. In addition, the funds now being allocated to the automakers were originally intended for the financial sector under TARP (Troubled Asset Relief Program).
The law doesn’t seem to mean a whole lot these days. In this crisis atmosphere, it appears to be taking on new meaning by the hour. Don’t like what Congress did? No problem. Change the outcome by executive fiat!
With an incoming, strongly Democratic Congress far more willing to throw money at a stinking ship than the current one, many more Christmas presents are in store for GM, Chrysler, and Ford.
I wonder what industry will be next on the lengthening conga line of corporate beggars. What if cash-strapped Americans start cutting down on non-essential medications? Will the pharmaceutical giants be holding out the tin cup? What if people suddenly stopped smoking? Would Congress or President-elect Obama-who’s been trying to quit-subsidize Big Tobacco? Sounds absurd, doesn’t it? But since Mr. Bush has removed virtually all restrictions from the financial rescue program, the resulting torrential flow of taxpayer dollars is bound to give the Treasury a bad case of monetary diarrhea.