Why not let Detroit's Big Three go bankrupt?

McClatchy NewspapersNovember 18, 2008 

WASHINGTON — To hear the chief executive officers of Detroit automakers and union leaders tell it, bankruptcy and economic hellfire await if lawmakers don't craft a government bailout for them, soon.

Probably not, according to legal and economic experts, who warn that what's ailing Detroit isn't fixable with the $25 billion being sought.

Government aid of the sort that's being debated might allow U.S. carmakers to survive a bit longer in their current form, but even supporters acknowledge that it's unlikely to make them thrive.

For now, their fallback argument is that not helping them could be the worse of two bad options.

"If one of the companies was to go into bankruptcy, I would almost bet it would take another one with it, and possibly all three of them," Ron Gettelfinger, the president of the United Auto Workers union, told the Senate Banking Committee late Tuesday.

To get back on the road to viability, experts said, Detroit's Big Three are going to need more than government money. They're likely to need the government taking over their so-called "legacy costs," the pensions and health-care benefits they've made to generations of workers during better times.

"This is not a bailout of the auto industry. The U.S. auto industry is doing just fine. It is a bailout of the United Auto Workers (union), and regardless of what happens to the bailout, it will simply prolong a period of poor performance," said Michael Hicks, an economist at the Center for Business and Economic Research at Ball State University in Muncie, Ind.

Hicks describes himself as a middle-of-the-road, nonideological economist. He carries weight on auto issues, however, since Indiana is, along with Michigan, Ohio and Kentucky, home to a large swath of auto and auto-parts manufacturers for Detroit carmakers and foreign automakers such as Honda and Toyota that build cars in the U.S.

"It's not really the wages of the guys at the factory that are the problem. It's the legacy costs, and the other union or labor costs, that are so damaging," Hicks said, pointing to items such as full pay for idled UAW workers, and janitorial staff getting hefty union wages that saddle carmakers with higher costs than the transplants.

General Motors is widely viewed as the weakest of the Big Three. Its sales plunged 45 percent in October and its market capitalization is now around World War II levels. Last year it reached an agreement with the UAW to establish a health-care trust fund called a Voluntary Employee Beneficiary Association.

The association allowed GM to transfer off its balance sheet — effective Jan. 1, 2010 — some $51 billion in promised health benefits. The money will go into a UAW managed fund that will invest the money to help pay for the legacy costs.

"It was the hardest decision I ever made as a leader," UAW chief Gettelfinger told lawmakers.

During the current downturn, however, the UAW fears that GM won't fund this. UAW chief lobbyist Alan Reuther said bailout money should be directed to ensuring that these promises to the already retired are kept through the association.

"We think then it would free up financing assistance from the private sector for the rest of their operations," he told McClatchy.

The absence of private-sector lending has GM, Ford and Chrysler warning of looming disaster.

Chrysler Chairman Robert Nardelli told lawmakers that his company would be unable to meet the roughly $3 billion it faces monthly in cash obligations.

"Therefore, without immediate bridge financing support, Chrysler's liquidity could fall below the level necessary to sustain operations," he said.

The implication: Absent bailout money, bankruptcy awaits, and "we cannot be confident that we will be able to successfully emerge from bankruptcy," Nardelli said.

GM's CEO, Richard Wagoner, used more forceful terms such as "catastrophic" costs and "economic devastation" should automakers go bankrupt.

Some experts think that a GM or Chrysler bankruptcy wouldn't be much different from, say, steelmakers, who emerged more competitive, or United Airlines, which emerged from bankruptcy in 2006 as a leaner, more efficient company.

"It's happened before for large companies. Yes, GM is big and complex and has many stakeholders, but I think it is a lot better" to let it fail than provide a bailout, said Edward Altman, a professor at New York University's Stern School of Business and an expert on corporate bankruptcies.

Bankruptcy would allow GM or Chrysler to seek a kind of funding that lets new lenders get priority status over prior lenders. So bankruptcy could, beyond helping to reduce structural costs, give the carmakers a new and better source of financing, Altman said. The government also could encourage banks that have received bailout money recently to lend to a carmaker emerging from bankruptcy.

"There will be some turmoil if they have to file for bankruptcy, but most people are getting used to the possibility that in order to make the major changes, to get rid of management and probably the board (of directors) and right-size the company . . . it's hard to do that when you are outside the bankruptcy courts," Altman said.

Those who argue in favor of a bailout warn that a bankruptcy filing brings collateral damage that could harm thousands of suppliers to the automotive sector across the nation.

"Traditionally, we're not necessarily in favor of intervention in business. However, these are not traditional times, and this is the time when the companies need help," said Rebecca Lindland, an automotive analyst for forecaster IHS Global Insight in Lexington, Mass. "The reason it's so important . . . is that Main Street in all 50 states will be impacted."

A report Nov. 4 by the nonprofit Center for Automotive Research said the motor vehicle and parts industry employed 732,800 workers directly as of September, and the Detroit Three employed 239,341 hourly and salaried workers. The international producers, or transplants, employed another 113,000 workers in the United States.

"The auto industry has one of the largest economic multipliers of any sector of the U.S. economy, and is sufficiently large that its growth or contraction can be detected in changes in the U.S. gross domestic product," the center wrote.

The center concluded that a 50 percent reduction in operations by the Big Three — possible if GM and Chrysler both file for bankruptcy protection — would result in 2.5 million jobs lost at plants run by the carmakers or their suppliers.

More importantly to the broader economy, these jobs lost would reduce personal income by $125 billion in the first year and $275 billion over three years. That would only add to the personal wealth destruction from falling home and stock prices.

The Bush administration opposes using Wall Street rescue money to aid carmakers and thinks that any help must be tied to serious restructuring that sheds jobs and unnecessary costs.

"If we're going to do something, the taxpayer needs assurance that there's some likelihood they'll get their investment back," White House spokesman Tony Fratto said. "And if an automaker doesn't have a plan to make the very difficult decision that they have to restructure, then it would be hard for anyone in this town to make that promise to taxpayers. That is a critical factor."

ON THE WEB

Testimony of GM CEO Richard Wagoner

Testimony of Chrysler Chairman Robert Nardelli

Testimony of Ford CEO Alan R. Mulally

Testimony of UAW President Ron Gettelfinger

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