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Let GM Go Bankrupt

I know many people will be upset if GM goes bankrupt, but it's what needs to happen. GM has many, many issues that are slowly destroying it, but one of the biggest problems is that the unions have a strangle hold on the company and are sucking the carcass dry. A federal bailout will offer only a transfusion, and all it will do is delay the inevitable.

Michael Levine at the Wall Street Journal outlines how GM has gotten to where it is and how it will never change unless forced to through bankruptcy. Here's a portion:

Consider the costs of tackling GM's problems with some kind of bailout plan. After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of "change," GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.

GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota's.

Foreign-owned manufacturers who build cars with American workers pay wages similar to GM's. But their expenses for benefits are a fraction of GM's. GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it's not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.

GM cannot survive like this and it is downright immoral for the US government to require American taxpayers to support this company. Chapter 11 will make all these company killing contracts that Levine described void so they can be completely renegotiated. This is the only action that will truly save this company. Read the rest of Levine's article. Yes, bankruptcy will be very hard. People will lose their jobs causing our unemployment rate to go up, but this is the only way to help GM restructure. In the long run, the company will be stronger and its employees will be better off at a company that actually has a future.


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Comments (29)

Michael Levine doesn't unde... (Below threshold)
Larry:

Michael Levine doesn't understand what he is writing about. Manufacturing is a completely different ball game from service, financial or whatever as part of the economy.

Each dollar spent for product made here in the US by US based manufacturing multiplies down through the economy anywhere from four to seven times as a multiplier and thus taxable and a part of the GNP.

GM does NOT have too many dealers. That GM has dealers in many small towns is its strength, not its weakness. Think about the collateral cost of buying only in larger cities for the customer base. Think about the cost of warranty work for the CUSTOMER who lives 50 or more miles away from where he/she bought the car.

GM does not have too many dealers. Think about those who buy GM product because it is convenient instead of driving 50 Miles or more for another brand.

GM owes money to vendors. Those vendors are operating at margin for the most part, some already in bankruptcy. They make parts and sub-assemblies for GM, Ford and all the rest. And the parts guys also have vendors of their own and so on. If GM fails to pay their accounts receivable for their vendors, those same vendors are then at risk, and so on down the line.

The bankruptcy courts of the US are then going to have to manage the car business. Just shoot me.

Then there is the collateral cost of a GM bankruptcy. Well over a million workers will be dumped on Medicare or unemployment rolls or other forms of welfare. At what cost? Nobody knows but it is in the tens of billions, likely more than a bailout loan would cost.

Not only is it the down the line for direct cash flow vendors and workers, it is also the retail loss and tax loss in those communities where GM builds its cars or its vendors have a plant. It effects ALL 50 states.

We made money on the Chrysler loan many years ago and we can make money with GM. The new contracts with UAW phase in in 2010. We should be getting out of the recession about then. If we get warrants for the loan, we can cash in and make money.

I could write for days on the subject, digging down to a host of other issues such as Cafe Standards, economy standards, safety standards, emission standards, and all of the other regulations which inhibit manufacturing here in the US, some for our benefit and some that are just plain silly.

I have delved into other sides of this issue in other threads, which you apparently haven't read, Kim. The problem as I see it is that nobody really knows what will happen in the event of a GM bankruptcy because of the variable of what Judges and Lawyers will decide to do. And frankly, I don't trust lawyers and judges to run the car business.

GM got here through legacy UAW contracts that date back for decades and decades into the fifties. Current GM and Ford management has been successful in rolling some of it back with more to come.

Oh heck, one more thing. GM and Ford and Chrysler assemble world class product. On an international basis, GM and Ford are profitable.

It is here in the US where the problem is. And that and the inability to ship to some countries because of artificial trade barriers our political class has never had the guts to confront - mostly because of Lobbyists.

The problem at GM (and Ford soon) isn't that their management doesn't know how to run a car company, it is because of our political animals in Congress and regulatory bodies who screw with things about which they know very little - and lobbyists who work to satisfy single issue groups who are just as ignorant.

I agree, Kim, and I have be... (Below threshold)
drjohn:

I agree, Kim, and I have been posting this anywhere I can make a comment, and have sent emails to my Senators and Congressman.

The BEST chance Detroit has to survive is Chapter 11.

I will not listen to Wagoner, especially after his getting a 40% raise this year.

No one has explained how a handout will make any difference with Detroit. No one has explained how it will solve anything. No one makes clear that this does anything other than postpone the inevitable.

GM got here through lega... (Below threshold)
drjohn:

GM got here through legacy UAW contracts that date back for decades and decades into the fifties. Current GM and Ford management has been successful in rolling some of it back with more to come.

That's correct.

It is arrogance. It is hubris.

Don't ask me to pay for their promises.

My IRA portfolio took a major hit this fall. Who's bailing ME out?

BTW- can anyone tell me whe... (Below threshold)
drjohn:

BTW- can anyone tell me where the $290 billion spent on the bailout thus far has gone?

Exactly?

Thanks!

If we have to write a check... (Below threshold)

If we have to write a check let's cut out the middle-men (Ford, GM, Chrysler). Write the check to $25 billion check to the UAW and tell the car companies to pound sand.

There used to be an old say... (Below threshold)

There used to be an old saying that "so goes GM, so goes the nation". And it might be true as the collapse of GM could further self-destruct the American economy pulling down too many unrelated jobs and create an enormous social and economic problem difficult to address as well as potential military defense problem for the nation. But GM needs to change and fast somehow.

I've always been a huge critic of GM CEO Rick Wagoner, who made one of first duties as GM head raising his own salary by millions of dollars a year, and who has only allowed GM to get into this deep of mess. As CEO, Wagoner should have known how to make money and profits for both the company and the shareholders.

This all reminds me of the old joke: How do you make a millionaire? Well, you take a billionaire and put him in business. Or the wisdom of Benjamin Franklin who warned that "The first mistake of public business is going into it".

Im not sure who I trust les... (Below threshold)
GianiD:

Im not sure who I trust less, Big 3 management, union leaders, or bankruptcy judges.

NO way no how should we give big 3 any $$. For what we give them, we could buy all 3 of them.

Wow, the auto industry only... (Below threshold)
WildWillie:

Wow, the auto industry only supplies 19% of our auto's but we cannot let them reorganize because our economy will collapse? I say Chapter 11. Reorganize. Put a real business plan on the table, then talk money. ww

im against the bailout... b... (Below threshold)
peabody3000:

im against the bailout... but then again im fine with the whole economy taking a big crash now rather than a gargantuan one later. we cant keep propping the piano up with a broomstick

It's a given that the (used... (Below threshold)

It's a given that the (used to be) Big 3 can't maintain the status quo much longer and the battle is over who pays/suffers. Will it be the unions, retirees, other workers, suppliers, dealers or, as Congress wants, the taxpayers?

Ordinarily, I would let them go bankrupt, but now isn't the time to stand on hard principle. So I would agree (as outlined here) to use taxpayer money, not as a bailout but as the funds to dramatically restructure the three companies... big cuts to pay scales and worker counts, eliminating brands, cutting down the number of dealers, paring payments to retirees, substituting gas guzzler taxes for CAFE requirements, closing factories(and donating the facilities to local governments to use as they wish), and eliminating marketing and financing programs that boost volume but end costing money.

No bailout.let the... (Below threshold)
retired miilitary:

No bailout.

let them go bankrupt and reorganize.

If most of us cant pay my debts we cant look to the govt for a hand out. After a while of that we would have to go bankrupt. At least not yet. WIth Obama in power maybe I can just stop working and collect checks from the govt like others do.

What the government should ... (Below threshold)
sanssoucy:

What the government should do is require that GM meet every requirement of chapter 11 bankruptcy, but guarantee a treasury loan if DIP financing cannot be found ... but without *calling* it bankruptcy.

GM is probably right that nobody on earth is going to buy a $30,000 car from a bankrupt automaker. So the solution is for them to go through the entire bankruptcy process under another name, say, "The Automaker Total Continuity Without Bankruptcy Act of 2009."


GM is probably right tha... (Below threshold)
drjohn:

GM is probably right that nobody on earth is going to buy a $30,000 car from a bankrupt automaker.

Nonsense.

I flew on "bankrupt" air carriers, and often.

drjohn: you really think th... (Below threshold)

drjohn: you really think that buying an airline ticket from a bankrupt carrier is the same as buying a car from a bankrupt manufacturer?

Not exactly the same, no. B... (Below threshold)
drjohn:

Not exactly the same, no. But I have seen people get stranded by both.

I simply do not feel that I need to make good on GM's promises, nor do I feel that I owe them a living.

If you're business for youself, you live and die by your decisions. No one is going to give a damn about you. The UAW is not going to bail you out.

The unions and their worker... (Below threshold)
epador:

The unions and their workers are only part of the program, management shares the blame. The question is will we enable this kind of behavior or allow the consequences to occur? One way perpetuates the problem. The other MAY offer a chance for the offenders to learn different behaviors (or perish).

how can we get them to ba... (Below threshold)
mf:

how can we get them to back out the bailout?
totally dont agree with that and I dont want them messing with my 401K either.
seems like they are punishing the people doing things the right way.

Write the check to $25 b... (Below threshold)
drjohn:

Write the check to $25 billion check to the UAW and tell the car companies to pound sand.

Why the UAW?

Do you know what's being paid in legacy benefits now? Do you know how much of the sale of each car goes to benefits?

That's a big part of the mess they're in.

I find it really hard to be... (Below threshold)
LaMedusa:

I find it really hard to believe that bailing out credit card companies will benefit the American consumer. These guys charge 20-30% to the consumer with any piddly excuse they can come up with. Regardless, that is where the money is going:
Text of Paulson remarks on TARP

These are the key words in this text:

Current State of Global Financial System

"We also acted quickly and in coordination with colleagues around the world to stabilize the global financial system. Going into the Annual IMF/World Bank meetings in early October, I made clear that we would use the financial rescue package granted by Congress to purchase equity directly from financial institutions - the fastest and most productive means of using our new authorities to stabilize our financial system."

http://www.marketwatch.com/News/Story/text-paulson-remarks-tarp/story.aspx?guid={DD8C97EA-2B69-4AE3-82C1-01D0FD83536C}

The last part, "using new a... (Below threshold)
LaMedusa:

The last part, "using new authorities" is a major red flag.

I was born and raised in De... (Below threshold)
pvaughan:

I was born and raised in Detroit beginning in 1966. While I was growing up the unions were always on strike or threatening to strike. First they would pressure Ford, then GM, then Chrysler and then they'd start back on Ford. And if one union would strike, other unions would go on strike too in support. It was always about the employee getting more of this or that. It was nauseating.

Forty years later and living in southern California I had to live through the grocery store labor unions striking while our town burned as a result of wild fires. The teamsters went on strike in support of the grocery store labor unions so no deliveries were made to the stores. Imagine having your home burned down and living in a hotel while you tried to straighten out your life only to find that you can't even get a loaf of bread or milk. Nice people, huh. I've seen it all before. Fuck them all.

A shelf stocker is not a career. A cashier is not a career. Since when is it necessary for a cashier to make $30/hr, plus health and 401k. No degree, no skill set, no thought other than looking up a produce number. If it were anything else then what accounts for the self checkout stands. How is it one can go up to the machine, scan their products and pay all without the rigorous training that cashiers obviously must have to go through. Maybe if one uses self checkout then one should be afforded the same benefits as are given to the cashiers. That's how we can do it! Self checkout at all grocery stores and the grocery company will cover your medical insurance. Send that to Congress.

Unskilled labor should be paid at an unskilled wage. It should not be paid equal to a position that requires a degree, analytical thought and years of experience.

Unions have been killing corporations for years and years and years. Unions ignorantly, perpetuate their own demise through self inflicting detrimental actions. Soon they will be a thing of the past. We have enough laws with regard to labor regulations.

Sometimes you have to kill the host. And so goes GM. The new tit is government

My bailout plan is simple> ... (Below threshold)
RicardoVerde:

My bailout plan is simple> The US Treasury purchases all shares of GM, Ford, and Chrysler. The treasury then GIVES the shares to the UAW sections for each company. Sink or swim, it's up to them.

To hear everyone talk you t... (Below threshold)
jpm100:

To hear everyone talk you think GM was only made of UAW workers and top executives.

If the Big 3 were so mismanaged, why didn't a 4th domestic automaker arise during this time to kick their asses?

And I'm amazed anyone believe that bankruptcy will solve GM's capital problem. Very long-term it might. But short-term restructuring eats capital like candy. Where is that suppose to come from?

JPM100-A 4th domes... (Below threshold)

JPM100-

A 4th domestic automaker? Well, that would have been a bit problematic, since they had a lock on the market. Various foriegn makers tried to import cars, and failed - Renault, Fiat, and others - they needed deep pockets to make it in the US and the product quality just wasn't there.

Then Saturn looked to be a way GM was going to shake things up - but they got pulled back into the collective. So much for a new way of making cars... the early ones were good, with styling that still looks good 15+ years later. Then the stylists went for 'efficiency', and the vehicle had all the head-turning ability of a half-used bar of soap. They weren't anything special any more.

Now look at how the MAJOR foriegn makers have gotten into the market. Toyota, Honda, Kia - good cars at a reasonable price, with high-end features standard that you'd have to pay the Big 3 thousands extra for. AND they're making cars here in the US. No wonder they're kicking the Big 3 to the curb.

Last time I was looking for a car, about six years ago, I tried Chevy and Chrysler - didn't find anything there with the features I wanted at a price I was willing to pay. Ford? A guy at work was buying a new Ford PU about every 18 months/2years, and either he consistently got a string of lemons or they just didn't last. He wasn't doing anything other than occasional light hauling and daily commuting, so Ford wasn't an option.

Subaru? Mazda? Didn't like the styling. Honda? Found a CR-V, and it felt right with the features I wanted at a price I was willing to pay - and that's what I ended up with. A Ford model similar to the CR-V had a baseline price roughly equivalent, but by the time you added in the extras the Honda had, you were looking at a LOT more. (And it was a Ford to start out with... that didn't help.)

I won't buy a car just because it's 'made in America' - unfortunately, that's become almost as bad a recommendation as 'Made in Japan' was in the '50s and '60s. I want value for my dollar - and cars cost enough that I want a LOT of value!

Sorry but this is just anot... (Below threshold)
ODA315:

Sorry but this is just another "we need to throw money at this now or the sky will fall" proposition (remember how well the last one worked?)

In America a corporation has the tools of last resort when it fails, the bankruptcy laws. These are not always used to shut the doors and sell all the stuff as is a popular misconception.Chapter 11 is specifically designed to allow an organization to restructure it's debt, assets, and operations in the hope of regaining business success while creditors are held at bay, all under the direction of a bankruptcy court.

I've personally been involved with two of these (both antiquated companies in smokestack industries) as a senior corp. executive. In each case we exited chptr 11 stronger and more efficient than when we entered. It wasn't fun, easy, or galmorous. It was UGLY. Layoffs, reorganization of resources and operations, selling portions of businesses, loss of pensions, loss of benefits, reductions in pay. I could continue but you get the picture.

But the end result was WE SURVIVED. Not only were management's eyes opened to the changes demanded but also labor, our suppliers, and even our customers. The companies today are robust with good operating margins, profitability, and significant cash reserves.

I guess this is too tough a journey for the BIG 3. They "just need a loan". Bullshit. At company "A" we deluded ourselves for several years thinking we just needed a little more cash to get thru so we acquired loans, junk bonds, and other "fixes" until the weight of these and our own failures crushed us.

Now Obama, BIG 3 execs, and other "leaders" attempt to scare us with visions of BIG 3 "going out of business (like they were Mr. Johnson's corner drug store that just shut his doors one day). They MUST go into chapter 11 if they can't make it. Otherwise the true market value "floor" of their operations, assets, and labor will remain artificially inflated adding increased volatility to the market. Of course no significant (and I mean SIGNIFICANT) examination of their operations, financials, and labor contracts will occur unless driven by a bankruptcy court. True change and the road back to survival and on to prosperity can't occur until this happens. Proven fact.

Rick Wagoner, Alan Mulally, and the UAW leadership have litle desire to do this hard work. I can tell you it's easier to beg for more. Oh btw, compensation structures, bonuses, hourly employee "rubber" rooms, all which are wonderful for the current folks would go "poof". Maybe their hoping the charade just continues long enough for them to get their stuff before the "poof" occurs.

And btw Obama, Nancy, and Harry, if you REALLY want to help America, and not just your UAW constituents, quit the scare tactics and just say no.

The Big 3 got themselves in... (Below threshold)
B. Stehle:

The Big 3 got themselves into this....and the other half of the problem is the UAW. Plain and simple. If you don't believe that, you're in deep denial.

GM still has eight... (Below threshold)
GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn,
Except for Saturn, every time GM tries to restrict certain types of cars to certain brand names they get a class action suit filed against them by the dealerships. The dealership franchises are a big a problem for GM and the big three as the unions have been. Saturn is different as the dealerships are GM owned (at least partially) and follow more the Toyota model.

GM could use some of the benefits of bankruptcy as far as the unions and dealerships are concerned, but the negative connotations not so much.

Much of the bad management is in the past, but they are strapped with a lot of baggage from those days.

ODA315I am not as ... (Below threshold)
Larry:

ODA315

I am not as worried about GM as I am the downstream suppliers - you know how manufacturing works.

So how do they get protected in some way during bankruptcy?

The reason I ask is that many, if not most operate at margin now and cannot afford for accounts payable to go poof.

"I know many people will be... (Below threshold)
markm:

"I know many people will be upset if GM goes bankrupt, but it's what needs to happen. GM has many, many issues that are slowly destroying it, but one of the biggest problems is that the unions have a strangle hold on the company and are sucking the carcass dry."

A few things. The Union contracts have already been redone and will take effect next year so that the labor costs for an Amercian car will be on par with their Japanese counterparts...if they make it that long.

Also, in normal times I agree that they should file chapter 11 and restructure. But in order to do that you need mounds of cash and currently that isn't available like it was when the airlines reorganized so i'm not sure that filing is a real option.

Finally, I truly don't think people realize how far the tenticles of the big three reach. The amount of people that would feel the pinch should one or all go under would be staggering and I am not talking about suppliers, dealers, etc. It goes far beyong that.




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