Auto bankruptcy: Just Say No

Posted by: David Welch on December 4, 2008

This morning, Brookings Institute economist Robert W. Crandall was on Bloomberg Radio flogging the idea of a prepackaged bankruptcy for Detroit’s carmakers. It’s the best solution, he argued, because the car companies could negotiate cuts with their lenders, unions, suppliers and dealers before going to court and then the judge will quickly pound his gavel and all will be well. About 450,000 retirees and workers will accept smaller healthcare benefits and pensions, GM can kill brands without buying off dealers and rewrite the union contract. The government will provide the debtor-in-possession financing to keep, say, General Motors afloat while the courts work it all out. It’s done. It’s a snap.

If only it were so simple. It’s not. Actually, it’s a terrible idea. One survey says four in five consumers won’t buy a car from a bankrupt company. That’s why GM says its sales would drop even faster than they are now while it’s in bankruptcy court. Plus, the bargain hunters who might buy a GM car would want a discount, right? If GM is right and their sales drop by 2.5 million vehicles and rebates climb another $4,000 a car, the company would need another $11 billion in addition to the $12 billion they already say they need. That’s $23 billion in DIP financing that the government has to come up with. And that’s just for GM.

I know what the skeptics are thinking. The notion that consumers will shun the cars of a bankrupt carmaker is unproven. True. But what those bleating for a GM bankruptcy are calling for is the government to lend—instead of $12 billion to $18 billion—maybe $23 billion to $29 billion. And they are willing to do it without knowing if buyers will come back to GM brands after the public beating that the company will take in the press for ending up in bankruptcy. GM can’t prove buyers won’t be there. But the bankruptcy hawks can’t prove they will. Since they have no skin the game, they don’t care either. What I mean is, they’re willing to risk bankruptcy on a hunch, but not a bridge loan.

Mr. Crandall and the proponents of bankruptcy must come from the Wall Street firms and banks that are in trouble right now. Remember, they got into this mess by racking up more debt and using that cash to make riskier loans and investments. That’s the same principle as bankrupting GM. The government-sponsored prepackaged bankruptcy says that we will possibly loan out more taxpayer dollars than the companies want in a bridge loan. And we will give it to a company that might lose customers, and hence revenue, in droves. GM’s biggest problem is retaining customers. Bankruptcy makes that harder, or at the least risks doing so. Talk about putting tax dollars at risk.

So we want a plan that gambles taxpayer money that shoppers lied in the survey and will keep buying GM cars after all. Is that right? Yeah, that will work. And when it doesn’t and the manufacturing sector of the U.S. economic takes a massive blow, we can then rely on the brilliance and strength of the financial sector to make up for the loss of jobs and value creation. How’s that working out for us right now?

Reader Comments

Paul (Vw)

December 4, 2008 1:39 PM

>>> One survey says four in five consumers won’t buy a car from a bankrupt company.

Maybe we should have a poll of those who will refuse to buy a Detroit car if our tax dollars are used to bail them out. Up until recently I've been considering buying domestic again (if I can find something with a manual transmission)...but this bailout would kill that idea for me...forever.

Absent the kind of restructuring that bankruptcy would allow (such as cleaning up the UAW contracts), I don't see the point in wasting the better part of $100 billion (as has been stated into today's hearing) on 3 companies who's market cap is worth almost nothing.

I also find it troubling that a prime beneficiary of this bailout (the UAW) is also a major contributor to election cycles. Maybe we should take a close look at the "UAW VOLUNTARY COMMUNITY ACTION PROGRAM".

Dave

December 4, 2008 2:19 PM

It's been mentioned before, but does not get much attention--the airline industry has been dealing with bankruptcies for the last decade or more. Did people stop flying on those airlines? No. Did the industry contract and reduce capacity to meet with the reduced demand? Yes. Were the unions able to agree to reductions in pay and benefits? Yes, and they are continuing to do so. I don't see why Detroit should be treated differently.

Dan Hampton

December 4, 2008 10:56 PM

"Mr. Crandall and the proponents of bankruptcy must come from the Wall Street firms and banks that are in trouble right now. Remember, they got into this mess by racking up more debt and using that cash to make riskier loans and investments".

Blaming GM's problem on the banking crisis is a non sequitur. The Big Three's problem have been culminating in disaster for the past twenty five years. Their legacy costs, coupled with a $30 p/hr cost disadvantage, has put them on an unavoidable collision course that would have happened, in any event.

A little history is in order. In 1962 GM had 52% of the U.S. market, with Chevrolet comprising 25%. Today, that number is south of 21% (job banks included). Now....tell me that there current problems are but a one time crisis because of the failings of Wall Street. Does the concept, "secular trend" mean anything to you?

Chuckles

December 5, 2008 1:00 AM

Most likely the Big3 will spend our American tax dollars to expand manufacturing in other cheap labor countries - just what they have been doing for years - exporting jobs instead of cars - now they want USA taxpayers to give them mega bucks to keep the mega salaries and wasteful spending going, going and going - if the Big3 can't match the financials of the well run foreign brands (on our shores) why should taxpayers keep throwing bucks at them? - by the way - has anyone asked the American consumer if they are going to buy a new car in 2009? - it seems that this data should be determined by independent research rather than wishful thinking by Big3 execs - with current sales tanking to 50% of 2007 there is NO WAY any of the Big3 can turn a profit in the next few years, if ever - this is a taxpayer money pit that will never go away - bankruptcy will sort it out which could result in the emergence a new Big3 (or Big2) that can compete in a global marketplace - have we heard if Mexico and Canada are "chipping in" on this since they have benefitted from current Big3 operations? -

paul is a moron

December 5, 2008 4:08 AM

Paul and Dave why don't you take your jap cars and go live there. Dummies, the GOVERNMENT headed by the idiot BUsh caused the credit mess,not Detroit . If you read anything ,you would see Jap and German cars sales are even in worse shape sales wise than American . Dave,where will this financing come from in bankruptcy? And airlines don't have parts industries of millions of people either do they .

Simran Wadhwa, SG Analytics (Serving the global community)

December 5, 2008 7:05 AM

Detroit’s big three automakers who have come second time for a government bailout are definitely going to require more than the $35 billion they are currently pleading for. The impact of the embarrassment they faced last time can be clearly seen in their agreement to cut down their salaries to $1 a year if the federal loan is approved. GM which is currently in desperate need of $4 bn will surely run out this emergency fund also in a blink. Merger of two firms sounds far better!

Common Sense

December 5, 2008 7:20 PM

It makes me extremely upset and angry when I start thinking what mismanagement and bad bets Citi Bank have done when they needed $300 billion with almost no supervision how they are going to spend them!!?? $300 billion. I will repeat one more time, $300 billion. + $150 billion for AIG + other thief that should be in jail how for making millions of American families living life worst then in third world countries.

Why they are not lending that money back to tax payers, small business? Are they sending our money outside of country?

Why we don't have $450 billion to stop foreclosures and get the economy out of this pit and we have $450 to donate to Citi and AIG? Why they are so much important then American people?

What our president is doing letting car makers going of the cliff in situation when is very difficult to sale any car even for Honda and Toyota?

Every lost job in one of Big Three's will consequently lead to loosing 10 more jobs all around the country.

I wonder are those people who are making decisions really believe in what they are saying? and are they saying truth.

Jessica

December 6, 2008 12:47 AM

Your article is ridiculously one sided. Moreover, bankruptcy is the only way to go.

Darin

December 8, 2008 7:43 PM

Anyone that is so far out of touch they still use the debunked, misleading, $75.00 p/hr figure for UAW wages and compensation is automatically disqualified from further comments! Please educate yourself.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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