The proposed automaker bailout will be a huge topic this week. Here’s veteran journalist Jerry Remmer’s take on the issue. Guest Voice posts do not necessarily reflect the opinion of TMV or its writers.
The Automaker Bailout Battle
by Jerry Remmers
The Case For Bailout: Led by General Motors Corp., U.S. automakers this weekend are lobbying Congress and the Obama transition team for more cash infusion to keep their industry from filing bankruptcy. The Senate as early as Monday will deliberate the $25 billion rescue proposal. Congress authorized an initial $25 billion last September but the funds have yet to be dispersed. The latest cash infusion proposal would come from the $700 billion Troubled Asset Relief Program (TARP) Congress approved in October for the financial sector.
Most Republicans and President Bush oppose the additional funds on grounds the requirements would force the Big Three automakers to retool for more efficient gasoline mileage and development of hybrid vehicles. Without the bailout, GM, Ford and Chrysler could go bankrupt which they say would unleash unintended consequences that could cripple the country’s industrial base.
A bailout would be a boon both to the companies and, by saving jobs, to organized labor, a major supporter of Obama in the election. Auto-related industries employ 3.1 million people around the country, encompassing everything from car-seat makers to auto dealers to auto-parts stores. GM itself employs 123,000 in North America and does business with thousands of North America suppliers.
Bankruptcy also would threaten the health of the government’s pension-benefit insurance arm, which covers millions of workers not in the auto industry. According to an analysis in Saturday’s Wall Street Journal: “A GM bankruptcy could create a cascading set of bankruptcies among these part suppliers, other automakers and suppliers. That’s because a bankrupt company could take months, if ever, to pay its pre-bankruptcy bills. Such delays would put stress on suppliers that already run on thin working capital and that feed just a few end automakers. …
In all, as many as 5,000 parts suppliers dot North America, with combined annual sales around $150 billion to $200 billion. …The parts business has three times as many workers as the automakers. There were approximately 489,500 auto-parts production workers at the end of last year, a figure which fell to 415,700 at the end of September, according to the Department of Labor. There were approximately 151,000 auto-assembly workers in the U.S. at the start of 2008, a number that slid to 127,300 at the end of September.”
In addition, the WSJ article says, one of the biggest fears in Washington is how a bankruptcy filing by one or all of the automakers would affect the federal agency that insures the retirement savings of almost 44 million Americans. The Pension Benefit Guaranty Corp. ended 2007 with a $14 billion deficit.
Finally, there’s the union-negotiated health care costs for current and retired employees burdening Detroit’s Big Three. It reminds us of a famous quote from Lee Iococa, the former CEO at Ford and Chrysler, who complained the auto industry was in the health care industry rather than the manufacturers of cars and trucks.
What Bankruptcy Can Mean: While GM lobbyists paint an Armageddon picture, bankruptcy can reorganize by cleaning out the top executives and board of directors and develop a more profitable and competitive culture.
The WSJ authors quote New York University business professor Edward Altman, a long-time analyst of corporate bankruptcies, saying the federal government should only put money into GM through a pre-planned bankruptcy process that knocks out GM shareholders, rolls bondholders into equity and renegotiates union labor contracts. “I do not think putting more money into the failed business strategy there makes sense,” said Altman. “The government should help, but it should use bankruptcy as part of the more-efficient process that also limits exposure to taxpayers.”
Such an approach, says Altman, would also avoid risk to the broader industry, because GM could use the process to keep paying its most critical vendors.
Tough Call: So there you have it. Not a sexy subject but one with dire consequences. Congress is like the guilty guy whose options are death by firing squad or miracle pill that may or may not prolong his life. Either way, the immediate impact won’t be known until midway into 2009.
Is the impending failure of U.S. automakers so catastrophic the government must help as it did the financial sector? Like we observed yesterday, if so, where do you draw the line? American Express? FedEx? What about the cities of Philadelphia and Detroit on the verge of bankruptcies? Do you tell them, as President Ford told New York City, drop dead?
Jerry K. Remmers has a diversified career in the newspaper field, as a landscape contractor and freelance writer. Ne worked for five newspapers over a 26-year span, the last 23 with the San Diego Evening Tribune as reporter, assistant city editor, politics editor and county editor.
This Guest Voice is cross-posted on his blog The Remmers Report.
Cartoon by David Fitzsimmons, The Arizona Star
Joe Gandelman is a former fulltime journalist who freelanced in India, Spain, Bangladesh and Cypress writing for publications such as the Christian Science Monitor and Newsweek. He also did radio reports from Madrid for NPR’s All Things Considered. He has worked on two U.S. newspapers and quit the news biz in 1990 to go into entertainment. He also has written for The Week and several online publications, did a column for Cagle Cartoons Syndicate and has appeared on CNN.