The Constitution was made to guard the people against the dangers of good intentions." --American Statesman Daniel Webster (1782-1852)

Tuesday, September 11, 2012

GM Bankruptcy...? Facts and Fiction, Past and Future

As those that have read my bio know that I am a former autoworker.. Ford shuttered the Atlanta Assembly back in 2006 in their restructuring bid.  Some facts about the Ford restructuring that is not apparent with the GM model.  Ford mortgaged its own restructuring, it borrowed against everything it had, sold off unprofitable side ventures(Volvo,Aston Martin,Jaguar because it detracted from the core business which was building cars for the blue collar(Lincoln handles the white collar folks).  Ford had veered away from its core business in the 90's when the SUV craze hit America and leading the pack was the Ford Explorer
    The trends started changing after the turn of the new decade and Ford didn't. they focused on SUV's and trucks, Ford Motor company cars got the short end of the development stick.  The Ford Taurus was considered by many the emblematic problem of Ford Motor Company, from being a cutting edge vehicle to being relegated to rental status at the end of its initial run in 2006 as an automotive fall from grace that was unprecedented.
  The other vehicles with the exception of the Ford Mustang was equally lackluster.  Ford realized that there was a big problem and they need to find a formula that worked or they will fade away like the other names in automotive history like PackardAMC and Studebaker.   Ford knew that they needed somebody that was respected in the business world to show that Ford was serious about rebuilding itself.  They wooed the CEO of Boeing (BCA) to lead the way.  Alan Mulally was brought in and Ford went through a frantic period where they sold off excess ventures and borrowed heavily against its own assets to restructure.  They didn't get a government bailout like GM and Chrysler.   Ford did it themselves..they rolled the dice and went for broke...literally.  If they failed in this, Ford would fade away  like the other Icons of the American Automotive landscape.   Ford was the only American Automotive company that refused the government bailout.   Ford engineered a comeback and totally changed their corporate culture.  That is a point of pride for me.  I still have my pension(small as it is) and I still have all my Ford stock.  Alan Mulally had the Taurus nameplate brought back...to him it was a poor business decision.    The new Ford Taurus looks a lot different than the old one.

    I do want GM to succeed but they still have all the baggage from before, from the management to the unions   Nothing has changed...the corporate culture remains the same.

The Democrats have decided to run in 2012 as the bailout party. It is an odd choice — the 2008–09 bailouts were deeply unpopular among the general public, and even their backers were notably conflicted about the precedent being set and the ensuing moral hazard. But Democrats have nonetheless made one of the most abusive episodes in the entire bailout era their economic cornerstone: the government takeover of General Motors.
The GM bailout was always an odd duck: The Troubled Asset Relief Program (TARP) was created in order to preserve liquidity in the financial markets by heading off the collapse of key financial institutions that had made catastrophically bad bets on real-estate securities — nothing at all to do with cars, really. GM’s financial arm, today known as Ally Financial, was in trouble, but GM’s fundamental problem was that its products were not profitable enough to support its work-force expenses. A single dominant factor — the United Auto Workers union’s extortionate contracts with GM — prevented the carmaker from either reducing its work-force costs or making its products more efficiently. And its hidebound management didn’t help.

Admirers of the GM bailout should bear in mind that it was the Bush administration that first decided to intervene at the firm, offering a bridge loan on the condition that it draw up a deeply revised business plan. President Obama’s unique contribution was effectively to nationalize the company, seeing to it that the federal government violated normal bankruptcy processes and legal precedent to protect the defective element at the heart of GM’s troubles: the financial interests of the UAW. It did this by strong-arming GM’s bondholders into taking haircuts in order to sweeten the pot for the UAW. The Obama administration also creatively construed tax law to relieve GM of tens of billions of dollars in obligations — at the same time that Barack Obama & Co. were caterwauling about the supposed lack of patriotism of firms that used legal means rather than political favoritism to reduce their tax bills. Mitt Romney’s proposal for a structured bankruptcy would have necessitated considerable federal involvement, too, but with a key difference: The UAW contracts would have been renegotiated, and GM’s executive suites would have been cleaned out, placing the company on a path toward innovation and self-sufficiency rather than permanent life support. Which is to say, Obama did for GM what he is doing by un-reforming welfare: creating a dependent constituency.
The Democrats cling to the ridiculous claim that the bailout of GM and its now-Italian competitor, Chrysler, saved 1.5 million U.S. jobs. This preposterous figure is based on the assumption that if GM and Chrysler had gone into normal bankruptcy proceedings, the entire enterprise of automobile manufacturing in the United States would have collapsed — not only at GM and Chrysler but at Ford and foreign transplants such as Toyota and Honda. Not only that, the Democrats’ argument goes, but practically every parts maker, supplier, warehousing agency, and services firm dedicated to the car industry would have collapsed, too. In fact, it is unlikely that even GM or Chrysler would have stopped production during bankruptcy: The assembly lines would have continued rolling, interest and debt payments would have been cut, and — here’s the problem — union contracts would have been renegotiated. Far from having saved 1.5 million jobs, it is not clear that the GM bailout saved any — only that it preserved the UAW’s unsustainable arrangement.
Bill Clinton bizarrely tried to claim that the bailout has been responsible for the addition of 250,000 jobs to the automobile industry since the nadir of the financial crisis. Auto manufacturers and dealerships have indeed added about 236,000 jobs since then, but almost none are at GM, which has added only about 4,500 workers, a number not even close to offsetting the 63,000 workers that its dealerships had to let go when the terms of the bailout unilaterally shut them down.
Ugly as the bank bailouts were, the federal government appears set to make its money back on most of them, with the exception of some smaller regional banks and CIT. Even AIG, one of the worst of the financial basket cases, is set to end up being a break-even proposition for U.S. taxpayers. But tens of billions of dollars will be lost on GM. The federal government put up more for a 60 percent interest in the firm than GM is worth today.
At their convention, Democrats swore that GM is “thriving,” but the market doesn’t think so: GM shares have lost half their value since January 2011. And while the passing of the Great Recession has meant growing sales for all automakers, GM is seriously lagging behind its competitors: Its sales are up 10 percent, a fraction of the increases at Kia, Toyota, Volkswagen, and Porsche. With its sales weak, its share price crashing, and its business model still a mess, some analysts already are predicting that GM will return to bankruptcy — but not until after the election.
The Obama administration talks up all of the “jobs” it saved at GM — but jobs doing what? Manufacturing automobiles that are not competitive without a massive government subsidy? Propping up an economically unviable enterprise just long enough to get Barack Obama reelected? As much as it will pain the hardworking men and women of GM to hear it, it is not worthwhile to save jobs at enterprises that cannot compete on their own merits. So long as the federal government is massively subsidizing the operation, a job at GM is a welfare program with a fairly robust work requirement. (And we all know how the Obama administration feels about work requirements.)
We have bankruptcy laws and bankruptcy courts for a reason. It may make sense to expedite the proceedings for very large firms such as GM in order to prevent disruptions in the supply chain that would, as Ford’s executives argued, harm other, healthier firms. But bankrupt is what GM was, and bankrupt is what GM is, a fact that will become blisteringly apparent should the government ever attempt to sell off the shares it owns in the company.
The GM bailout was a bad deal for GM’s creditors, for U.S. taxpayers, and, in the long run, for the U.S. automobile industry and our overall national competitiveness. No wonder the Democrats are campaigning on a fictionalized account of it


  1. Great and detailed post. I am very proud of Ford as well and that is why I hang on to mine.

  2. Great post, and thanks for the 'real' history! :-)