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.

First Generation Taurus 1986-1991

4th Generation Taurus 2000-2007 model

  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 Packard, AMC 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

White House raises the CAFE Standards....

I believe that this is political pandering to his base.  I used to build cars and the automakers shave ounces everywhere they can to lighten the cars.  Computers have helped with engine management and fuel economy.  The free market tells the automakers that they need to build more fuel efficient vehicles and the automakers respond because they want to stay in business...unless they are government motors.  Now they have this artificial standard that they have to meet.  It will force them to cut weight along with the composites that are being used.  People wonder why cars cost more and more.    The cars will also become more dangerous because in a collision the lesser weight becomes a liability.

New Rule Raises Costs

White House’s fuel rules will raise car costs by $2,000

 

AP Images

BY: CJ Ciaramella
August 28, 2012 1:40 pm
The White House finalized its new fuel efficiency standards Tuesday. The new standards are designed to double the miles-per-gallon of consumer vehicles by 2025, and will raise the average cost of a car by $2,000.
The Obama administration’s finalized Corporate Average Fuel Economy (CAFE) fuel standards rule will require cars and light trucks to achieve fuel efficiency of 54.5 mpg by model year 2025. The standards will also cost up to an estimated $157 billion and add $2,000 to the price of passenger automobiles, according to two federal agencies.
“These fuel standards represent the single most important step we’ve ever taken to reduce our dependence on foreign oil,” President Obama said in a statement Tuesday. This reduction comes with a cost, however.
Republicans have panned the rule changes. Rep. Darrell Issa (R., Calif.), who chairs the House Oversight Committee, has questioned whether the rules were rushed and could jeopardize safety by reducing the weight of cars.
“The rule finalized today by the Obama Administration will hurt American consumers by forcing them to drive more expensive and less safe automobiles,” Issa said in a statement. “The Administration drafted these standards in secret, strong-arming automakers and short-circuiting the deliberative regulatory process to achieve a purely political result, abandoning sound science and objectivity to appease its political allies in the extreme environmentalist lobby. I support the goal of higher fuel efficiency, but this rule will only add to the burdens American small businesses and middle class families face under the heavy hand of the Obama Administration.”
In an analysis of the rule posted on their websites last summer, the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA) predicted the administration’s new CAFE standards would add an average of $2,000 to the price of each new passenger vehicle sold by 2025. The NHTSA attributed the increased costs to the price of developing new fuel-saving technology.
However, the highway agency predicted the costs of the new standards will be offset by benefits of $419 billion to $515 billion. The Obama administration also claims the rules will save consumers $8,000 in reduced gas costs over the lifetime of a vehicle by 2025, ultimately reduce oil consumption by 2 million barrels a day, and reduce carbon emissions by six billion metric tons over the course of the program.
The rules were first drafted in July 2011 with the cooperation of 13 major auto manufacturers, and will go into effect in 2017

The lesson of the Auto bailout.

I have stated many times and it says on my profile that I am a former Ford Motor company employee so I have an interest in the industry.  I accepted the buyout when Ford closed my Taurus plant here in Atlanta.  I don't hate Ford Motor for what happened, Ford was in trouble and was trying to turn around.  I got a generous severance package and I am still a vested employee which means that  I will get a pension(small one) when I retire.  Ford mortgaged themselves to the hilt to finance their turn around.  It was basically " go for broke" either change or become a footnote in history. Ford unlike GM and Chrysler refused the government buyout.   Ford was successful, they have profitable cars and trucks and are doing well and is respected in automotive circles.  GM and Chrysler far less so.  GM is accused of "cooking the books"  or flooding the lines and dealership lots with cars that they cannot sell.  This is a repeat of the notorious "Car bank" that Chrysler was best known for in the late 70's, a car bank is the number of cars that are over 90 days old that are sitting around with no buyer.  This is bad business practice that inflate the numbers in the short term (like elections) but like cholesterol will clog up the arteries.  There is a lawsuit in new york on this issue.   I still own stock in Ford and I am glad that I do.  I still drive Fords and will continue to do so.

What do companies get when they act responsibly? Government-subsidized competition. On July 5 in the swing state of Ohio, President Obama treated voters to his campaign-2012 synopsis of the 2009 auto industry bailout: "When the American auto industry was on the brink of collapse and more than one million jobs were on the line, Governor Romney said we should just let Detroit go bankrupt." His message was clear: The Obama administration’s 2009 decision to bail out the auto industry allegedly saved it from the fate it would have suffered had Romney’s approach—bankruptcy—won the day. The map below, adapted from the Ohio affiliate of the U.S. Census Bureau, shows automobile assembly plants in the Midwest and South, and helps to illustrate the “industry” in question. Red indicates companies rescued by the bailout; green indicates companies that didn’t participate in the bailout. Also in his speech, Obama noted that top-down economics doesn’t work, and that risk-taking, hard work, and taking responsibility should be rewarded. The irony in that was easy to miss: The bailout was the government version of top-down economics, and the companies that had responsibly prepared themselves for surviving a downturn were not rewarded, they were penalized. Although the campaign rhetoric may be effective with some of Ohio’s voters, anyone familiar with more than just the headlines of the 2009 auto bailout would know that it doesn’t stand up to scrutiny, for several reasons: • The choice in 2008-2009 was not bankruptcy versus no bankruptcy; instead, the choice was between precedent-driven bankruptcy and White House-driven bankruptcy—rule-of-law versus rule-of-czar. • The taxpayer bailout was not applied to the “American auto industry”—instead, it was applied only to the two failed companies, GM and Chrysler, bypassing companies that had been sufficiently prepared for the downturn, including Ford, Honda of America, Toyota, Nissan, BMW, and others. • Orderly, rule-of-law bankruptcy might have led to continuing operations under restructuring for GM or Chrysler, in which case many auto-making jobs would have remained in Michigan. • Alternatively, orderly bankruptcy might have led to a shutdown of GM or Chrysler and an open auction of assets—probably to surviving companies—in which case car buyers would have shifted to surviving companies’ products and auto-making jobs would have migrated to those same survivors. (When a grocery store closes, its customers don’t stop shopping, they take their business elsewhere; car buyers behave in the same way.) • The notion that the White House should intervene with a specially designed bankruptcy process, thereby sidestepping rule-of-law bankruptcy, originated in the Bush White House in 2008, not in the Obama White House in 2009. A more honest name for the program would therefore be the “Bush-Obama Bankruptcy/Bailout” for Detroit’s two failed auto companies. • Ironically, top-down economics was the de facto remedy applied to “save” GM and Chrysler—but in this case “top-down” was the government-knows-best notion that political wisdom, trickling down to displace a century of evolved bankruptcy case law, was supposedly a superior alternative for the two failed companies. Top-down economics, the politicians’ version of  “intelligent design,” directly rewarded GM and Chrysler with special-interest life support—instead of indirectly rewarding their surviving competitors with new customers and the necessary additional workers. • For the record, the only thing that “saves” any company, not just auto companies, is a sufficient number of buying customers—not the government, not union bosses, and not incompetent management. It’s a truth that all but two of the American-based auto companies understood sufficiently to withstand the 2008 downturn without help from the taxpayers. As of the 2008-2009 crisis, American workers in companies such as Ford, Honda of America, and Toyota had won the marketplace battle against GM and Chrysler for survival during hard times. They had planned successfully for a “rainy day,” proving their competiveness in the auto market. Unfortunately, however, they couldn't compete against the politicians in power, the rule-of-czar bankruptcy process, or intelligent design economics. When government wisdom, not consumer choice, decided which companies deserved to be kept alive and which types of cars consumers should decide to buy, it was the two failed companies that were rewarded; perversely, hard work and acting responsibly was not. What the responsible companies got was government-subsidized competition. A more intellectually honest synopsis for Ohio’s voters would be something like the following: When GM and Chrysler failed, Governor Romney’s approach would have been a rule-of-law bankruptcy process, followed by consumer-driven selection of the pecking order for American-based car companies. Instead, both the Bush and Obama administrations favored White House-directed bankruptcy, followed by life support for the two failed companies.  That begs a question: How many jobs in Ohio and elsewhere would the car-buying public have awarded to the responsible companies if Romney’s preferred approach had been the policy? Unfortunately, we'll never know. The unemployed who would have had new auto-making jobs don't even know who they are and therefore have zero political clout. That's a fatal disadvantage against the politically connected crony capitalists and union bosses who are skilled at employing intelligent design economics to protect themselves. It’s also standing in the way of a new Golden Era for the U.S. economy; in the July 6 Wall Street Journal, Michael S. Malone summarized the problem in his article, “The Sources of the Next American Boom”: Getting there won't be easy, as we are currently governed by leaders who want to manage our complex and dynamic economy from the top down, to tame entrepreneurs with regulation, to tax the productive and, ultimately, to pick the next generation of winners. That's never worked well and it isn't working today. Not only will we never know the number of auto-industry jobs that would have migrated to Ohio and the Sun Belt, we’ll never know the answer to a final hypothetical question: Instead of spending taxpayers’ money to bail out two irresponsible car companies, might it have been better to invest it in a useful infrastructure project such as wider highways leading away from failed companies and towards the more responsible ones in Ohio and points south? We shouldn’t expect an answer to that question anytime soon, let alone during campaign season. Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is www.optimist123.com.