Friday, December 19, 2008

To Bail or Not to Bail: A Motor City Tale

President Bush has ok'd a $17.4 B bailout package for GM and Chrysler earlier today. Ford pulled out of the bailout for now. Pres. Bush thought that the economy is too fragile to let those two huge companies fail. He went against the Senate Republicans who were opposed to it.

Much has been said over the last few weeks about the Big 3/AWU bailout. Everything from planes, trains, and automobiles have been discussed. The emergency room doctors are doing all they can to keep the patients alive. GM, Chrysler, and Ford have all been shot in the assault on our economy. So far, Ford is in critical but stable condition. GM and Chrysler, on the other hand, are in the Intensive Care Unit. They have massive internal bleeding and are beginning to bleed out, and they are desperate for a blood transfusion.
Should we give them just the transfusion, or should we do the surgery to stop the bleeding? That is the dilemma that is facing Drs. Pelosi, Reid, and Bush right now in Washington.

To bail or not to bail? That is the question that has plagued Washington for a few months now. Who do we bailout? Where do we draw the proverbial line in the sand? The Republicans want to draw the line at the automotive giants. The Democrats don't seem to know what a line is. The $14 B bailout is needed to keep GM and Chrysler from going into chapter 11 bankruptcy. There are those "Chicken Little's" that say that Ch. 11 bankruptcy would spell doom for the Big 3 and the US economy and that people wouldn't buy cars from a company that goes into ch. 11. There are, also, some that say that the bailout would spell doom for our country by raising the national debt and taking us one step closer to bankruptcy as a nation.

Let's first look at what chapter 11 is and is not. It doesn't mean that the company is going out of business. Chapter 11 will enable the companies to reorganize its debt and renegotiate its contracts. The company will still exist.

One major argument for the bailout is people would be scared to buy from a company under going chapter 11. They are scared that, if the companies go under, there will not be anyone to fix their cars that are still under warranty. There have been some polls that seem to confirm this theory. A recent Fox poll said that 59% of people would not buy a car from a company in bankruptcy. If people really understood what chapter 11 bankruptcy really is, they would not fear buying from companies in chapter 11. Perhaps Congress should use the money that they want to give the companies to insure the warranties of the people that buy the new cars. If people weren't afraid of being left out in the cold with their warranties when one or all of the Big 3 folded, they would not be so reluctant and would be more likely to buy the cars.

Another reason some give to them a bridge loan is that there the effect on all of those people that is currently being employed getting layed off would be catastrophic to the entire US economy. They have a point with this argument. It would have a disastrous impact on the entire country, if they went down. However, under chapter 11, they wouldn't totally dissolve. They would just restructure how they operate. A few might be layed off, but not the amount of what is being floated around. Filing for ch. 11 doesn't automatically mean that the collapse of the company is inevitable. There have been other companies that filed for chapter 11 that didn't collapse. Texaco, Delta, and Continental Airlines all filed for chapter 11 bankruptcy over the years. (Continental has filed twice.) They are all still around and profitable today.

One thing that a ch. 11 bankruptcy would do is make any contracts null and void, including the contract with the United Auto Workers. I believe that is the real reason why the union and the Democrats that are in their pocket are so against filing for Chapter 11. The UAW doesn't want their contracts to be voided. They know that they got a sweetheart deal that they could not get again. They were able to get the Big 3 to start a Job Bank program, which is a program that guarantees laid off workers would still receive full pay and benefits from the company until they find another job or they find another position for them. These workers could receive funds from the program for up to two years for doing nothing. According to research done in 2005 by The Detroit News, 12,000 laid off workers from the Big 3 plus Delphi Corp. were still receiving regular paychecks and benefits for doing nothing. How could they expect the companies to be financially viable while being dragged down by all that dead weight? The four auto companies above combined spent over $4 B on this program alone.

According the Heritage Foundation's research, the Big 3 pay their employees over $70 p/ hour including current wages and future benefits like retirement pensions. About $30 of that is current cash wages, plus an additional $10 a hour on average for overtime pay. The rest, which comes to about $31 p/ hour, is for medical, dental, and life insurance and unemployment and retirement benefits. On average, all other private sector workers makes about $25 p/ hour. That is a $45 a hour difference. No company can afford that. To contrast their foreign counterparts that have factories in other parts of the country, especially the South, they pay the people just over $40 p/ hour for current and future benefits, and they are doing much better financially than Detroit.

The Legacy benefits are also a problem for the Big 3. These are the health benefits and pensions for current retirees. Retirement pensions alone cost them an additional $31 p/ hour per current active worker.

The GOP was wanting the UAW to make concessions that would make sure that both companies would be viable in the future. They wanted the union to discontinue the job banks program and make their pay more "competitive" with other auto companies across the country. The UAW knew that the administration wouldn't let the companies file ch. 11, so they would not agree to any significant changes. They said that they would temporarily suspend the job banks program for 1 year and little else. The Republicans wanted more concrete changes. Most of the Republicans that were against the bailout represent states in the South where unions don't have a hold on the foreign automakers in those right- to-work states. They see how well that those companies operate and would like the Big 3 to become more like them, so they can stay in business for a long time and keep Americans employed.

Bush did tell the UAW that they must stop the job banks program and become more competitive with their counterparts, but Obama could reverse that in one month as he takes office. Obama was quoted as saying, "The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry and millions of American jobs that depend on it." Anyone else catch that he only mentioned that the companies must change and not anything about the UAW needing to change, too? That doesn't make me feel too good about him keeping the demands on the union intact after he takes office. They need to force the union to accept a new agreement with the auto companies that would make it possible for the companies to survive.

I'm not saying that GM, Chrysler, and Ford are innocent in their financial difficulties. No one put a gun to their head to accept the UAW's demands. They were arrogant enough to think that they would always dominate the market before the rise of foreign automobiles. The CEOs of the companies insistent on pushing SUVs and trucks on a public that was starting to lean towards more fuel efficient models. They refused to listen to their customers, and it cost them many loyal customers. This summer's gas spike cemented the gas guzzlers fate.

The government deserves some blame, too. They put strict guidelines on what Detroit could make. Some regulations are needed, but they went overboard on some things. The Democrats' refusal to drill more offshore, in Alaska, and the Rockies has helped bring down Detroit.

There needs to be an overhaul on how the industry operates. They need to put more fuel efficient and alternative fuel cars on the market, and they renegotiate the contracts they have no matter how hard the UAW and their supporters in the government whine and resist. To let them crumble would devastate the economy, but throwing money at them and letting them stay the course that has led the to the brink of bankruptcy would be even worse. This would be increasing our national debt for nothing. Giving them a bailout without strings attached that would make the company financially viable is like putting a band-aid on a gunshot wound to the aorta. It is useless and the patients will die anyway. It would just delay the inevitable. We should help Detroit but only if they will help themselves.

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