Pearlstein: “A Detroit Bankruptcy Beats a Bailout” — but what do you think?

car-over-cliff-sign.gifI’m quite interested in hearing your thoughts on two questions:

  1. How much of your money, if any, should the government give to Detroit?
  2. What should we get in return ?

That is, of course, beyond the $25 billion already promised the Big Three (Medium Two?) U.S. automakers to retool their factories (in theory) to make fuel-efficient cars.

Worth noting at the start is that anyone, including the feds, could buy GM right now for about $2 billion, its current market capitalization, which is about one third the market cap of the Dr Pepper Snapple Group.

My biggest concern with giving them any more money is, of course, that their existing management brought this upon themselves. In particular, for years they refused to listen to those who begged them to build fuel-efficient cars — heck they ran away from the hybrid vehicle partnership they started with the Clinton administration in the mid-1990s once W took office, ultimately giving Toyota and Honda a 10-year lead in the core drivetrain technology of the century.

Worse, if we give them more money, what is to stop them from using some of it to keep lobbying against tougher fuel economy standards and serious greenhouse gas tailpipe emissions standards. So obviously the money would have to come with serious strings attached? Indeed, I see little point in a true bailout that isn’t part of a genuine grand bargain to make a complete transition into hybrids, plug-in hybrids, and EVs, as Gore wrote.

I heard Governor Granholm of Michigan say on NPR this morning that GM had something like 17 models in development that get over 30 miles per gallon — but first off, who knows what “in development” means and second, I’m guessing she has adopted the auto industry euphemism that you can brag about the “highway” mpg of car as if that were the actual total mpg of a car. [Note to future Obama FCC: How about banning any greenwashing claims that just feature highway mpg.] And third, we need GM to have 17 models in production that get 60 overall mpg.

Granholm said that failure to save the Big 3/Medium 2 would cost the country three million jobs, but Diane Rehm and her guests demurred, since going into bankruptcy does not mean you shut down every auto related job in the country. The ever-cogent Steven Pearlstein explored all this in a recent Washington Post business column on the issue of whether the government should subsidize a GM-Chrysler merger:

… even with a government-financed merger, the companies are going to have to shrink by at least 25 percent to reflect the realities of a shrinking market and much-reduced market shares. That translates into the direct loss of an additional 40,000 jobs and the indirect loss of several hundred thousand more. There is simply no way to avoid this pain without making the company a permanent ward of the federal government.

The real flaw in the government-financed merger proposal is that it spares the companies from bankruptcy reorganization, the very process they need to get their costs and structure in line with market realities.

Only a bankruptcy court can reduce the burden of pension and health benefits to 600,000 retirees that are slated to cost the companies $90 billion over the next decade.

Only a bankruptcy court can override the state laws that make it difficult and expensive for Chrysler and GM to pare back a combined network of 10,000 dealerships, about 10 times more than Toyota has in the United States.

And only a bankruptcy court can impose on members of the United Auto Workers pay and benefit packages comparable to those paid at the nonunionized plants of foreign manufacturers that have been stealing market share from the Big Three for decades.

If the Treasury were to commit government funds without getting this kind of long-overdue restructuring, it would simply be throwing good money after bad.

But that’s not all. Taxpayers should also demand that the Treasury take the same hard line in negotiating a rescue for the automakers that it took in structuring the rescues of Fannie Mae, Freddie Mac, AIG and Bear Stearns.

Equity holders of both auto companies — including Cerberus Capital Management, the hedge fund that purchased Chrysler from Daimler with very little of its own money — should be wiped out, or at most given a small stake in the new company.

Creditors should get only 30 or 40 cents on the dollar owed — about what the debt is selling for now — plus an equity stake in the new company.

And top management of both companies should be shown the door, along with most of the directors, in recognition of their failure to deliver for shareholders and creditors.

All of these terms — the cost-cutting, the dealer restructuring, the haircuts for shareholders and creditors, the management changes — can be negotiated upfront and presented as a done deal to the bankruptcy court. Such a “prepackaged” bankruptcy would allow GM-Chrysler to run through the reorganization process in a matter of a few weeks or months without missing a payroll or a day of production. It would save as many jobs as can reasonably be saved and preserve what value is left in the companies, while giving taxpayers a reasonable chance of earning a return on their investment.

So the question is not whether many more jobs are going to be lost in the term. They are. The question is will we end up with a well-managed domestic auto industry that can prevent far larger job loss in the medium term and thrive in the long term? Will we end up with an industry that understands its only hope for the future is being part of the solution to peak oil and global warming — and that means changing its core drivetain.

I have previously explained why electricity is the only alternative fuel that can lead to energy independence and why Plug-in hybrids and electric cars are a core climate solution. We need, as Obama promised, one million plug-in hybrids by 2015, and then S-curve growth after that.

Moreover, Toyota and Honda believe Hybrid production costs may drop two-thirds within 10 years, “as shipments rise and companies gain experience” — but obviously only for companies that are aggressively making the transition to hybrids.

The Detroit deal has to be not just meeting the new fuel economy standards, but meeting them increasingly with hybrids. The deal has to be multiple plug in hybrids car models. And most important, the deal has to be a new management team that is wholly committed to that green inevitable transition, a team that will not waste a penny of the taxpayer-funded bailout lobbying against the even tougher standards and regulations that will be needed to avoid the harsh consequences of catastrophic global warming and peak oil.

The good news for Detroit is that when the country gets truly desperate on climate change — possibly within five years, but more likely closer to ten — the federal government will probably need to put a bounty out on fuel-inefficient cars to accelerate the stock turnover. That will goose auto industry sales a great deal. Unfortunately there are no commercial plug-in hybrids, let alone factories that could build them in volume, so such a strategy is not even conceivable until a second Obama term and until every major company has plug-ins across their product line.

I have doubts that such a deal can be constructed politically, but if it can be, the Obama team is the one to do it. This isn’t socialism. And it isn’t nationalization of the auto industry. It is immunization of the auto industry against the seemingly fatal disease of mental decay. [Note to self: Would that be an auto-immune disease?]

I would be interested to hear your thoughts on this thorniest of economic, energy, enviromental, and political issues.

26 Responses to Pearlstein: “A Detroit Bankruptcy Beats a Bailout” — but what do you think?

  1. MikeB says:

    Two thoughts:

    Let the big automakers die, and divide the same money to every company with an entry in the Progressive X-Prize. Even companies who fail to meet the 100MPGe prize threshold will deliver something far better than Detroit will.

    Second, on the topic of greenwashing statistics: nobody should be allowed to combine PHEV plug-in range and ICE-driven MPG into a single number based on an arbitrary driving range per day. Plug-in range must always be listed separately from sustained driving efficiency.

  2. PeterV says:

    There’s still truth in the old saying, “bankruptcy is health”, let them die a clean death and let those parts still worth anything be sold off to the highest bidder.

    If that’s not politically possible how about they get subsidized to retool to make PV panels and wind turbines?

  3. Jim Bullis says:

    Answer: Not a cent if the deceitful practice continues of computing miles per gallon for electric or “plug-in” vehicles as if energy fell from the sky. Of course it does in small quantities, but until that actually happens on a large scale, the mpg must be calculated based on heat energy used to produce the electricity.

  4. Modesty says:

    “It is immunization of the auto industry against the seemingly fatal disease of mental decay.”

    Guess there’s no preservative available for that vaccine, no matter how much mercury you might be willing to throw at it. It’s use it or lose it.

  5. Perlstein is right, but I don’t think BK would end the pressures on federal policy. A reorganization plan under Chapter 11 typically has in it very little financial room for anything to go wrong–a deeper than expected recession, for example. The argument will be made that all additional (and some existing) regulatory burdens must be deferred or eliminated to prevent pushing a reorganized company into “Chapter 12.”

    Whether in a BK or in a bailout, I anticipate a full court press from auto company management, debt holders, suppliers, unions, pensioners, dealers, and Governor Granholm (who seems to be on Obama’s economic policy team for this reason) to make the environment the enemy. The Waxman challenge to Dingell is probably a bellwether.

    Is there a way to put in a big slug of federal money on contractual condition that the company agree to take certain tangible steps toward environmental goals? Possibly, but certainly not if we let Hank Paulson do the negotiations. It might be that such a deal should be made in BK, rather than to avoid BK.

  6. paulm says:

    Its painful, but the management have to be flushed and the focus refocused on to near zero emission transport.

  7. Karen says:

    What to ask for in return? How about employee ownership? I’ve heard that employees in Detroit long ago wanted to build smaller and more fuel-efficient cars, but that just wasn’t management’s way. If the goal is to preserve jobs and the industry, but make it green, and if it’s a progressive goal to not let all the money go to the top (and then out the door, as it seems to be doing with Wall Street), I say give taxpayers a stake, absolutely, but/and find a way to let employees buy in as owners; work with the unions to impose a new model. Make it a co-op; call it what you want. This would not only be stabilizing (versus risking a ‘new boss, same as the old boss’ scenario); it would also remind America there are other options out there. Could be a great inspiration to the rest of the economic and green energy revitalization. And I bet it leads to better decisions and faster transitions. Call John McCain/the GOP on their rhetoric: you really believe in American workers? Then put ’em in charge.

  8. llewelly says:

    The automakers need to re-tool a large portion of their plants to make windmills.

  9. Jared says:

    I think Government intervention is probably inevitable, given how many jobs are at stake. But government intervention will only work if the companies wind up with good leadership committed to vehicles powered by electricity in whole or part, instead of the just awful leadership they have had for years and years and that have brought them to the precipice of bankruptcy. Also, the white collar culture in these companies must change, so there is urgency to accomplish goals and to bring green vehicles forward.

    Here’s what I would want to know. Who is going to choose the leaders? What’s the board composition going to be? What’s the exit plan so the government doesn’t permanently own these companies? We should know these answers in advance and do the government capital infusion with deliberate care, rather than the kind of crazy can’t figure it out pattern we see in the bank bailout.

  10. Climateer says:

    Re: Making “windmills”, “PV panels and wind turbines”:
    Last year G.M.’s average UAW employee made $39.68/hr. in wages, shift differentials, overtime etc. Benefits were another $33.58/hr.
    The average turbine production worker in Arkansas makes $12 to $18 per hour.

  11. charlie says:

    Look, we all agree that the BOD and management of GM should be fired. Ford, maybe.

    Second, people aren’t buying cars b/c of the fuel efficiency – they are not buying them because they can’t afford them. We talking 50% declines across the board. Detroit may only be about 4% of GDP, but I can’t wait to explain to journalists everywhere that if GM goes under, they will be fired as well (media buys).

    Third, the $25 billion is not a bad spend. Govt. keeps the keys in the event of bankruptcy. It is open to anyone who can show a 25% increase in efficiency.

    Fourth, GM does have a 60 MPG car in the pipeline (The Volt) but what they need is the ability to provide financing on a 45K vehicle. That would be a much better spend — $5 or $10K tax credit to each buyer. GM has cut off all future model development to save money.

    Fifth, even these marginal improvement in MPG pay big dividends. Moving from 12 MPG to 16 MPG has a huge impact. And Joe, guess what — any car outside of a hybrid is going to have terrible city mileage.

    Calling for GM and Co to go bankrupt would push the US unemployment rate up to 10% or so. Try selling your progressive climate ideas to a bunch of autoworkers next time.

  12. John A. Harris says:

    For all funds tied to new technology have DARPA represent the entire US government in allocating funds for small innovative companies as they were doing about 15 years ago, and also not approving funds for Detroit unless they somehow learn to be innovative with Congress approved funds.25 billion SO FAR.
    Cuts in salaries for managerial staff from 10% up to 75% for top executives and Board members, and no golden parachutes.
    Somehow bring in proven managers from outside the auto industry to take over.

  13. hapa says:

    as blunt as possible.

    “the american car industry’s failure belongs to all of us.”

    WE let them boss us around and set their own goals when they were clearly losing ground against companies that had thorough regulation at home, pushing them to improve.

    WE took the stance that giving someone access to loans — unaffordable in the long-term — was the same as giving them access to practical products with low environmental impact and good prices.

    WE let our health insurance industry become a ten-ton weight on our ankles.

    WE were the ones who bought the wall street line that planet-scale problems would clean themselves up like magic in the future because of… compound interest.

    WE have been extraordinary suckers.

    those are the reasons we are now choosing whether to throw the babies out with the bathwater.

    the auto industry was once wholly ours. outside the arms business, outside printing dollars, making television shows, and wiping out other people’s farmers, it’s now still our signature industry and look what it says about us.

    the wealthiest country in the world, with the most road miles, most miles driven, most cars, couldn’t keep its domestic car business, in business. never mind whether it should be.

    i don’t know what we should do. i like karen’s idea of going co-op; i’d love to buy them myself and arrange for them to start building existing low-cost high-efficiency vehicles that other manufacturers can’t make enough of, on contract, but playing “import substitution” would be too humiliating for people who’d held that industry up as a business exemplar.

    but i don’t think there’s a should until there’s a commitment to improving our thinking. we don’t have a majority view of where we’re headed, against what headwinds. and of course this at least a two-year decision.

    watch any sports broadcast now, every company is offering all but to pay you to take a car off their hands. this business sector won’t “recover” under any circumstances for years unless they’re hired to replace our fleet early, and build other, newer equipment, for some reason.

  14. Richard C says:

    Oh go on. Give them your money. And then, eventually you will also be able to give them more when you buy their cars.
    Come on fellas, look at their big soulful eyes. It is only right that you should sell yourselves into penury for the sake of those poor unfortunate managers.
    Alternatively, spend your money where you want, for what you want, and let corporations continue to look after themselves. When was the last time they gave you money?

  15. David B. Benson says:

    I favor employee owned. Strong incentive to make that which will sell.

  16. Rick C. says:

    Start with Big Picture context: Due to collapse of the Debt bubble (borrowing from our future), we have *worldwide* Overcapacity of production capability relative to consumption.

    The current number of jobs in the auto industry is simply NOT SUSTAINABLE. So let’s get rid of those jobs *now*, rather than throwing money down an unsustainable rathole. Instead, we need to *invest* that money in a new energy economy, in projects that *are* sustainable.

    Workers in the auto industry (and the Coal industry) deserve a “Just Transition”. This country cannot afford to waste (fast-shrinking) taxpayer money subsidizing a soon-extinct Dingell-Dinosaur economic configuration. Instead, let’s subsidize *education* and *training* for those workers, so they can become productive in the new energy economy.

  17. Rick C says:

    Letting the auto companies die out of some misguided idea in that the free market determines what’s best for the society is an absurd notion from a bygone era. It didn’t work for Wall Street. What has failed was not the auto workers but the management that decided to crush the EV-1 and walk away from the Partnership for a New Generation of Electric Vehicles that produced a car for GM that got 80 mpg. Instead Honda and Toyota lead in sales of hybrids.

    We also have to realize that it took decades to build the auto industry to where it is today. The amount of investment in factories, inventory, and human capitol would be hard if not impossible to rebuild if GM and Chrysler were allowed to die. Even the startups like Tesla are hiring these ex Detroit mechanical engineers. If these companies die, mark my words, there will be no more influence from the U.S. on how a car ought to be built to address green house gas emissions and combat peak oil. Toyota is clear on not building an extended range electric vehicle.

    What ought to be done is first fire the board members at GM, including Rick Waggoner, that decided to walk away from PNVG and crushed the EV-1 and give the workers a controlling voice in how the company is managed. The management team should be selected for their total commitment to plug-in hybrid vehicles.

    Tie the low interest loans to retooling the factories specifically for high mileage and plug-in hybrid electric vehicles with the emphasis on investment going specifically to plug-ins. No money may be used for executive bonuses, perks, retooling factories for yet more SUV’s and monster trucks, lobbying Washington to water down stricter CAFE standards and boondoggles like hydrogen fuel cells.

    Require quarterly meetings with the Congressional subcommittee on Energy to remind the auto companies that they are being held accountable for their actions and produce quarterly reports available to the public on their progress retooling their factories for plug-in hybrids and production figures and what their average fleet fuel economy ratings are.

    Invest any surplus funds they have left over for making their factories more energy efficient.

  18. Brian M says:

    I am truly tempted to let them die if they cannot compete. However, I’m not sure that now is the time to add another 74,000 people to the jobless roles (plus whatever upstream and downstream jobs would go as well). Instead, as part of a rescue/stimulus package, perhaps the feds should provide funding but break up GM into 2 entities (or buy them, restructure them, and then sell them off …. possibly to employee owners if that is practical).

    1) A smaller focused hybrid/electric/high-efficiency car company. Something along the lines of a Saturn, but even more specialized. Legally limit their ability to compete in any other automotive market for some period of time (a la antitrust). Subsidize them, but require serious competitive performance as a requisite for continued subsidies. This is a stimulus/infrastructure spend, not a free lunch. Existing management must go. Bring in new management from a successful auto maker (like Toyota since they have direct hybrid experience) or go with an employee-owned approach.

    2) A green infrastructure manufacturing company (windmills, grid improvements, whatever else their skill set would support). Subsidize, as part of green infrastructure/stimulus, these workers AND the workers in Arkansas at something like $20/hr. Yes, this is less than what the UAW make, but it’s substantially better than being unemployed in a recession.

    Yes, this is massive government intervention, but, if you want the taxpayers’ money, suck it up …. and from the government side, if you are going to spend the taxpayers’ money (or jack up their debt), make sure you get something valuable, meaningful, useful and tangible for it. From now on, every “bailout” should be accompanied by painful, strong, nasty conditions aimed at furthering the energy/economic/environmental benefits for the American people and the world at large. No more, “here’s the money…. buy stuff.”

    Yes, I’m ignoring deficits and debt. Isn’t just about everybody? Why buck the trend? ;-)

  19. paulm says:

    It definitely is the opportune moment to shift all that CO2 producing resource to manufacturing sustainable energy alternatives – like wind, tide and solar generators.

    What a huge turn around that would be. Climate change WWIII here we go.

    The current management wont be able to cope with this.

  20. EricG says:

    I find Pearlstein’s argument compelling. To bail these guys out, whether that means accepting their proposal or imposing one that is more severe, would support BAU and tie another anchor to this country’s financial future. As painful as this would be, it’s the right thing to do.

    While this would be difficult politically, Obama might look at the action taken by Ronald Reagan at the beginning of his first term. Jimmy Carter had appointed Paul Volker Chairman of the Fed in 1979, but it was Reagan who finally gave Volker full support to raise interest rates and crush the inflation problem (13.3% in 1979, 12.5% in 1980). The high rates caused a deep recession in 1981, but by 1984 everything was hunky dunky, and Reagan won the greatest landslide in US history.

    We’ll never have a better opportunity to do this right.

  21. jorleh says:

    Let them go down and begin the only green business: Greenland ice mass potential energy engineering. And Antarctic. And ships without water resistance: the rolling pontoon train ships.

  22. TomG says:

    I agree with Mr Pearlstein.
    Up until yesterday I thought bail-out was the way to go…but that wasn’t facing reality.
    This problem needs an overhaul, not a quicko patch job.
    I suppose I should mention that I’m involved in this mess (I work for a logistics suppler to GM), currently laid-off and wishing things were back to normal….

  23. red says:

    I’m usually in favor of letting nature take its course. Maybe that’s a bad idea at the current economic moment, maybe not.

    You always have to consider the external implications of bailout actions. For example, what’s the effect on future businesses? They may see bailout as a backup plan, and take more risks than they otherwise would have. What about the effect on solid competitor businesses? In this case, perhaps there are none in the U.S., but there are the automotive entrepreneurs like Tesla. How would the bailout affect them?

  24. Donald B says:

    This may be too harsh, particularly when good people must be retained (e.g., companies like Tesla Motors are hiring people from Detroit), but the greedy must be weeded out.

    It would be nice if a “claw-back” could be built in to get back ALL executive bonuses for the last 5 – 10 years and implement NO golden parachutes to the extent that their retirement benefits are reduced to whatever the lowest-paid laid-off workers get and nothing more, until they bring the company back to profitability. That should give the execs pause before they do what the Polaroid execs did before bankruptcy.

    ALL future bonuses (to executives or others) should be contingent ONLY on profits from plug-in hybrid car sales.

    ALL executives and board members MUST take a “for credit” course from Jim Hansen on Climate Warming and failing the course should make them ineligible for ANY bonuses or even raises, not to mention promotion.

    Any company money spent by the company on lobbying against mileage standards or other global warming avoidance should make the CEO and CFO eligible for personal taxation at double the prevailing tax rates. Too many members of the current Supreme Court will have trouble with this due to the current idea that a corporation can be a “person.”

  25. Roger says:

    Many great ideas above. Also, instead of bailing out the bungling auto companies, let’s establish a TVA-style federal utility that will buy U.S.-made wind turbines, upgrade the grid, and offer clean, competitively-priced electricity with which to recharge all the plug-in hybrids. This will provide an economic boost while also helping to presere a planet in peril!

  26. Felecia - Detroit says:

    I understand the frustration with the auto manufacturers and unions. The problem is the executives are wealthy and even if they experience a significant lifestyle change will pretty much stay wealthy for the rest of their lives no matter what is decided. The union leaders will also be at least comfortable for some time to come.

    We keep referring to jobs, when we are in fact talking about people. If we consider that those jobs are supporting families, what happens to the children of those let go? How do they eat. How do we take such a large percentage of the revenue contributors of the country and turn them into service users (in the form of Medicaid, Food stamps, unemployment, etc) and still operate with the services this country, its states, counties and cities need to sustain EVERYONE? There is a city of 67,000 that had a plant closing that had to reduce it’s police force to 5 people. It is not near another city large enough to offer support. What will happen to Ohio, Pennsylvania, upstate New York, Wisconsin, Indiana, Illinois outside of Chicago and south eastern Michigan? Are we expendable because a few people (who’s parents and grandparents likely worked in manufacturing to educate them) find the whole process of change too slow and inconvenient?