GM Bailout: Do GM, Ford and Chrysler deserve bankruptcy?

GM Bailout: Do GM, Ford and Chrysler deserve bankruptcy?

As much as GM, Ford and Chrysler claim the recent crisis is the result of nothing more than the short-term credit crunch, that claim is pure spin. The truth is much colder and harder than that.

  • Fact: GM market share peaked 40 years ago when they controlled over half of all vehicles sold in the US. They have lost market share nearly every single year since then, to the low 20s today.
  • Fact: Despite near unanimous agreement that fossil fuels are causing global warming, and the fact that the US was sending hundreds of billions of dollars a year to repressive middle eastern governments, some of which covertly funneled funds to terrorists, the “big three” automakers steadfastly opposed tighter fuel efficiency standards.
  • Fact: If GM, Ford and Chrysler had adopted stricter fuel efficiency standards, they would have a fleet of more competitive cars instead of huge gas-guzzling cars that nobody wants to drive, and they wouldn’t need this bailout.
  • Fact: Executives from the big three showed up to congressional hearings on their own private jets. When asked to raise their hands if they would give up their private for the benefit of their company, not one of them raised their hands. This is more symbolic than anything, but it shows how out of touch with public opinion they are.

So while the automakers like to blame unions, the credit crunch, or basically anything except their own mismanagement for the current crisis, the blame lies firmly and directly at the executive management’s feet. After decades of building cars that nobody wanted, the chickens have come home to roost.

Should GM be allowed to go bankrupt?

Yes. GM, Ford and Chrysler all deserve the situation they are in. In fact, in normal economic conditions, they should be allowed to fail completely. But these are not ordinary times, and a complete collapse of the US auto industry would be catastrophic to the US economy. It is reasonably estimated that 3 million jobs would be lost in such a case. The drag on the already imploding US economy may even be enough to push us from recession to depression.

The Age of Pragmatism

This is not the time for idealism. It is the time for pragmatism. Americans are thankful every day that we don’t live in a socialist economy. So any assistance should conform to the following criteria:

  • It significantly and substantially benefits the US economy.
  • It holds executive management of the automakers accountable for the failure of their businesses.
  • The existing investors (shareholders and bond holders) should not receive any benefit from government intervention.
  • They took the risk in exchange for return, and this is an extreme example of what risk really means.

Pragmatically speaking, this means a financial rescue package along the following lines

  • Each company that receives assistance will first declare bankruptcy
  • Shareholders equity would be wiped out by issuing a very large number of new shares to the US government (along the lines of what happened at AIG, Fannie and Freddie). Existing debt holders should be wiped out.
  • The top 2-3 layers of management and the board should be fired without severance. A new reform-minded CEO would be appointed to head the new company, and would report directly to the treasury secretary.
  • Over the next 2-3 years, valuable parts of the business would be sold off; union contracts would be renegotiated to ensure long-term competitive cost structure, pension benefits would continue but at a reduced level. The remaining core business would be structured to be profitable as a much smaller entity, producing roughly half the vehicles as today.
  • At its core, the auto business is a fashion business. And these companies need to make cars the public demands, which will be the focus of a 5-year turnaround plan.
  • The US auto industry would adopt aggressive and tough fuel efficiency standards, retooling their plants to a higher reliance on hybrid, fuel cell and electric technologies. Time lines would be aggressively shortened so that by 2015 we see major, quantum leap improvements in US fuel efficiency.
  • All US government-owned equity in GM, Ford and Chrysler would be sold back to the public by 2015, and the companies would be fully independent by that point.

This plan punishes those who deserve it, protects the US economy and some level of employment, accomplishes the strategic goal of energy independence and reduction in global warming, and offers the potential windfall to taxpayers after successful completion.

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