General Motors (NYSE: GM) and Chrysler executives have managed to drive their business to the brink of bankruptcy. And the private sector appears reluctant to provide the financing they would need to restructure in bankruptcy. Yesterday, Tribune Co. (NYSE: TXA) went over that precipice without a penny of government money. But GM/Chrysler cannot be allowed to follow that natural path for a failed business -- they need government to save them from the free market.
And so this morning a plan to socialize their losses goes before Congress. It creates a car czar who will administer $15 billion worth of loans. The car czar can demand that GM/Chrysler pay back the loan by March 31, 2009 if they don't come up with a restructuring plan, throwing them into bankruptcy. If the car czar thinks they're negotiating in good faith, they get a 30-day extension. It's not clear what happens if they come up with a restructuring plan by the 31st. A restructuring won't pay back the $25 billion and will probably require even more taxpayer money.
But the plan also requires the car czar to approve transactions above $25 million; it limits executive compensation; demands the sale of their corporate jets; prohibits paying dividends and requires that the government share in future profits and taxpayers be repaid before any other shareholders. So should Congress approve this bill?
Based on the politics it looks like the answer is yes. Americans are for it by a narrow margin -- 46% want it and 42% oppose it. The Republican Senators -- such as Mitch McConnell, R-KY -- who oppose the deal are in states that house plants from non-U.S. automakers and would benefit from a GM and Chrysler bankruptcy. It could be difficult to get the 60 votes needed to approve this bill, but other Senators in states that would benefit, such as Carl Levin D-MI, are in favor.
However, on the merits, the bill will use $15 billion in taxpayer money to keep a dead patient in the ICU when it belongs in the morgue. Having destroyed 95% of GM's shareholder value, its board and top executives do not belong in the room when the restructuring conversation happens. It would be far better to put together a crack team of turnaround experts -- perhaps led by Lou Gerstner who so ably rescued International Business Machines (NYSE: IBM).
If taxpayer money is going into the automobile industry, it does not make sense to put politicians in charge of what is fundamentally a business decision about how to restructure. Politicians are better at getting and keeping power than they are at turning around a sick company. And the plan is designed to help them preserve their state power rather than looking at the interests of all the industry's stakeholders.
If taxpayer money is at stake, let's give Congress a bill that uses America's best turnaround experts to restore the U.S. auto industry.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing, will be published by Portfolio on December 26, 2008. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
12-10-2008 @ 9:13PM
Tip Sanders said...
NO! Don't bail these companies out. If Cerberus Capital Management owns controlling interest in Chrysler and they won't invest anymore of their own assets into their own company why should we? They don't have enough confidence in the market of their management to make it work so why should we bail these PRIVATE businesses out? Let them go. Please, no bailout. The congress and the Fed is going further than the system can handle.
12-11-2008 @ 10:47AM
Guiseppi said...
Who is going to be the auto czar? OH I know WE WILL WAIT FOR THE NEXT BARMITZFAR TO CHOOSE
12-10-2008 @ 10:09AM
Sandy said...
GM's stock was $64 per share when Wagoner took over in 2001. Now the share is $5. This to me does not represent success.
12-10-2008 @ 10:28AM
Chris K. said...
Kentucky is the 3rd largest producer of automobiles in the United States, after Michigan and Ohio. The state is home to the second largest Ford factory in the country and also hosts GM's factory for the Corvette and Cadillac XLR.
It is true that Toyota's largest North American factory is also located in Kentucky, but to say that Mitch McConnell opposes the bail out because he represents a state that "would benefit from a GM and Chrysler bankruptcy" seems silly. Granted, your basic premise makes sense in that is usually how political decisions are made, but in McConnell's case, I don't think that can be assumed here.
I honestly don't know enough about McConnell to say what his motives may be, but I do know that auto manufacturing is a big deal in Kentucky.
Uh, Kentucky has at least one GM plant (where the Cadillac XLR and Chevy Corvette are made), and two Ford factories (Explorer and F-150 trucks)
12-10-2008 @ 2:14PM
Nicole said...
YES!!!!! How can anyone call themselfs an American and want one of the only companies that can still have that made in america by american people sticker on there products. Seriously how many things are made here, not much. Should we just get everything overseas, so no one will have a job anymore. Did anyone get a choice in giving citibank a ton of money, after make a bunch of bad investments. Thes banks and there greed is what got us here. Why didnt they have to go beg for help? They got checks with no stings attached over the coarse of a couple of days and no one is looking over them to see how they are spending it, or who is getting what. I think the world is full of bullys picking on the hard working middle class then letting all the rich just fly bye. And its not a bailout it is a loan why isnt that in the headlines? When are the banks going to payback there billions? Do they have 4 months to show improvement and fix what they messed up. Tell me how is this fair and how can anyone want thses companies to go under and not only that how can anyone not care about all the working people and there familys.
12-15-2008 @ 9:20PM
CrazyEddie said...
Bail out the Big 3?
No friggin' way. Chapter 11 is perfect for them to clean house. Chapter 7 if they're too inept to do even that.
Will that affect their suppliers?
No. Bail THEM out. They're the ones that reportedly "will destroy America as we know it..." if GM goes under. Pooh.
The US Gov't should pledge support to the supplier infrastructure. Screw the perpetrators. They deserve their problems and we have a great system in place to fix that. Chapt. 11 will allow them to continue to operate and renegotiate all contracts. THAT is what is scaring the leeches like the UAW and the dealerships.
CE
2-18-2009 @ 6:42AM
Dean said...
I agree with Crazy Eddie and Tip Sanders. Let them file Chapter 11 or Chapter 7 and figure it out like the rest of us in business. I have been in business 30 years and have never had such a difficult time in maintaining my business cash flow and generating income. Noboby is going to bail me out, I have to do that. And if I don't , I'm toast. Let GM, Chrysler fall. Maybe Ford will survive and be the only American car maker left. I've never owned a Ford but I may be buying one soon.
The auto business lost their way and now they don't want to face the music. Let them go, please.