Diary

Congress Inches Toward Reality On General Motors

As I’ve been telling you for nearly a month, General Motors is going to be out of cash by the end of this year, mere days from now.

If that happens, they won’t be able to write checks to their employees, suppliers, dealers, or bondholders. They’ll have opened a path that leads to a forced liquidation of their business.

What part of “out of cash” don’t you understand? Well, if you’ve ever run a business through a tough time and had trouble meeting a payroll (as I have), there’s no starker reality in the world. It burns in your gut like molten lead. You’ll never forget the feeling, and you’ll go to great lengths never to be in that position again.

But if you’ve never run anything in your life (like quite a few members of Congress, and like our historic, world-changing President-elect), then “out of cash” probably doesn’t have much practical meaning for you at all.

So yesterday and today, Congress is again listening to testimony from the CEOs of the Detroit Big Three and from the leadership of the UAW. The case for the automakers is: “We need your help on an emergency basis because there’s no one else that can do it. And we’ll take it on whatever terms we can get.”

But polling shows that the American people, still simmering with anger over the bailout of the financial industry and facing deep fears about their personal finances, are in no mood to spend their tax dollars on a lifeline to General Motors and Chrysler LLC, the automakers in imminent danger of collapse.

Now I really don’t know if the many people who are against a bailout of GM, have even the slightest appreciation for what will happen if GM goes down at the end of this month. It will be dire. Thousands of small companies will face their own bankruptcies, and hundreds of thousands of people may suddenly lose their jobs, just as the recession is starting to bite harder.

But it’s equally true that the public money which is destined to go into GM will largely be wasted. The people who are against the bailout implicitly understand this. The domestic automakers need to shrink their business in many painful ways, if they’re ever going to return to health.

And because we’ve gotten to this state of emergency (partly because of the rapid collapse of consumer demand in October, and partly because of decades of poor management by Detroit), we have no good choices at all, and no time to debate the issue fully.

The taxpayer dollars we put into GM are not an investment of any kind. The money will be used strictly to wind down operations, and to soften the blow for people who will lose their jobs or go out of business.

It’s of course dawning on the leadership in Congress that they’re sailing between Scylla and Charybdis. And, just as they did during the TARP debate in September, they’re trying to find a way to make Republicans take the political hit.

Republicans in the Bush Administration (including Sectary Paulson) and several Senators (such as Bond of Missouri and Voinovich of Ohio) have long supported the idea of redirecting an existing $25 billion appropriation for fuel-efficiency research, so that it can be used as an emergency bridge loan for the Big Three.

Many Democrats have been dead-set against this idea, because they badly want that research on alternative-fuel vehicles. (How badly do you want it, Mr. and Mrs. Taxpayer?)

The Democrats have been pushing to use funds from the TARP plan to rescue the Big Three. There are several objections to this, which I broadly agree with. First, the TARP is there to keep the financial system stable, not to rescue industrial companies out of bankruptcy. And TARP money is being used to guarantee obligations by financial firms which they are very likely to be able to meet anyway. The vast bulk of the TARP commitments will come back to the Treasury.

Whereas the money committed to the auto industry, as I’ve said, is just going to be spent on a partial liquidation, and will never be repaid. (Wagoner, if that’s you howling in the background, just shut up. You will not repay this money, and don’t insult my intelligence by saying otherwise.)

The most likely outcome in the near term is some kind of compromise between the two sources of funds.

There are two other challenges in the debate that you need to understand.

First, there is no time to debate exactly what would be a reasonable and acceptable set of commitments from the automakers in return for taxpayer support. And second, there’s every likelihood that anything Congress does now won’t be enough, and the Big Three will be back for another bite at the apple, early next year.

Senator Corker of Tennessee has proposed an interesting challenge for GM, which he stated in open session yesterday. He’d like General Motors to agree to a strict set of cost-cutting measures before the end of the first quarter of 2009. If GM fail to meet the objectives, they agree upfront to go bankrupt at the end of March. (The industry is, reasonably, dead-set against a bankruptcy because of the permanent damage to their brands and market position.)

What this means is that GM will need to extract a large set of painful concessions from a diverse set of stakeholders, including their bondholders, suppliers, dealers and workers, who will have no incentive to play ball. Many of those people would in effect be negotiating their own bankruptcies or job losses.

Rick Wagoner would have to be the greatest negotiator in history in order to achieve even a small fraction of what needs to be done before the end of March. This idea is laudable in that it recognizes reality, but is still a Hail Mary.

And that leads to the second challenge. There’s simply no way on God’s green earth for this problem to be solved in one blow with a public commitment of only about $35 billion. Congress’s actions this month (whatever they turn out to be) will not be enough. We’ll be putting money into this for a long time to come.

Back to the politics. The reality of the situation is that the American people have entrusted the leadership of Congress to the Democratic Party. Democrats control both houses of Congress and all the relevant committees. And Democrats are getting set to take over the Administration as well.

This is a Democratic problem to solve, whether they like it or not. Republicans have already stepped up with reasonable proposals that recognize we will all have to eat a yummy excrement sandwich. Democrats have refused to vote on those proposals, while posturing as if the Republicans were the ones who are obstructing the process.

Someone is going to get a big political black eye out of this. A bailout of a failed industry and a craven labor union that no one has much sympathy for, is an awful outcome. But a collapse of an industry representing a two-digit percentage of GDP, with a million lost jobs, is an unthinkable outcome.

Like it or not, the Democrats run Congress. They’re going to have to eat the excrement sandwich.

And what about the Hope of the World, the Man of Change?

He’s hiding in his lair in Chicago, lying low, watching the process, contributing little or nothing. When asked, he says only that the auto industry may not collapse, but he’s still thinking about the sources of funding to bail it out. Well, thanks a million, Sherlock! The rest of us already knew that. Show some leadership, already! Or are you giving us an early look at how you’re planning to run the country?

-Francis Cianfrocca