Diary

The Wrong Way to Bail Out Detroit’s Big Three

We still don’t have a deal in Washington to bail out America’s financially-depleted Big Four automakers (three in Detroit, and a fourth, Tesla Motors, in Silicon Valley).

But the outlines of a deal are being hammered out between Congressional Democrats and the outgoing Bush Administration, while House and Senate Republicans are stuck outside the room, looking in and pressing their noses to the windows.

If we’re to judge from the “shell” legislation that leaked out on Monday, Congress is cooking up a very bad, an historically bad piece of legislation.

But that rather makes sense, if you look at the priorities of the people making the deal. The Democrats are intent on safeguarding the United Auto Workers, while forcing the Big Three to stop making SUVs and start making electric cars.

And the Bush people want only to make sure that General Motors doesn’t declare bankruptcy while they’re still in office.

The result is a cowardly, business-as-usual bailout that will guarantee the ultimate demise of the Big Three, while wasting an open-ended amount of taxpayer money in the process.

Republicans should oppose the bailout, assuming it emerges in substantially the same form that we saw on Monday. In fact, anyone who wants to see a strong, healthy domestic auto industry should oppose it. And if you care about not wasting public money, your hair should be catching fire now.

Let’s start by reviewing the objectives that animate the draft legislation, as it states them right up front. What Congress wants to do is to “protect and preserve” the jobs of everyone who currently works for an automaker, one of their suppliers, or one of their dealers.

But the key problem that Detroit faces is that their cost structure is poorly matched to the current competitive environment. They need to become far more efficient and productive than they are now. They need to reduce their total employee count. Not “protect and preserve” it.

The second core objective is to transition the domestic industry to “aggressively” design, build and market vehicles with unspecified “new technology” that will be… something different from today. I’m not using scare-quotes. These terms literally appear in the legislative draft.

Congressional Democrats intend, with a completely straight face and no evident irony, to dictate marketing strategy to the Detroit automakers, as part of the price for ensuring their survival. Barry Obama said recently that government doesn’t have a good track record at running companies. One suspects that he and Congressional Democrats think they can succeed where others have failed.

So as things stand today, this legislation wouldn’t be much different if it had been written by the UAW and the Sierra Club.

The next thing you’ll find is that Congress is recognizing the industry’s manic phobia of bankruptcy. I’m not convinced that Chapter 11 bankruptcy is the death-knell that Detroit says it is.

What you’d get in a bankruptcy is that a court-appointed trustee would put all the stakeholders in a room (management, labor, trade creditors and bondholders) and knock heads together until everyone gets bloody, and then agrees to some kind of shared cost-cutting strategy for moving forward.

Evidently that process is too non-deterministic for a lot of people. And the preference has emerged for a “Presidential designee,” or Car Czar, who will be exempt from confirmation by the Senate, but will have God-like control over the industry. The Car Czar will have the power to reverse essentially every substantive business decision made by any automaker which accepts government assistance under this bailout plan.

The legislation specifically charters the Czar to ensure that protected automakers will transition to “new technologies” for making vehicles. The much-ridiculed government-designed cars would in fact have a reasonable chance of becoming reality.

I think that bankruptcy is a better option than the straightforward nationalization that this legislation is candidly and unironically proposing.

Why? Two key reasons. First, Chapter 11 bankruptcy is temporary, not permanent. At some point, you either emerge from bankruptcy or you go out of business. But nationalization won’t be reversed until Margaret Thatcher reincarnates as the President of the United States.

And second, because I think that a bankruptcy trustee will be far less susceptible to political corruption than an unconfirmed Presidential appointee.

What is the US taxpayer getting in return for what could easily turn into a $100 billion-plus bailout? We get warrants convertible to common stock worth 20% (at today’s market valuation) of the bailout amount.

If you recognize as I do that profitability will never return to the GM, Chrysler and Tesla Motors once they’re nationalized, you know that the value of the warrants is somewhere between zero and the pus from a mosquito bite. The draft bailout proposes to give an open-ended financial commitment to Detroit while giving taxpayers NOTHING in return.

So who are the big winners in all this?

Well, I’ve already mentioned that everyone who wants to force Detroit to start making electric cars is a big winner.

Another winner is the venture-funded electric-car startup Tesla Motors, which I’ve already mentioned. If you look at Section 9(a)(2) of the draft, you’ll see a mysterious appropriation of $500 million to be spent under the provisions of Section 136 of the Energy Independence and Security Act of 2007.

Section 136 provides for government loans to companies that are developing vehicle technologies deemed desirable by… someone in the government. And isn’t it interesting that Tesla, which is nearly out of cash and its investors don’t want to put any more in, recently applied to the government for $400 million?

Well of course, this can’t be a coincidence, can it? After all, Section 136 specifically disallows government loans to companies that wouldn’t otherwise be financially viable. The loans are intended to support technology development, not to bail out failed investors. So you’d guess that Tesla would be disqualified by their poor cash position.

But hey, have you noticed where Tesla is headquartered? Menlo Park, in the heart of Silicon Valley. Right in the backyard of House Speaker Pelosi’s Congressional district. And that some of Tesla’s investors were major contributors to the Obama campaign? Hmm, ya think? Naaaah, can’t be.

But wait, what about Cerberus, the private equity firm that owns 80% of Chrysler LLC? They have billions of dollars. (And they’re politically connected up the wazoo, being run by former Treasury Secretary John Snow.) But they’re not going to put another penny into Chrysler. Instead, they want you, the taxpayer, to do it. Doesn’t that make you suspect that Chrysler isn’t that great an investment right now?

So some very wealthy and politically-powerful investors are going to be big beneficiaries of the Detroit bailout that you, dear taxpayer, are being asked to pay for.

Who’s next? Oh, how could I forget. The United Auto Workers.

I’ve been saying for weeks that the only way for Detroit to restructure successfully and return to competitiveness, is to aggressively and systematically cut costs.

I was hoping that the bailout legislation would include a strong condition that the UAW should re-open its contract with the Big Three, with the intention of bringing labor costs, benefits, and work rules into line with those of the foreign (“transplant”) automakers operating in the US.

Instead, the whole legislation is a big wet kiss to the labor union. The UAW will escape any responsibility to restructure along with management and the capital structure. As I said, Ron Gettelfinger could have written this bill.

You might have thought that the point of bailing out GM and Chrysler was to preserve a strong and competitive domestic auto industry. Instead, the point is to prevent several hundred thousand highly-paid manufacturing workers in political swing states from taking a cut in pay or benefits.

Since this makes no economic sense, the conclusions are inescapable. Either the bailed-out automakers will continue to operate as uncompetitive nationalized entities at tremendous ongoing taxpayer expense.

Or the next Congress will force all the other automakers to accept the UAW’s high labor and benefit costs.

Either way, the costs will far outweigh the benefits. We should put a stake through the heart of this legislation.