No Bailout For You!

You’ve already heard the headline: the UAW-bailout and electric-car legislation that was misnamed as a rescue plan for Detroit’s Big Three, has gone down to defeat on a cloture vote in the Senate last night.

The problem with this bill was that it attempted to solve the wrong problem.

We know that the Big Three automakers need to restructure in fundamental ways, to adjust to the reality of a significantly smaller and different North American market for vehicles in the coming years.

We also know that General Motors is suffering a cash crunch for reasons not entirely of their making, that threaten the company’s survival past the end of this year.

(Ford Motor’s situation is bad but they’re not in imminent danger of collapse. Chrysler’s owners, the private equity firm Cerberus Capital Management, have billions of dollars to spare, but they saw a chance to get taxpayers to give them money instead.)

GM needs an immediate cash bridge, to get them into position to execute something like a bankruptcy, even if it isn’t called that, and start cutting costs. Including labor costs.

Instead, what did the draft legislation, defeated last night, propose to do? Remember, it was negotiated between Congressional Democrats and the Bush Administration.

The Bush people simply want to get out of office without an automaker failure on their hands. Democrats wanted to provide two things: strong protection for the high salaries, benefits and inefficient work rules of unionized autoworkers; and a mandate to force the domestic automakers to stop making the cars you want to buy and starting making electric vehicles.

Senate Republicans were right not to agree to the original proposal. It would have been an open-ended financial commitment by taxpayers, with no incentives whatsoever for the industry to cut costs, and no plan for survival of the domestic industry without massive, continuing infusions of taxpayer money.

When Senate Majority Leader Harry Reid saw he was going to have trouble with the Republicans early yesterday, he challenged them to come up with an alternative. They did.

One of the heroes of the saga is Senator Bob Corker of Tennessee. You’ll know he’s a hero, because the media, the Democrats, and the auto industry are going to portray him as the devil incarnate.

A week ago, Corker proposed a set of requirements for any bailout package that would force the assisted automakers to start cutting costs immediately. I spoke with Senator Corker about these requirements last week, and have already written about them here.

Suffice to say at this point, that Sen. Corker’s objective was to ensure that boldholders and labor would be forced to take some pain in the inevitable restructuring of GM. The UAW and Congressional Democrats would have greatly preferred that the union not make any concessions at all.

At the end of a long evening, the UAW and its representatives among Congressional Democrats wouldn’t budge. Why not? Because they know they’ll be back next year with another chance to get the deal they want.

This is not a graceful outcome. And I’m not here to say that the UAW is the villain of the piece. By their lights, they’ve already made major concessions over the past three years.

But the workers and their retirees are a big part of GM’s unsustainable cost structure, and they simply need to concede far more. This is reality, and it won’t do to deny it.

What comes next? The Treasury Department will find some way to provide GM with a bridge to get through the next four weeks. That’s the escape hatch that allowed the UAW to walk away from the table last night.

One dearly hopes that Chrysler’s owners will be told to put up (from their very large pool of undeployed capital) or shut up. But Cerberus is so well-connected politically, that I strongly expect they’ll also get a near-term bridge that they don’t need.

Secretary Paulson is a deal-maker from way back, and knows the mechanics of bridge loans made under duress. Even so, something tells me that he’s not going to attach the kind of evil conditions on a near-term bridge loan for GM that any private investor would. This will be a nearly no-strings-attached cash infusion.

And in January, the new Congress will come in with strengthened Democratic majorities and a new labor-friendly and green-friendly Administration. And we’ll do it all over again.

Except in January, labor and the greens will get what they tried and failed to get last night.