Diary

The Automaker Bailout and Obama’s First Hundred Days

You know already that Congress scuttled Plan A of the automaker bailout. The outlines of Plan B are now becoming clear. Per President Bush’s announcement last Friday (and subsequent publication of “term sheets” by the Treasury) the Administration will extend about $17 billion in grants (euphemistically called “loans”) to General Motors and Chrysler.

The terms and conditions of this capital infusion will be identical in most respects to what Senate Republicans rejected on December 11. It’s anticipated that the deal will close on December 29, which is not a day too soon for General Motors.

Now of course Ron Gettelfinger, the leader of the United Auto Workers, got himself quoted far and wide this weekend. He said that his union is being “singled out” to take the pain in the coming inevitable restructuring of the auto industry.

If you’ve been around business or finance people, you know what “restructuring” means. In this context, it’s a euphemism for “fire a lot of people and get a lot smaller.”

You may think Gettelfinger is just being disingenuous. He’s not. In reality, he’s positioning himself for the epic political battle that will come early in 2009.

Let me tell you what to expect.

The Treasury has to make a deal with GM and Chrysler in the few remaining days of this year. The process by which the deal will be made differs substantially from the legislative effort that failed.

The Administration (with the encouragement of Congressional Democrats) will broadly interpret the constraints of the TARP financial-industry bailout legislation.

That will allow them to use what’s left of the first $350 billion tranche of the TARP bailout fund. It means about $4 billion each, immediately, for GM and Chrysler, with a bit more to follow in January.

Since this is an administrative arrangement rather than legislation, you’re not going to see the public grandstanding, demagogy, and back-channel horsetrading that comes with the territory on Capitol Hill.

Instead, they’ll cut this deal with the automakers much as any cash-crunched business would arrange emergency financing from existing investors.

For one thing, that means that the automakers can not commit to wage and benefit reductions by the UAW. The UAW isn’t a party to the negotiation. Management can probably commit to “best efforts” to get concessions from the union, but that’s as far as they can possibly go.

That’s why Gettelfinger was apparently speaking out of school this weekend when he made his remarks about being “singled out.”

The politics of the issue has, I believe, been a great big surprise to all the principals of the drama, from the automakers to the union to the Congressional leadership. With phrases like “Bailout Nation” being thrown around the country, the popular mood is violently opposed to a taxpayer bailout of Detroit.

This is going to be an absolutely critical aspect of the next few months that you need to pay a lot of attention to.

And the thing that the American people have not been adequately prepared for (except for people who read RedState), is this:

We won’t be done bailing out General Motors and Chrysler if we give them $17 billion now.

Keep saying that to yourself, over and over, until you’ve got it memorized. That’s what will make this debate hot as a firecracker next year, and will consume Obama’s First Hundred Days.™

If car sales continue their current trend, GM is out of cash (I mean bone-dry out of cash, not even enough to pay the light bill) by late December or early January. The current Bush proposal gives them about $13 billion in several tranches. That only gets them to early or mid-March.

That means there will be a second bailout to follow this one, just as night follows day. Congress can’t start working on the second bailout any later than early February if they have any hope of completing it in time.

And after the next bailout of GM and Chrysler, there will probably be a third, and a fourth, and even more. We’re looking at an open-ended public commitment to these two failed companies. It simply isn’t credible for them to totally rationalize their cost structures before March 31.

But let’s put on the rose-colored glasses and assume that GM and Chrysler really could present a “viable” restructuring plan by the March 31 deadline. If the restructuring is phony, we’ll be propping up these companies with public money indefinitely.

And if the restructuring is proper, then the amount of lost jobs, bankrupt suppliers, closed dealerships, and retiree health benefits would still necessitate a public bailout that could easily exceed $100 billion.

It’s been pointed out that GM’s management have been wearing rose-colored glasses, predicting a future recovery for the economy and for car sales that is far from likely to materialize.

This isn’t true. When they first went up to Congress in late November, they definitely were trying to deny reality. I was told by industry representatives at that time that the North America vehicle market would be back up to 17 million units by 2010.

Like hell it will! 12 million would be pushing it.

However, in the recovery plan which GM presented to Congress on December 2, which I read carefully, they did use 12 million as a baseline market size for the next several years. To that extent, they’re facing reality. And they probably couldn’t have produced that business plan in two weeks over a major holiday if they had to make it up from scratch, so I think we’re seeing what their real thinking was all along.

I do, however, think they (meaning GM’s management) were badly surprised by the fact that Congress didn’t just roll over and play dead when they came asking for a handout. This speaks to the same kind of arrogance that led a former GM executive to tell Congress nearly sixty years ago that “what’s good for GM is good for America.” Facing imminent and ignominious death does seem to have a concentrating effect on people’s minds.

And that leaves the UAW and the Congressional Democrats. They had an incredible arrogance of their own when they proposed a bailout that expressly stipulated no concessions whatsoever from the union. Did they learn their lesson from their failure in Congress and the public outcry, as the management did?

That remains to be seen. And that also will be the most compelling and important thing about the political battle to come in January and February over the second (and third, and fourth) bailout.

Here’s how it will play out: the American people will be asked to put up an open-ended amount of taxpayer money in order to sustain the United Auto Workers in their current labor contract.

That contract pays UAW members twice the national average wage. Plus, they’re allowed to retire with full and very generous benefits at the age of 50. And, like European workers, they can’t be terminated when business conditions make that necessary.

The American people are going to put up a hue and cry over this, that will dwarf the protests over the Iraq War. You’re going to be told that the UAW contract is the template for what everyone should be paid.

But the people are too smart to fall for that line. They know intuitively, because they face it every day in their own budgeting, that you can’t pay someone too much in relation to the value that they produce. That way lies bankruptcy.

This controversy is going to be a great big surprise for the UAW and the Democrats, who seem to be assuming that the people will roll over and do whatever they’re told.

And it’s going to consume Obama’s First Hundred Days. At the same time, Congress will have to work on his proposal to deficit-spend about $850 billion on roads and bridges to nowhere, and on new HVAC and computer equipment purchased from China for schools and federal buildings.

God help us if there’s an international crisis.