Felix Salmon
About this author:
Why bail out GM? I can think of quite a few reasons:
- As Andrew Leonard notes, it's what Barack Obama was elected to do. "If evangelical supporters of George Bush had the right to expect conservative judge appointments and restrictions on stem cell research, then working class Midwesterners are equally justified in expecting delivery on Democratic economic promises. That's how a democracy works." If Obama didn't intend to bail out Detroit, he was being very slippery during his election campaign.
- It's an efficient way of directing fiscal stimulus towards the rust-belt states which need it most. Up until now, Treasury's been careful to separate the idea of bailouts as distinct from fiscal stimulus: We're "investing" rather than "spending" the money going into the banks and AIG. But that's a silly distinction. As Steve Waldman says, most government spending, outside of entitlement transfers, is investment.
- It might be cheaper than the alternative of letting GM fail and throwing its employees, and its suppliers' employees, and its dealerships' employees, and so on and so forth, onto the unemployment rolls at a time when it's harder to find a new job than it has been in a very long time.
- It's a great way of being able to implement the long-term strategic goals of the Obama administration when it comes to things like energy independence. Leonard, again:
A Manhattan Project-scale plan to move the U.S. into an energy-sustainable future should start with a complete restructuring of the automotive industry. It's time to think big.
These aren't the kind of reasons that Treasury put forward for bailing out the banks and AIG. In that case, we were worried about the collapse of the global financial system: The bailout was necessary to prevent systemic meltdown. A lot of the arguments against a GM bailout seem to say that there aren't similar systemic reasons to bail out GM: That's true. But it's worth realizing that there are other reasons.
The government also has a lot more latitude about exactly whom it bails out than most commentators seem to realize. There seems to be an assumption that any bailout will, by necessity, have to be a bailout of all GM's bondholders, and will probably leave some non-zero value for shareholders as well. But that doesn't have to be the case: There are numerous ways of structuring a "bail-in" whereby GM's bonds are restructured and its bondholders share some of the pain.
On the other hand, there are other reasons not to bail out GM, as well. Ryan Avent says that since the long-term future of the rust belt does not lie with the automakers, a bailout would simply stand in the way of the rust belt's reinvention. "Political energy in the Rust Belt is geared toward maintaining the status quo at the expense of other priorities," he notes, and a bailout is much more likely to reinforce those tendencies than it is to shake them up.
That said, given the state of the economy, there is a strong case to be made, I think, for the government giving GM a helping hand in winding down slowly, maybe emerging as a smaller, leaner, sustainable carmaker, rather than simply collapsing overnight. So I disagree with Avent here:
$50bn spent propping up the Big Three is $50bn that can't be spent on direct investments in the people and cities of the Rust Belt. That kind of money could fund early retirement for older workers and unemployment benefits and retraining for younger workers, with enough left over for infrastructure improvements, research incentives and educational grants for the region as a whole.
Ford, General Motors and Chrysler are American institutions. They have helped define the character, the shape and the economy of the nation for a century. They're also just companies - corporate entities designed to provide goods and services at a profit. For too long, these firms have failed at that goal, and they've dragged down an entire region with them. We can spend that $50bn simply perpetuating, for a while longer, the names and structures of these companies. Or we can spend that $50bn helping the people and the cities of the Midwest. I don't think we can do both.
I can envisage a bail-out which goes largely to fund the UAW's healthcare trusts -- directly helping the people of the Midwest -- with a bit of extra cash to help bondholders put together a debt-for-equity swap and corporate restructuring. In other words, we can do both, especially considering the very low cost of US government funds.
So count me in on a strategically-oriented bail-in package which benefits the Midwest rather than GM's bondholders and shareholders. And if you want to call it a bailout, that's fine by me.
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This article has 42 comments:
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tridog
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1 Comment
My Website
Nov 12 03:12 PM-
goanywhere
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4 Comments
Nov 12 04:07 PM-
katec
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5 Comments
Nov 12 04:17 PM-
Sarath
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1 Comment
Nov 12 04:28 PMEveryone should take a page from Chrysler pre merger with the Germans. If any one remebers over a decade ago then Chrysler was in deep financial trouble. At the time Lee went to the Republicans for help and was turned down. Then he talked to the Democrats and was given a helping hand with loans at a low interest rate. Lee and Chrysler survived, made good on the loan, actually paid it back ahead of time and everyone came out a winner. This should be repeated. Aotomakers should not be bailed but given a helping hand during a real financial crisis. The Feds should lend them the money they need on reasonable terms and make sure they pay back every red cent. This is not new it was done once with Chrysler and there is a blue print for a win win situation for all. This is not socialism but the patriotic American way to resolve this mess.
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To Makesense:
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4 Comments
Nov 12 04:30 PMOn Nov 12 03:12 PM tridog wrote:
> I think NOT bailing out GM will help KEEP people employed there.
> Right now, they are laying off engineers, while keeping people in
> the 'jobs bank'. If they go Chapter 11 - people keep on working,
> they keep on getting paid. But, the courts will impose new contracts
> on the union. This will cut costs, make GM more competitive, and
> SAVE jobs in the long run. Bailing them out does not fix the underlying
> trouble - it simply prolongs the agony. This happened to the airlines
> - it should happen to the automakers too.
I think the big 3 SHOULD be bailed out. Alot of this trouble stems back to the foreign competiton from which Nafta came. It is an unequal system. They tax our cars way more going into their country than our country taxes their imports into our country. The Uaw has agreed to MANY cuts in wages(new hires at 14.00), outside contractors now do cleaning making 14.00 an hour, they have helped eliminate many jobs on line. $14.00 an hour isn't enough to support a family let alone purchase a car, home, provide college education for their children. The Uaw has made sacrifices. They only want the people to make a decent living without struggling like every American should.
They need to tax license plates for import cars about $800 a year which would help create jobs. It would fix our roads, thereby creating construction jobs for reparis of the roads. The taxes made from the foreign car license tax could also help the schools which are constantly struggling also and it would HOPEFULLY help change the minds of Americans to drive domestic autos which would create many jobs. Jobs paying a decent wage, not overpaid jobs, just jobs making a decent wage with the thought of having a pension after working for so many years.
The CEO's should take a huge cut in pay at least until they start making a profit. The Uaw has made sacrifices, they should too.
The big 3 also spends big $ for processing engineers to eliminate the people that are building their products. They need to "lay them off" across the board. At least temporarily until they start making a profit and this alone would save the big 3 billions of dollars.
Finally, the big 3 then needs to regain consumer confidence which I feel was starting to happen until the market crisis took place. Now, people are in fear of losing their jobs and are not purchasing anything, let alone an automobile. Ford has proven that they have now gained level ground with Toyota in quality, if not slightly more.
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HaywoodJablomey
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1 Comment
Nov 12 04:32 PM-
Make sense
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1 Comment
Nov 12 04:35 PM-
Retired Investor
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1 Comment
Nov 12 04:35 PMThe big problem will be convincing the american who was just let go from his minimum wage paying job at Best Buy, (retail workers are 10% of the american workforce) to support the bailout plan, by convincing the average american:
a. Why It is better for the USA economy to rescue a UAW workers job (70 per hour in total costs, appx 34 per hour in wages), rather than a retail-workers job.
b. Why it is better for the government to support the lavish pensions of the UAW worker (when the average american chump has no pension and has just seen his 401K plummet by 30+ percent)
c. Why it is better for the american government to pay for the lavish healthcare benefits of UAW workers and retirees (when 25% of americans have NO health insurance)
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Miken
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48 Comments
Nov 12 04:44 PMWe have appropriated $700 billion to bail out the financial services industry. It is typical of this country's total indifference to the manufacturing sector that we are arguing about $25 billion to save the biggest value stream in the world.
In an economic sense, the manufacturing sector is the biggest value added sector in the economy. We cannot be a player in the world financial system with an economy based on services. The Japanese government knows this much better than we do. After WWII, did they decide to build their future based on creating a financial system that came up with ideas like bundled assets, derivatives, etc.? Of course not, they developed, with huge government support including a closed home market, a manufacturing sector because they knew that it was the surest way to rebuild their economy.
For those that say this is throwing good money after bad, I don't believe that. While I think that the unions are not without blame, they have agreed to cuts, both in wages and benefits, which will take effect in 2010. Most are forecasting that the auto market will begin to return in late 2009. GM has fuel economy parity with the Japanese except for the micro car segment. GM has surpassed the Japanese in engineering content as shown in the 2008 J. D. Powers APEAL Survey (Automotive Performance, Execution, and Layout). The domestics can be successful again if we can bridge them through the current crisis in the economy and make up our collective minds to reconstruct our manufacturing base.
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To Makesense:
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4 Comments
Nov 12 04:45 PMOn Nov 12 04:35 PM Retired Investor wrote:
> The reasons to bailout out Detroit is that Detroit has been struggling
> for decades with high labor, healthcare and pension costs. Detroit's
> pensions are grossly underfunded. Should the automakers fail, the
> US government and US Taxpayers will be on the hook for billions to
> pay the lush pensions and retirement healthcare benefits of the autoworker.
>
>
> The big problem will be convincing the american who was just let
> go from his minimum wage paying job at Best Buy, (retail workers
> are 10% of the american workforce) to support the bailout plan, by
> convincing the average american:
> a. Why It is better for the USA economy to rescue a UAW workers job
> (70 per hour in total costs, appx 34 per hour in wages), rather than
> a retail-workers job.
> b. Why it is better for the government to support the lavish pensions
> of the UAW worker (when the average american chump has no pension
> and has just seen his 401K plummet by 30+ percent)
> c. Why it is better for the american government to pay for the lavish
> healthcare benefits of UAW workers and retirees (when 25% of americans
> have NO health insurance)
I take it you're a retired investor. Were you one of the day traders? If so, you are one of the economies problems. Sitting at home on your computer all day moving stocks around so you can gain millions of dollars while everyone else is at work, doing physical labor. Then you come on here and talk about the lavish pensions, and healthcare of others? How dare you. I think every American should make a decent living and have decent healthcare. There is nothing lavish or overbloated that the uaw gets. It's what every american should get. But, because of all the foreign competition they let come into our country and the jobs they let go overseas, most americans are forced to work 2-3 min wage jobs just to get buy. Why hate the ones that are making a decent living? Yes, the big 3 are in trouble. Why? Because of the investors, and the Japanese and CEO's yearly OVER inflated pay. Yes, they should make more than the line workers, but NO they should NOT be getting 22 million a year. Not at this time. Not until they make some profits again. And by the way-Toyota and Honda pay their employees VERY well. They just have not been around long enough to have the pensions coming out yet. But, the day is coming and let's see how they do then. I'm sure their costs will be going WAY up.....
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Stockpikr
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2 Comments
Nov 12 04:46 PMSarath - Iacocca only delayed the inevitable. Chrylser has been building junk very since Lee's famed K-car. We'd be better off if they'd have gone out of biz and provided GM and Ford a better domestic market.
296960 - What do you consider a foreign car? Chryslers are made in Canada, Honda's in Ohio. The "foreign" companies have provided better jobs and economic wealth in the last decade than the big 3. Why penalize them and give money to the big 3? Let Chapter 11 do what it's supposed to do.
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To Makesense:
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4 Comments
Nov 12 04:50 PMOn Nov 12 04:17 PM katec wrote:
> goanywhere your are right on!! To start with, what I have heard in
> the past weeks about people who work at GM....are paid those type
> of wages and do nothing when they get to the job!! Wow! The world
> must be laughing at us! Why do we not just give them a loan....charge
> an interest rate, then they can pay the government back like Chrysler
> did????
You "HEARD"? Do you believe everything you hear? LOL.. He said, she said. Get a mind of your own please.
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To Makesense:
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4 Comments
Nov 12 04:52 PM-
goanywhere
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4 Comments
Nov 12 04:53 PM-
goanywhere
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4 Comments
Nov 12 05:05 PM-
Auto Lover
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3 Comments
Nov 12 05:11 PMI know that everyone is enchanted with Toyota but they tried to capitalize on Americas love of SUV's with their Sequoia, Land Cruiser and Tundra and are now losing sales just like the "big three". Toyota stock is down 50% or more this year also. I don't buy that American car companies don't build what Americans want to buy. Americans bought plenty of pick-up trucks and SUV and the demand was high. That's why Toyota invested in this market.........they didn't want to miss out on that share of the pie. Well, gas prices suddenly went sky high and granted the US car makers were "caught" without an arsenal of fuel efficient small cars. But they are coming and these companies deserve a chance to succeed. The unions need to recognize this also and make more concessions to keep the US makers on a level playing field. Their refusal to do this will lead to bankruptcy filings by all or some of the "big three". What the union leaders need to remember is that 100% of nothing is still nothing. So concessions are in order for survival.
In the meantime, give them the loans to ramp up and produce the fuel efficient cars Americans want and let's sustain some industrial might and capacity in this country. Remember too that failure of our auto industry does not affect just auto workers (blue and white collar) but also all related industries like rubber, glass, plastics, electronics, leather, steel, etc. as well as all of the retail auto locations. When you consider the impact, it could put 20 million people out of work. Now you're talking about irreversible damage to the US economy from which we might never recover. The implications of a "let 'em fail, this is capitalism" mentality are disastrous.
Government regulations have severely damaged the competitive postion of the US makes...........also unfair trade policies that let importers send as many vehicles here as they desire but restrict (Japan and Korea especially) the number of US vehicles that can be exported into their countries. Let's remember folks, while import makers pay salaries to American workers who build cars in the US, all the PROFITS they make in the sale of those vehicles goes back to their home countries. This accounts for a significant transfer of wealth from our country to theirs. The yen/dollar valuation also puts US companies at a competitive disadvantage.
In conclusion, I hope Americans will support the US industry in the long run...........and the products they allegedly want (small, high-quality, fuel-efficient cars) will be here soon!! I, for one, want to support the American auto companies because I believe they are the core of America's industrial might and we dare not lose it.
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Dan the non-union man
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1 Comment
Nov 12 05:12 PM-
sunil94062
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8 Comments
Nov 12 05:19 PMPlanting money into failed private enterprise on the premise that they are too big to fail or define our country is the same as saying that we must preserve our 1800's characteristis just because they are 'nice' to have, or are presumed 'better' as are "wise old men"- nice to have.
It is, and shoulod be, foreign to most inquiring minds, to presume that house cleaning is bad. As an analog - is it "good" to keep a gangerene infected arm, because we must have two arms? How silly is that? It is not nice to get gangarene in the first place, but if one is sadly afflicted with that wound, then one does what is medically expedient - let go of the arm to save the body.
The making of a car is not that novel anymore. Many folks know how to make a car. And many do. Right here in the US. Cars that people want and do buy.
I ask: should we be really Democartic, fair and perhaps "nice" and also send bail out money to those others that make cars here in the US and are not asking for a bail-out - pari-pasu? after all they make cars too, but woe, just don't happen to be in Detroit. How rational would that be most would ask? One reason we won't be doing that is because it is morally hazardous.
I therefore ask - If we must NOT reward merit (by sending them a prorata share of this $50B) then pray why do we reward mediocrity? Seems absurd to me, any other way. I would always endorse the meritorious - the winner.
My heart goes for Detroit and its citizens. But in this economy or society, only merit shoud be rewarded. A somewhat leaderless people of Detroit gave their work lives to their respective automotive companies but just for that election, they are NOT now the wards of society at large.
Bummer, is all that comes to mind. Andy Rooney style.
These Detriot auto workers, truly should have left the employ of GM, Ford or Chrsyler, years ago, seeing the picture on the wall.
America has to be about fairness, reasonableness and equity for all. Even rules for all. Opportunity for all. And, Yes by golly, Homes for all Health care for all, Pensions for all and why not, some Vacations for all. But these are all NOT entitlements. We all have to strive, struggle, risk, engineer, innovate, win, and then and only then deserve the joys of these services and products. That is the American 'character' worth saving and always emulating.
The brass at GM, Ford and Chrysler have amply shown that they are poor stewards of their shareholders monies. They, by their own doing have come to to the logical but unfortunate end of their good fortune.
To my mind we the "Tax Payer" should not now take them as "prisioners" and support, or worse encourage their bad stewardship. I truly am sorry for Detroit but applauding of Tenessee and of even here in Califonia where they design and make many fine cars, like the Prius as an example. Our roads show many of them!
Bye Bye GM, Ford and Chrysler.
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saad
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1 Comment
Nov 12 05:21 PMthe soner big 3 go out business the better for mich, and usa???
why . the saving we make not importing oil ,the result 10 times better.
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SoCalsurfbum
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15 Comments
Nov 12 06:12 PMAll of the guys running the companies now were running it 8 years ago when they had a lot more money and a mandate to change and you can see what they did with it.
Buy it and clean out the C-suite. Float it for a couple years then flip it.
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2bz
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31 Comments
Nov 12 06:50 PMBailing out the 3 is akin to keeping a terminally ill patient on life support. It cost the family a ton of money, but the final outcome remains certain regardless of the efforts.
Bankruptcy of the 3 is not equivalent to closing them down. It gives them an opportunity to clear their books of debt and start with a clean slate. Many airlines have done so and are still around today. We should however consider the impact on their suppliers. The ones with decent balance sheets (if there are any) will be the hardest hit in that they will have to swallow losses generated by the 3's defaults, but they may not yet be eligible for bankruptcy thus likely resulting in RIFs. The rotten ones will just go bust like the 3 and start from scratch under new ownership.
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User 297012
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1 Comment
Nov 12 08:09 PMI am in agreement with you 100%.... Hate to think of the consequences of the (Big Three) going bankrupt... However it should not be the role of government to keep them in business.. We are still a "Free" enterprise country... Thanks...
On Nov 12 04:35 PM Retired Investor wrote:
> The reasons to bailout out Detroit is that Detroit has been struggling
> for decades with high labor, healthcare and pension costs. Detroit's
> pensions are grossly underfunded. Should the automakers fail, the
> US government and US Taxpayers will be on the hook for billions to
> pay the lush pensions and retirement healthcare benefits of the autoworker.
>
>
> The big problem will be convincing the american who was just let
> go from his minimum wage paying job at Best Buy, (retail workers
> are 10% of the american workforce) to support the bailout plan, by
> convincing the average american:
> a. Why It is better for the USA economy to rescue a UAW workers job
> (70 per hour in total costs, appx 34 per hour in wages), rather than
> a retail-workers job.
> b. Why it is better for the government to support the lavish pensions
> of the UAW worker (when the average american chump has no pension
> and has just seen his 401K plummet by 30+ percent)
> c. Why it is better for the american government to pay for the lavish
> healthcare benefits of UAW workers and retirees (when 25% of americans
> have NO health insurance)
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sr9web
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168 Comments
Nov 12 08:37 PM-
liarloans
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6 Comments
My Website
Nov 12 09:25 PM-
Steve Russell
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2 Comments
Nov 12 09:30 PMNot true. It went to Canada over health care. Wages in Canada are UAW and pretty similar to the US.
Wages are not the problem. Health care is.
Hello? If the government does health care, problem solved, a problem that would not have existed if the US had taken the path Western Europe did after WWII.
German unions get representation on corporate boards by law, and VW is still doing well.
Wanna blame unions for something? British unions did indeed kill their car exports. US unions are wimpy by comparison.
Anyway, no bailout without a turn to green vehicles.
As a GM shareholder, I'll say I would rather see my stock flushed than GM propped up to do the same crap it's been doing.
If the Big Three (or 2 and 1/2) won't do green cars, take the same money and dangle it in front of some of the green car startups that have been struggling. Not as clear freebies, but guaranteed loan and government committments to buy green fleets.
We need to save jobs and we need green cars. If we can do both at the same time, right on.
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AgAudi
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1 Comment
Nov 13 12:39 AMHow can I as a tax-payer be okay with a bail-out of a company or companies (if including ford) that makes undesirable and mechanically obsolete products and has known of this problem for the last decade (looking at their ever decreasing market share)? I'm sure the executives, engineers, and everyone else knew that this day would eventually come, if they kept manufacturing the same junk they did back in 1990, but with different plastic panels and "On-star" (another joke contraption). Mind you, to add to my misery, I have to watch my money (if I agree to such a non-sense idea as a bail-out) being spent on wages and health benefits for workers who have no transferable skills and get paid like millionaires to bolt on tires and rivet a few things every now and then.
The only way that I would as a tax-payer and/or shareholder approve of the actual bail-out would be if the following conditions were met:
1. Dismantle the union and or drastic cuts in their salaries (workers have a choice as to make $8.00/hr or go look for another job as their company would be bankrupt anyways)
2. Strict provisions as to where that money would be spent and detail it to the public
3. Restructuring the companies contractual obligations to health-care and wages
4. Remuneration of 50% of the salaries of the executives for the past 5 years (as they are responsible for the horrid direction the company took and they were all to happy to take the helm when doing it)
5. Establishment of a formalized and detailed payback plan as to when that money would then be returned to their lenders (the people)
On Nov 12 09:30 PM Steve Russell wrote:
> They told us car manufaturing went to Mexico over wages.
>
> Not true. It went to Canada over health care. Wages in Canada are
> UAW and pretty similar to the US.
>
> Wages are not the problem. Health care is.
>
> Hello? If the government does health care, problem solved, a problem
> that would not have existed if the US had taken the path Western
> Europe did after WWII.
>
> German unions get representation on corporate boards by law, and
> VW is still doing well.
>
> Wanna blame unions for something? British unions did indeed kill
> their car exports. US unions are wimpy by comparison.
>
> Anyway, no bailout without a turn to green vehicles.
>
> As a GM shareholder, I'll say I would rather see my stock flushed
> than GM propped up to do the same crap it's been doing.
>
> If the Big Three (or 2 and 1/2) won't do green cars, take the same
> money and dangle it in front of some of the green car startups that
> have been struggling. Not as clear freebies, but guaranteed loan
> and government committments to buy green fleets.
>
> We need to save jobs and we need green cars. If we can do both at
> the same time, right on.
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PA007
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6 Comments
Nov 13 12:48 AMThen get rid of CAFE and car vs truck fuel economy standards. Simply tax gas at a uniform rate and let the companies and consumers decide what to build, sell and buy. The incentives will at least ensure honest effort and innovation. Reply |Report abuse