Is There a Good Auto Bailout?
Sure, in principle.
There appears to irresistible momentum behind a “temporary” bailout designed to forestall bankruptcy until the new administration is in place. The problem with imagining that this does anything other than kicking the can down the road a few months (at a cost of putting $15 billion at risk) is that there is no reason to believe that Detroit will be any better able to pay its bills in March than they are today.
Let’s start at the beginning. These companies have a solvency problem, not just a liquidity problem. When you add up all the contractually-obligated payments they have to make to employees, retirees, suppliers, bondholders and so on, there just isn’t enough cash to go around. If they could escape these prior commitments and manage themselves more intelligently, there are profitable operating companies buried in there, but they are trapped underneath the absolute size of the commitments they have made. Everybody is either better off or no worse off if this happens, as compared to just liquidating the assets in a fire sale. This is exactly what Chapter 11 bankruptcy is meant to do.
Experts disagree about whether a literal application of a Chapter 11 process would work for the Big 3. So, if we could stipulate that we could get all of the effects of an orderly bankruptcy through some government-sponsored process that just had a different name, then of course we should do it. If we had a process called conservatorship or something, in which a set of government employees called an oversight board, who are insulated from political pressure and have very similar motivations and authorities to the government employee named a bankruptcy judge, makes decisions that force renegotiation of contracts and a change of ownership, we would have a materially identical process to bankruptcy. This hypothetical alternative could – again, in theory – actually be superior if it could reduce some of the inevitable disruption in consumer demand that would very likely be created by bankruptcy.
Of course, as even thoughtful liberals have observed, this is easier said than done. What are the odds that members of Congress are really going to vote for a body that can be directly tied to them that will do things like tear up all UAW labor contracts, tell every holder of a share of GM stock in the U.S. that they’re just out of luck, aggressively fire tens of thousands of white collar workers in politically-competitive states and districts throughout the industrial Midwest, and tell anybody who owns a house in Michigan that he has just gotten a lot poorer?
This seems to me to be the acid test of whether such a plan will work, in the sense of ending up with a competitive auto industry and minimum moral hazard, instead of an inefficient jobs program. Unfortunately, the key aspects of the requirements that Congress actually seems to be imposing look more like a political kabuki dance: government warrants (a good idea; but the key open question is the priority and assets against which this $15 billion will be securitized), limits on executive comp and the a appointment of a car czar selected form the Washington bureaucratic class.
“Car Czar?”
I’m not one of these experts who reads history books and stuff, but I have a vague sense that this whole czar thing didn’t work out so good in Russia. (It was Russia, wasn’t it?)
So how come every time there’s a problem in America, Washington appoints new Czar of This or That? And have any of Washington’s Czars going back to the first Energy Czar in 1973 every accomplished much?
— Steve Sailer · Dec 9, 10:42 PM · #
So, a lot people have been talking about reorganization of the auto companies, and amongst the methods of organization you hear is the conversion of credit to equity. Well, the biggest “creditor” of the auto companies to use the term loosely for a moment is the UAW. GM’s obligations to the union through their asinine contracts are monumental.
Over lunch, my dad mentioned the following alternative idea to the bailout: Have the government take-over (nationalize) one or more of the car companies, but instead of having them run it with some ridiculous car czar or some such, simply cede the company to the UAW. Neither my father or I are big (or even little) fans of labor unions or government nationalization of industry, but this curiously makes sense.
The main reason I don’t care for labor unions is the false dichotomy they set up between Management and Labor. In the best of all systems, everyone from the CEO to the weekend janitor should be on the same page, and their incentives should reflect this. That’s what stock options are for. That’s the engine that has allowed Silicon Valley (where I work) to function. It has always seemed that employee-owned companies tend to be run the best because everyone at the company has the company’s best interest at heart. They have the financial incentive to behave that way.
Well, let’s apply that here. Let the UAW renegotiate its own contracts with its workers knowing that now they have the power to run the company as they see fit. No more excuses blaming incompetant management; they can fire the board and executives and replace them with the group that they feel will maximize profit, and thus wages.
In fact, I’ll tell you what, if the union agrees to this, we can even throw in the first bridge loan to get them started, (but not any more down the road).
If the employees want this industry saved, and it’s reasonable that they do, it’s time to tell them, “You’re so smart, you run it.”
— John Bejarano · Dec 10, 12:00 AM · #
I agree with the suggestions in this article. It is really a shame that our government will almost certainly do nothing other than shovel money thoughtlessly to the car companies, or should I say the UAW. Much as the Republicans mindlessly shovel money to Wall Street, apparently Democrats do the same shoveling, with different beneficiaries. After 8 years of watching Bush reward failure, it’s a shame to see something similar happen with the auto companies.
— babyming · Dec 10, 09:26 PM · #
Pennsylvania has a process for insolvent cities that is also a bankruptcy court in all but the name. A panel of five people picked by the state senate gets to approve all contracts and the budget and also gets to decide when the city can resume normal operations. The mayor and council still serve, but they are barred from screwing anything up, as any attempt to do so will be nixed by the oversight panel.
It’s a good system. Like you say, any Big 3 bailout should be modeled on it.
— Joe Magarac · Dec 10, 09:49 PM · #