Wednesday, November 19, 2008

The Mounting Cry Against A GM Rescue

As time passes and the CEOs of GM, Ford and Cerebrus/Chrysler continue to cry for Federal aid, more and more Americans seem to be raising objections.

For example, the Wall Street Journal's weekend edition had a nearly-full page article entitled, "Just Say No to Detroit."

It was a thorough, reasoned analysis of how GM has destroyed nearly $200B in capital over the past decade.

As David Yermack, the article's author, writes,

"Yet one can only imagine how the $465 billion (the once-Big 3's total value destruction) could have been used better- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen."

There is also a growing awareness on the part of average Americans that rescuing GM is really about propping up the UAW via aiding the auto maker. It's dawning on more non-union workers, which means most Americans, that the UAW workers have unparalleled benefits unavailable to most of us.

For example, yesterday's Journal featured an editorial by Michael Levine, a "former airline executive" and "senior lecturer at NYU School of Law," entitled, "Why Bankruptcy Is the Best Option for GM." My business partner noted that the same day's NY Times gave the front page of its business section to reporter Andrew Ross Sorkin for a similarly-themed piece on GM.

Levine's editorial is noteworthy for highlighting an underestimated area of auto maker troubles- dealership networks. I touched on it in this post from July of last year. Levine notes that only in bankruptcy could GM renegotiate its suffocating state-by-state dealership agreements.

So bankruptcy is about much more than the old view of filing Chapter 11 as closing a business. In fact, only last night, by business partner noted that the retail chain of Dave & Barry's is now in liquidation. I mentioned, 'oh, yes, they filed chapter 11 this summer.' My partner noted, however, that doing that simply allowed them to reorganize. Now, however, they are actually closing.

Thus, with GM, although its management, the UAW, and even, this morning, on CNBC, government representatives such as Bart Stupak of Michigan would have you equate filing for bankruptcy with being closed for business, that's not true at all. He and another government official alleged that, because so many middle class employees would be affected, the entire country must save them. And that Goldman Sach's average compensation/person was too high to be 'middle class,' so they never should have been given any help whatsoever.

It's also extremely disingenuous for Stupak to keep saying,

'This would be a loan, not a bailout. It'll be paid back.'

Yeah. Right. Bart, nobody but Michiganders believes this. And that's why it won't happen.

A GM bankruptcy, with Federal aid in that context, would allow the firm's management, and/or the government, to tear up existing contracts- including those with unions- and renegotiate them. Perhaps sell the profitable parts, or slim down and then sell the whole package to a better-run auto maker.

But if, as my partner noted, the left-leaning NY Times is running prominent pieces against a loan to GM, or any of the Detroit auto makers, you know broad public sentiment is probably going to be against a Federal rescue of GM prior to its filing Chapter 11. Once in bankruptcy, GM could be extended a debtor-in-possession loan by the Federal government, which, according to bankruptcy law, assumes senior position among all other creditors.

No matter how you try to spin the troubles of GM, Ford and Chrysler, they are too late in the game to be helped now. The UAW is crying that their employers are victims of the financial crisis, and deserve TARP money.

No such luck. Nobody believes that. And, anyway, we all see the self-serving argument by Gettelfinger, the UAW's chief, as trying to preserve the union's ultra-lush compensation and benefits packages.

The senior management of the three companies are trying that tack, as well as arguing over gasoline prices, 'green cars,' and anything else to avoid admitting that the same lousy management that brought them to this point is going to be and spending the tens of billions of dollars of "loans" they now insist must come before January.

So, on a final note, let's ask this question.

If GM, Ford and Chrysler so badly misforecast their cash and liquidity positions as to be running out of money in a month, when, only two months ago, they reported that they were good through June of next year, what does that say about the quality of management which we, as taxpayers, are being asked to rescue?

Wouldn't we all be better off if any Detroit auto maker receiving a loan from the Federal government did so only after filing Chapter 11 and firing its senior management team, so a more effective, capable team could be put in charge as receivers?

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