Monday, December 08, 2008

More On Detroit's Bailout

Paul Ingrassia, former Detroit bureau chief of the Wall Street Journal, and Pulitzer Prize-winning author, wrote another excellent editorial in Thursday's edition of the paper, entitled "The Latest Song of Detroit."

The core of Ingrassia's piece are these passages,

"Consider GM, which appears to be in the most immediate danger, and sits "at the epicenter of the auto industry's crisis," in the words of respected Deutsche Bank analyst Rod Lache. General Motors seeks a total of up to $18 billion (including the $4 billion mentioned above), which is a hefty $6 billion more than it had requested just weeks ago.

The company proposes in its "Restructuring Plan for Long-Term Viability" to reduce its distribution network from some 6,500 dealers today to 4,700 in 2012. It also pledges to put its Saab and Saturn brands through a "strategic review," which means a potential sale, in addition to Hummer, which already is under review. Ailing Pontiac would become a niche brand, leaving GM mainly with Chevrolet, Cadillac, GMC and Buick. Additional efficiencies could come through amending contracts with the United Auto Workers union. GM suggests a federal "Oversight Board" to monitor its progress in meeting its "restructuring benchmarks."

But here's the problem: GM, by its own admission, is out of time. The benchmarks, while moving in the right direction, remain too low and too slow. Making Pontiac a niche brand isn't new; that plan has existed for years. Putting the other ailing brands "under review" will mean little unless GM actually can discontinue the brands (and thus end the cost burden they create) if the company is unable to sell them. Negotiating contract changes with the UAW will be a protracted process, and negotiating with dealers to reduce their numbers will be slower still. Even if the company does get down to 4,700 dealers by 2012, it will still have an excess of at least 2,500 dealers -- as compared to the average annual sales volume of Toyota dealers.

That's why an "Oversight Board" isn't enough. What's needed, under the aegis of the board, is a federal restructuring trustee who can lead car companies through a bankruptcy-type process if they opt for federal loans -- which Ford, alone among the Detroit Three, says it might not have to do. A restructuring trustee would have the power to set appropriate compensation for terminated dealer-franchise contracts, which would be invalidated with no value if an auto maker files for Chapter 11 bankruptcy. And the trustee should help find a foreign buyer for Chrysler, which is that company's best hope now.

The trustee also would have the power to impose a new labor contract on the UAW. An excellent model for such a contract already exists at the GM-Toyota joint venture plant in Fremont, Calif. The UAW represents that plant too, but the contract there is shorter, simpler and more flexible in every respect than the union's master contract with the Detroit Three."

He pulls no punches. A Chapter 11 filing, or an equivalent status, must be required for GM in order to receive any more Federal help.

As I discussed this ongoing drama with my business partner yesterday, he noted the front page of a newspaper, probably the NY Times, listing five options for Detroit's auto makers. Bankruptcy wasn't even among the top three, and anything requiring outsider-led reorganization was down the list and assessed as being opposed by the UAW and company managements.

It's taken this to make the strangest bedfellows, UAW chief Gettelfinger and CEOs Wagoner, Mulally and Nardelli. And, this morning, GM executive Bob Lutz, who has worked for all three auto makers, at one time or another.

Lutz and Gettelfinger were each interviewed on CNBC this morning. It was pretty disgusting.

Lutz sang the praises of Wagoner, but, when asked how much the UAW had to give to make things work, he punted. Then he continued by claiming that firing Wagoner was like 'firing the mayor of a town just hit by an earthquake.' According to Lutz, i.e., the company line on this fiasco, all of Detroit's problems have been external. They didn't mismanage themselves, ever.

Nope. The financial crisis and current recession are entirely to blame.

Then Lutz corrected the interviewer, saying something like,

'I don't know why people call this a 'bailout.' It's not a bailout. It's an emergency loan that will be paid back.'

Yeah. Right. A company that can't forecast being profitable under the best case for two more years will pay back an $18B loan on time.

If this were such an attractive financing opportunity, GM would be going to the capital markets, not Congress.

A little later, Ron Gettelfinger, head of the UAW, was interviewed. What's surprising is that Gettelfinger is so craven and desperate that he's singing the same song. When asked about firing Wagoner, Gettelfinger virtually repeated Lutz' argument- that all the trouble GM is in is outside of its control.

When pressed for what the UAW would give to make a reorganization work, Gettelfinger, too, punted, saying everything was on the table, but nothing was sure until he 'saw what everyone else was giving, too.'

When corporate management and their union suddenly begin singing from the same hymnal they are holding together, you should worry.

And put your hand on your wallet. And hope your Congress has its hand on your Federal wallet, too.

It seems that these clowns really believe nobody has noticed how the managements of GM, Ford and Chrysler, together with the greedy UAW 'management' and its workers, have run this sector's US-based companies into the ground. Now, they want $34B of our money to 'tide them over,' as if we'll ever get it back.

Paul Ingrassia, who has followed this industry for decades, making his mark by studying it closely, is right on target. The only way these three companies should receive any more Federal help is in Chapter 11. Period.

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