The Detroit Pigs Return To The Washington Trough

On Thursday, I wrote this post on my companion political blog discussing those aspects of the current drama being played out on Capitol Hill involving the US-based auto makers.

After I wrote that post, there was still plenty of drama occurring, both in the Congressional hearing room, and outside, as all parties rushed to appear before cameras on CNBC and Fox to attempt to add weight and urgency to their positions.

In this post, I want to address the economic aspects of what was said, and not said, yesterday in testimony and various post-hearing interviews.

Perhaps the most outrageously insidious and disingenuous 'witness' at the hearing was the UAW chief, Ron Gettelfinger.

This union chief stopped at nothing to save his hide, and, parenthetically, his union, too. To hear Ron's view of the world, filing Chapter 11 is unacceptable, because it would cause GM to cease to function.

Of course, that's a lie. But what else can Gettelfinger say? The truth is too awful for him and his union members.

Gettelfinger kept banging away on the theme that millions would become unemployed, national production capacity would be lost, and cars would be unbuilt if GM, Ford and Chrysler file for bankruptcy. And that no consumers would buy a car from a producer in Chapter 11.

Trouble is, Gettelfinger's source on that last contention was hopelessly biased and suspect.

But, listening to the UAW chief, you'd think that filing Chapter 11 was somehow less efficient than having a giant pow-wow, before a filing, in which everyone magically sits down and negotiates in good faith, once you and I have agreed, through Congress, to write checks totally some $30B to the three failed auto makers.

The truth, of course, is that Chapter 11 is crucial to force such negotiations. Gettelfinger is scrambling to hold out for pre-bankruptcy negotiations, because, in bankruptcy, his union will have its benefits and wages slashed unilaterally.

In fact, one Democratic Senator explicitly accused, but not by name, some Republicans and pundits for using Detroit's problems to break the UAW. But the UAW is doing that all on its own. It doesn't need help.

Perhaps the most sickening aspect of the presentations by Wagoner, Mulally, Nardelli and Gettelfinger were their simultaneous claims of two mutually exclusive positions:

-If GM, Ford and Chrysler are not rescued, their failure will mean untold damage to the US economy, so dire is their current predicament. And this predicament, by the way, is only the result of the recent financial crisis, not the woeful mismanagement of the three firms and the UAW for decades.

-If GM, Ford and Chrysler are bailed out, they will magically become the best-managed, most eco-friendly, well-run, successful American companies you ever saw.

Actually, both positions are probably lies.

First, Chapter 11 filings by all three firms would allow them to operate under a Federal bankruptcy referee, who would assist in the pruning of loss-making operations, reorganization of the three firms into fewer, stronger firm(s), and/or sale of attractive operations to other car makers.

Further, shuttering Ford, GM and Chrysler, as we know them now, does not preclude Federal assistance to formerly-employed UAW workers, as citizens, though, not UAW members. Shareholders and creditors may suffer, as they should, but employees need not be totally cast adrift.
Too, if GM, for example, is truly within a month of failure, then it's way too late to claim that a few billion in cash will magically solve all its ills.

Also, the three CEOs attempted to con the Senators at the hearing into believing that it is natural and acceptable to forecast 18-30 month timeframes until which these firms will show a profit again.

No private investor would stand for this. No bank would lend on these terms. But the CEOs could offer no case for rescue, in this situation, other than trying to cause a fear of massive unemployment and national economic ruin, should they fail.

Simply put, the CEOs, and Gettelfinger, all of whom are culpable in having brought the firms, and the US-based auto making sector to this point, attempted to evade responsibility for ruining the three firms, but threaten to make the nation's taxpayers pay a high price for the mistakes of these four leaders, and their predecessors.

The second contention of the four leaders, that, if bailed out, they will magically become better-managed companies, is silly on the face of it.

Without significant change in management, union contracts, and various other vendor arrangements, these companies will never survive to repay the 'loans' they claim to want.

You have to ask yourself, how will GM, Ford and Chrysler, which mismanaged themselves to this point, magically change just by the infusion of tens of billions of dollars of taxpayer money?

They won't.

Finally, there is a lot of emphasis on various surveys purporting to claim that, if in bankruptcy, these firms will lose customers, because, 'nobody will buy a car from a company in bankruptcy proceedings.'

These surveys are, when you carefully evaluate them, specious. Gettelfinger and Wagoner never actually cite the details of the 'survey' on which they rely.

Today, on CNBC, economic misfit Steve Liesman cited the network's own poll as showing that 52% of those questioned would buy a car under those circumstances.

Then the economic idiot claimed he had reversed his own numbers, and the correct value was a lower number. 37%, I believe, with the balance, some 11%, were undecided.

The flaw, of course, in Liesman's figures, is that one would need to carefully consider the sample makeup. To me, the most reasonable universe for these surveys would be current buyers of each company's cars. With such a small market share now, GM is really only worried about current customers, since most car buyers wouldn't take a GM product if you gave it to them.

Thus, it's probably a good idea to totally discount these 'surveys' purporting to show that the firms can't....just can't...be in bankruptcy, or they will sell no cars.

Finally, the CEOs, and supporters, including the Governor of Michigan, would have us believe that, without GM, Ford and Chrysler, valuable non-carbon-based car technology will lapse, and we'll be at the mercy of foreign producers of alternative-fuel vehicles.

Again, this is a red herring, and nothing could be further from the truth. If these technologies are so promising, why would not either other car makers with plants in the US, or simply other companies, buy these patents, technologies, or operations, in order to continue perfecting them?

It's not the assembly of something like GM's oft-heralded, but far-off Volt, that is crucial. It's likely the battery and drive train technology. Parts that a supplier could easily buy and finish developing.

In general, any parts of these companies that are valuable will be preserved and transferred, in Chapter 11, to a better, stronger parent. So will employees needed for ongoing car operations.

In summary, the cases made by Wagoner, Mulally, Nardelli, Gettelfinger, et.al., are deeply flawed, specious, and devoid of merit.

We should all hope that Congress only extends a debtor-in-possession loan to any of the three US auto makers which choose to enter Chapter 11, and then offers focused assistance packages to displaced employees.

To do more would be folly and insanity. Throwing our good taxpayer money after bad, lost shareholder and creditor money.

Earth To Ron Gettelfinger: Wake Up!

I just saw/heard UAW chief Ron Gettelfinger give a completely surreal press conference.

It's difficult to catalogue every single one of his mischaracterizations, lies and errors of reasoning. Among them, however, were these:

-Contending that if the US auto makers file for bankruptcy, then any market share losses will be made up exclusively from off-shore, foreign auto producers.

-The beating that equity prices of GM and Ford have taken is merely a 'distraction,' and doesn't reflect some of the better products which at least the former has developed.

-The auto industry is vital to the US economy, and its failure, by virtue of Chapter 11 filings by GM, Ford and/or Chrysler, would plunge us into a severe recession.

-There must be immediate Federal rescue of the auto makers by the Bush administration.

-The UAW is awaiting January 20, 2009, when Gettelfinger indicated that he and his union feel 'real' help will unquestionably arrive in the form of a Democratic President and Congress.

This is pretty scary stuff. As counterpoints, here is what I believe to be more realistic:

-Market share losses of GM, Ford and Chrysler will most probably continue to be filled in by US-based producers owned by foreign car companies. Thus, more US-based jobs and capital investment will follow, though perhaps not on a 1-for-1, dollar-for-dollar basis, as these predominantly southern-based, non-union plants are more efficient than those of Detroit-based auto makers. Gettelfinger completely misrepresented reality, and, in effect, lied, on this point.

-To most Americans, and especially to Americans as investors, the beating that the equity prices of GM and Ford have taken is precisely the point. Not a distraction, but an important, crucial signal in the lack of confidence by investors that these companies, and Chrysler, will ever be able to provide sufficient value to their customers, in sufficient volumes, to merit higher equity valuations.

-The UAW and its major employers, GM, Ford, Chrysler, and their suppliers, hardly represent the larger share of US GDP that they once did, say, as recently as even 20 years ago. It's not a growth industry, and any employee choosing to work for one of these three auto makers, or their suppliers, made a conscious choice to bet their livelihood on no-growth, or shrinking companies with a track record of losing market share and money.

It's simply not true that, as in the 1950s, the US economy is supremely, or even largely, dependent upon the Detroit-based auto makers.

For example, according to this news piece,

"United Auto Workers union membership has fallen below 500,000 for the first time since World War II, reflecting the massive restructuring undertaken by Detroit's automakers.

The union reported Friday in a filing with the Labor Department that it had 464,910 members by the end of 2007, compared with 538,448 at the end of 2006. UAW membership peaked in 1979 at 1.5 million but has been dropping ever since."

That sure doesn't sound like an economy-wrecking number of laborers, if furloughed, does it? It's about four months of recent unemployment, on current trends. And in a Chapter 11 filing, these wouldn't all be laid off.

So, once again, Gettelfinger is lying about the importance of his union, and its major employers, to the US economy.

Where do we draw the line between natural, healthy Schumpeterian dynamics, a/k/a 'creative destruction,' and a 'too big to fail' case requiring the US Treasury and taxpayers to save an entire industrial sector which has, through its own management, failed?

-Gettelfinger is wrong to lay the entire mess of his employers and his own union's exorbitant benefit and wage demands in the lap of the outgoing Bush administration. If this were so urgent, why did the four pigs wait until the last sixy or so days of the current, conservative, Republican administration to beseech Congress for help? To wait so long, present so thin and unconvincing a case, and then blame President Bush for any subsequent damage from a refusal to rescue a group of failing companies, is completely unrealistic and immoral.

-This, sadly, is a fact. It's clear that Gettelfinger's UAW is salivating at the prospect of raiding the Federal Treasury, courtesy of the Illinois rookie, Frisco Nan and Harry Reid, without taking any wage or benefit cuts whatsoever. So desperate are they that Gettelfinger is trying to mau-mau President Bush to cough up the funding in advance. The greed and lack of a sense of reality on the part of the UAW's senior officials is just mind boggling.