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Bankruptcy For GM and Chrysler?

March 31, 2009

I had all intentions of using this space to question the unmitigated gall demonstrated by Barack Obama in firing GM CEO Rick Wagoner.  While any company that looked to the government with the corporate equivalent of puppy dog eyes while begging for a share of the TARP funds has to expect some degree of oversight, the administration’ s chutzpa in declaring GM’s proposed restructuring plan to be “insufficient” was astounding.  Obama is holding additional bailout funds hostage to a plan that passes his muster.  (The full text of Obama’s announcement and its video are here.)

In this context, my administration will offer General Motors adequate working capital over the next 60 days. During this time, my team will be working closely with GM to produce a better business plan.

They must ask themselves: have they consolidated enough unprofitable brands? Have they cleaned up their balance sheets or are they still saddled with so much debt that they can’t make future investments? And above all, have they created a credible model for how to not only survive, but succeed in this competitive global market?    Let me be clear: the United States government has no interest or intention of running GM. What we are interested in is giving GM an opportunity to finally make those much-needed changes that will let them emerge from this crisis a stronger and more competitive company.

Obama has no intention of  operating a car company–but he will dictate how it’s run.

What’s not getting play, though, was the second part of Obama’s announcement; even after receiving billions of federal dollars GM and Chrysler may still avail themselves of bankruptcy protection:

While Chrysler and GM are very different companies with very different paths forward, both need a fresh start to implement the restructuring plans they develop. That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger.

I had believed all along that the bankruptcy courts were the proper means to handle this automotive crisis.  Bankruptcy was a method that would allow the struggling companies to unburden themselves from legacy pension and insurance costs, from ridiculous ‘job banks” agreements, and to climb out from under mountains of debt.  Instead, we’ve endured a months-long Kabuki dance that only served to give the Federal government control of a car company or two (how else do you get the right to fire a CEO?).  And NOW, we’re likely to see them filing for bankruptcy protection anyway.
Why is this a big deal?  Because it puts the screws to the one American car company who didn’t have its hand out in supplication–Ford.  Ford had decided to forgo government assistance.  For its efforts it now will have to compete against GM and Chrysler/Fiat, who will have shed most, if not all, their financial burdens, will be free from the onerous UAW contracts that Ford will still be honoring, and will have gobs of US taxpayer money to use in developing products and strategies to compete against Ford.  And they wonder why it’s said that nice guys finish last.
My last seven cars have been GMs or manufactured by car companies at least partially owned by GM.  My next one won’t be.  Perhaps Ford has a better idea.
While I thought of the impact of Obama Motors on Ford, the Wall Steet Journal today added others who may not be too pleased that the government now owns a car company.

-Americans working in U.S.-based auto plants owned and operated by foreign companies. These auto makers have also been hit by the recession, and some are laying off American workers or putting their American expansion plans on hold. Still, these car companies generally operate from a more competitive cost structure, and they have been gaining market share because they are building cars that more Americans want to buy at prices we are willing to pay. Why should these workers, who generally receive lower wages than their Big Three counterparts, see their tax dollars go to bail out their competitors?

– American shareholders who have invested in these successful auto companies. When investors buy stock in an enterprise, they do so based on their read of the economic environment. Those who have invested in foreign auto makers have done so on the rational basis that these companies have a competitive model that offers them a chance for profit. How fair is it for the government to come in now, tilt the playing field, and diminish the value of their investments by propping up their less successful competitors?

I’m starting to bbelieve this is just the tip of the iceberg.

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