Wednesday, November 12, 2008

Don't Bailout Detroit

One of the problems you get when the government starts handing out billions of dollars to private businesses is that pretty soon everyone wants a similar deal.

Detroit's "[formerly] Big Three" automakers now have their hands out for multiple billions of dollars, and it looks like Democrats in Congress, paying off a political debt to Michigan, are going to hand it to them.

Here's our problem: no amount of federal dollars will be enough to save Detroit's automakers from themselves. They've been mismanaged for years, and nothing in any bailout proposal we've seen suggests that will change. If anything, it will only get worse, as horrible management will have been rewarded.

There's a better, albeit painful, solution: Chapter 11 bankruptcy. What would that mean? First, it would wipe out whatever shareholder equity is left in the auto companies. But it would not mean they would close their doors and cease business. Instead, with creditors held at bay, GM, Ford and Chrysler would be able to radically restructure their businesses, which is what is needed.

We don't need to extend the life of these dinosaurs by putting them on life support; instead, we need to force them to evolve into a new, viable species of auto company.

If restructuring doesn't work, or if management can't stomach it, then the still valuable assets of those companies would be sold off to other bidders, who would have a shot at doing something innovative. For example, another auto company might pay for the assets of GM's Cadillac division to augment its luxury car sales, with a new plan to streamline and update the brand and the manufacturing facilities.

It would be a painful process, but it would all occur under the supervision of a bankruptcy court that would have immense power to rewrite contracts and order other changes that the automakers either can't--or won't--undertake themselves.

Yes, there are serious issues about jobs, health benefits and pension benefits, but having the government address those issues indirectly by pumping billions into companies that would promptly lose those billions--still ultimately triggering some kind of collapse or bankruptcy--is hardly the way to go.

If, however, the Government is going to bailout these dinosaurs, then it needs to do it in a way that guarantees they will serve our national interests, not just continue to churn out gas-guzzling SUV's.

For some ideas on how the government might do so, check out Thomas Friedman's column in today's New York Times.


Favorite Uncle D said...

Chapter 11 is likely the only way to save the auto makers. They are going to have to get rid of expensive retiree health benefits and the unions' stranglehold on workers, along with some other radical restructuring (including top management).

Then, restructured and lean, perhaps they'll actually try making cars (as opposed to trucks and SUV's) that people want to buy.

Hard to imagine this actually happening though, as the unions and retirees would get hurt really bad in chapter 11.

Bluedog said...

I have to agree. The other day we got our 2009 Consumer Report Buyers' Guide and most of the American built cars are at best, average when it comes to reliability. The US auto industry builds a defective product and it continues to pound away trying to sell pick up trucks and SUVs.