Thoughts on the Gas Guzzler Bailout

Even though it seems like the GM bailout is pretty much a done deal, in this blog post, I would like to throw out an idea, that idea being that it is a terrible idea to bail out GM based on the experiences of other countries that have gone through economic crisis.

In 1997, the economies of several Asian nations shocked the world by crashing one by one in what is known as the *Asian Financial Crisis*. There are a multitude of reasons for why this happened on the local and international levels within each of the different countries that suffered economic failure. However, for countries hit especially hard, like Korea, the subsidizing (using government/public money to help pay for the costs of a company or organization) of large, uncompetitive and uncreative mega-companies (these mega-companies are called chaebol) played a large role in leading to serious economic crisis. Government protection of these companies from the forces of the international economy allowed for a lot of the unproductiveness and corruption that happened within the chaebol structure to occur in the first place, later leading to wide scale economic crisis.

It seems to me that the US's desire to bailout GM is akin to the subsidization of the chaebol in Korea. The connection I see is that the chaebol were huge, unwieldy, heavily indebted companies protected from external competition, which were subsidized by the government because of their huge role in the Korean economy.

Similarly, instead of letting a large, unproductive, unwieldy, uncompetitive and bankrupt company (GM) submit to the rigors of the market and therefore go bankrupt, the US wants to bail it out, i.e., subsidize it to continue to live on with public funds. It seems that the rationale behind the GM bailout is that it will prevent us from feeling the burn of this major company dying, and more jobs won't be lost.

However, I see the bailout of GM as being nothing more than a short-term solution and generally a terrible investment by the US. I cannot foresee the bailout of GM having any major impact in the long run, especially considering that the conditions for the bailout do not seem to be nearly as rigorous as they should be. It seems to me that the way that the conditions for the bailout are being structured will likely rule out any sweeping company-wide structural reforms from occurring within GM as a company. If this is the case, then it seems that this giant, unwieldy conglomerate will mostly likely continue to be unwieldy and not as efficient, creative, and productive as it could/SHOULD be.

Here are a couple of articles that have had some influence on my thought on these matters:

*GM considers dumping Pontiac, SAAB, and Saturn

*Why not just file for bankruptcy?* (this story is being posted below.)

*A GM Bailout? Here are my terms for a deal*

As I mentioned before, I don't know enough about these issues, and would love if someone could provide more insights about whether or not there is a comparison to be made here, and a lesson to be learned.

If anyone here has any thoughts on these matters, I would love to see what you have to say, even if it means that the idea expressed above will be torn apart.

Also, in case you are interested, the comments (in slightly modified form) in this blog post were posted as a comment to Harvard political economist Dani Rodrik’s blog, which you can access by clicking *here*.

THANK YOU!!

Why not just file for bankruptcy?

Dennis Byrne

November 18, 2008

President-elect Barack Obama and Democrats are facing the first important test of their promise of change, and they are about to land heavily on the side of the status quo in the most embarrassing and contemptible way. 

In their hyperventilated drive to "save" General Motors (read: the United Auto Workers union), they are deploying our wallets to save a failed business, when real "change" would be bankruptcy, from which would emerge a better and more competitive enterprise. 

The $25 billion lifeline, to be sliced from the $700 billion Troubled Assets Relief Program meant for the financial industry, rewards GM for decades of incompetence, greed and sterile thinking. We should scram as far as possible from GM's legacy, not resuscitate it. But if Senate Majority Leader Harry Reid, House Speaker Nancy Pelosi and President George W. Bush, with Obama's blessing, put GM on life support, they would be wallowing in exactly the kind of capitulation to special interests that just weeks ago Democrats condemned.  

The UAW has spent $24.6 million in campaign contributions, virtually all to Democratic candidates, in the last 20 years, while GM has spent $10 million on lobbying in just 2008, according to the non-partisan OpenSecrets.org. A few weeks before the election, the UAW announced a $3 million ad campaign in support of Obama.

These millions don't include the uncounted piles of dough that the company and union have spent in the last few weeks to pressure Washington into a bailout. 

Over the weekend, Pelosi assured us that GM and the UAW wouldn't get off scot-free, that the $25 billion would come with "strings" attached, such as requiring Detroit to embrace the technology of more fuel-efficient cars—never mind that a different $25 billion of our money already has been set aside in loans for that purpose. Pelosi said the additional $25 billion wouldn't be "new money" because it was coming from "existing" bailout funds. You mean that $700 billion, which suddenly showed up in the last month from who knows where, isn't new money? Stop it, Nancy. 

Pelosi's other strings would include a vague company "restructuring" to assure its "long-term" viability. Yeah, sure, we can trust the auto industry and UAW, which made this mess in the first place (GM's car sales began sliding a long time before the current financial crisis arrived), to do what it should have done decades ago.  

The best, and perhaps only, way to accomplish what needs to be done is for a bankruptcy judge and his appointed trustee to oversee a top-to-bottom reorganization of the high-bound, uncreative and sluggish company. (For example: How about breaking up GM, which has too many models and divisions, into separate companies, freeing themselves of the brain lock imposed by a lumbering bureaucracy and an unimaginative central management?)  

What's needed is a start-over. And a bankruptcy judge has the power to force the company to go back to square one by, among other things, forcing a recasting of the ridiculously rich union contracts. Stockholders, bondholders and other creditors and suppliers will be hurt by a bankruptcy, so why should organized labor escape whole?

If there absolutely must be a government cash infusion, New York University business professor Edward Altman says it should only be made on the condition of GM declaring bankruptcy, to protect the public's interest. No one can predict that the economy won't suffer greatly if GM is ushered into bankruptcy, but anyone who insists that he knows that a nationwide depression will surely follow if we don't cough up $25 billion more for GM is a faker, even a liar.  

Declaring bankruptcy doesn't mean that plant and dealership doors would be padlocked the next day and hundreds of thousands of workers would be instantly on the street—an impression that GM and UAW propagandists would like everyone to believe.

Bankruptcy requires an orderly process, prescribed by law, under which the company can be reorganized and emerge strong and resilient. Reorganization would allow the assembly lines to continue running while arranging reasonable warranties, maintenance and service for customers.  

Sure, it will take creativity and skill to handle a meaningful transformation, but that will never happen if the Washington friends of GM and UAW plop $25 billion in their laps. 

Dennis Byrne is a Chicago-area writer and consultant. He blogs at http://dennis byrne.blogspot.com