GM Bankruptcy: Best Bet For The Taxpayers' Investment?


Detroit couldn't be allowed to collapse. It was one of the very few things the Obama transition team and the outgoing Bush administration agreed on in December and January.

"I believe our government should provide short-term assistance to the auto industry to avoid a collapse, while holding the companies accountable and protecting taxpayer interests," then president-elect Barack Obama said in December, shortly before a bid to help bail out the sinking car companies stalled in the Senate. A week later, Bush's Treasury Department granted General Motors. and Chrysler $17.4 billion in emergency loans. GM wrangled another $2 billion from Obama in April.

Now that both companies have filed for bankruptcy, will the taxpayer lose out on that gamble? The government has agreed to invest another $30 billion in GM and $8 billion in Chrysler during and after their restructuring. Would the better move have been the one conservatives were calling for, just to let the companies go in December?

Given the far-ranging economic impact of any closures in the auto industry, most experts answered no. Or, at least, not exactly.

"There's clearly an economic case to be made to defend the jobs that are there, and to avoid a shock to the economy that might send us spiraling further down," Douglas Elliott, a fellow at the Brookings Institution, said. "On the other hand, this is a risky investment."

To minimize that risk, both the companies and the government needed that time to work out the details of a restructuring agreement that could proceed relatively smoothly, said economist Dean Baker of the Center for Economic and Policy Research.

Baker cited warranty guarantees, as well as limited commitments to parts makers and other sub-industries that depend on the automakers, as steps in the right direction.

"I'm sure the fallout won't be zero because of that, but it won't be disastrous," Baker said. "Back in December and January, when none of these pieces were in place, there was still enough up in the air that I think it would have been reckless to have done a bankruptcy."

At the end of last year, Susan Helper, an economics professor at Case Western Reserve University, said that the automakers' chances of managing Chapter 11 looked grim. "I thought filing for bankruptcy in December would be a disaster," she said. "It would have focused people on fighting over who was going to get paid, rather than making the companies work better."

Without some aid to stabilize both the automakers, and through them, the supplier chains, Baker believes that the industry would likely have collapsed, taking down with it the communities that grew up in the shadow of auto plants in Michigan, Indiana and Ohio. In that sense, he said, aid to GM and Chrysler served as a good investment from both an economic and a social standpoint.

"The region already is devastated, but if you'd had no bailout, I can't imagine how much more you would have needed in the way of government assistance to the towns in that area," Baker said. "The state governments just don't have the money to pay for basic services, they're already facing enormous shortfalls and it would have been a lot worse. I think you're better off trying to keep some of the jobs in there, rather than let the whole thing collapse and come in there and try and pick things up from scratch."

Job losses from such an uncontrolled bankruptcy would likely have totaled 1 to 1.5 million, Baker said. Helper's estimate is even higher -- 2 to 3 million job losses. If the broader economy were less shaky, that might not be so devastating, Baker said, but these are special circumstances. "Firms go out of business," he said. "We've seen that before and that's not the end of the world. But at this point in time, it would be."

That's not to say that neither the automakers nor the government had advance warning of the current industry crisis. Bill Visnic, a senior editor for Edmunds AutoObserver, said both GM and Chrysler should have gone through restructuring back in 2006, around the last time GM sidestepped a bankruptcy scare.

"These companies had all become so leveraged and such slaves to their own overhead, that as soon as revenue started to go away they got in drastic trouble very quickly," Visnic said. "Their business models were eroding. It was clear that what was happening with them was not healthy and not sustainable. The only thing that was really sustaining them for the last couple of years was a hyper-inflated level of auto sales in this country, with a lot of people buying cars almost on a whim."

This past winter, Baker said, the delay in government intervention was due to some extent to the transition between the Bush and Obama administrations, when there was little active response to the collapse of Detroit.

"In fairness to the Bush administration, they knew they were leaving, and they didn't have anyone who really was in a position to carry through with the restructuring of the industry," Baker said. "I think you really did have no choice but to put it off until you had the new administration in a position to deal with it."

Putting it off, it turns out, worked well for Chrysler. "The Chrysler bankruptcy is going so much more smoothly than anybody had a right to expect," said Elliott at the Brookings Institution. "I think it's given significantly more confidence to the administration and everyone else that they'll be able to actually make this work as a bankruptcy proceeding and come out the other end in a viable fashion."

That's not to say that the last half year has been a joyride for the car companies or their suppliers. Like the auto companies themselves, the many sub-industries that rely on them have been taking hits in the meantime. Though Baker lauded the administration for keeping an eye on subcontractors, Helper said she worries that too many machine-tool producers and other boutique industry labor may find themselves forced to shutter. If that happens, she said, the auto companies may be hard pressed to replace them.

"Their financial positions are much worse, because they've had six months of really low income," Helper said. "I'm really worried that when demand picks back up and the exchange rate becomes more favorable to American manufacturing, those people aren't going to be there." A production tax credit, she suggested, might help keep such businesses afloat until then.

Analysts were also sympathetic to autoworkers, who will see their wages, benefits and numbers thinned in the coming months, but were generally less concerned about the plight of dealerships, because they could be reopened later if the demand returns. So far, GM has announced plans to cut 1,100 of its 6,000 operating dealerships during restructuring, and Visnic said the final tally will likely more than double that.

"They're all over-dealered, especially GM I don't think anybody could argue that with you," said Visnic, who noted that voiding dealer agreements was a prime reason for entering into bankruptcy discussions. "There absolutely will be social fallout, but it's a business necessity."

Bankruptcy also affords GM and Chrysler the opportunity to retool other chronic problems with their business model. Helper recommended that the government encourage a longer view toward customer satisfaction, to which she said they have historically paid short shrift.

"Look at the top 10 warranty problems and figure out a way to solve those things," Helper said. "One of the problems that U.S. auto companies have had is that they've had quite short time horizons, so it's never actually paid off for them to handle things in the way that Toyota has shown work from a customer point of view. Right now, they're not selling many cars, so they have more time to figure it out."

The government also shouldn't be too quick to extract itself from the companies once the initial restructuring is complete, Helper said.

"When I hear people like Larry Summers talking about how we have to turn these companies around in two years, I think that's really insane. That's how you get the public perception of 'Government Motors' that makes crummy cars," she said. "They're almost acting like private investment bankers, which makes you wonder why they intervened in the first place. I think they're missing a real opportunity."

If the government is going to own 70 percent of GM, Helper said, it should behave like any other investor and act to maximize its interests with its investment, though those interests are broader than those of a typical investor. Continued employment of auto-sector employees, for example, increases return on investment via tax revenue. In that vein, Visnic said the administration has plenty of motivation to broker labor agreements that would keep more of whatever industry remains on U.S. soil.

"If you accept that labor made concessions here, then there will have to be payback, maybe in the form of guarantees that you'll keep more assembly here," he said. "I would hope that maybe we might get out of this another look at what our long-term goals are for manufacturing cars in this country and keeping that sort of heavy industry here, rather than seeing it off-shored."

Of course, the benefits of whatever aid the government provides to GM or Chrysler must be weighed against danger to Ford, the last of the Big Three automakers. Ford, another U.S. economic engine, is in better though by no means sterling financial shape. "It's a delicate balancing act," Elliott said. "You don't want the good-news, bad-news of, 'hey, we saved GM but we sank Ford.'"

On the other hand, Helper said, Ford doesn't have the stigma of bankruptcy attached to it. Restoring consumer confidence in GM and Chrysler coming out of restructuring is a challenge without a magic bullet. "Part of the problem is that the general atmosphere of consumer confidence is very fluid right now in every sector, and especially this one," Visnic said, noting that even industry leaders like Honda and Toyota have taken big hits. "The overall market is deeply depressed anyway."

Look for U.S. automakers to pare down their brands even further, both Visnic and Helper said. Visnic said the domestic auto industry of the future is likely to resemble more closely European and Japanese companies, which typically have one mainstream and one luxury brand, in an attempt to strengthen individual brand identity.

One piece of good news for the future, Elliott said, is the lousy sales rates of today. Car sales stand well below replacement rates, and as Helper noted, the average car on the road is more than 10 years old, so there will be a market if the economy can gain some ground. But there are no guarantees that U.S. automakers can grab enough of that market to stay afloat.

"They have to manage scared," Elliott said. "For too long, they've taken for granted that somehow things are going to work out."

These companies are no strangers to tough times or miraculous rebounds, however. In the early 1980s, Helper said, her research into Lee Iacocca's recently-insolvent, newly-invigorated Chrysler revealed a level of innovation and passion that the industry sorely needs today to revive.

"Conceivably, you could see this unleashed creativity, we've got nothing to lose here, let's do some cool stuff," she said, citing the fuel cell-powered Chevy Volt as an "expensive niche product" that leaves her optimistic nonetheless. "It's not time to write these companies off."

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