It appears painfully eminent that the distraught 'Big Three' automakers will get their bailout albeit a far cry from the original sought amount of approximately $36 billion. A congressional breakthrough reveals these new loans will likely not exceed more than $15-17 billion which will now largely come from the government's plug-in hybrid auto fund originally intended for Detroit.
That being said, allow me to emphasize the sound argument(s) for not bailing out Detroit and allowing them to operate via chapter 11 bankruptcy:
(1) The flexibility of a chapter 11 bankruptcy in this context would effectively allow the Big Three to break atrocious labor contracts with the United Auto Workers union and cancel/renegotiate debt with creditors by transfer of future assets, all while still operating largely uninhibited (especially in several international emerging markets where they have had success). Back in 2005 Delta Airlines filed for chapter 11 with $20.5 billion in debt and 2 years later reached full year profitability goals with the majority of past layoffs recalled. At the very least Congress should require them to file for bankruptcy first and then evaluate providing government aid.
(2) What message would a bailout of domestic firms send to foreign direct investors looking in the future to compete and insource (opening jobs) in the United States? Proponents of a Detroit bailout argue it is necessary to protect the manufacturing base here. Ironically, too many similar bailouts could deter the prospects for manufacturers to invest here.
(3) Detroit is near failure primarily due to its inflated cost structure and crude business model. Foremost, the Big Three were quick to settle with the demands of the UAW and pay wages of about $29 per hour more than their foreign competitors (who still are paid handsomely despite being relatively unskilled laborers). Secondly, Detroit has long emphasized the production of inefficient SUVs for their high profit margins, even during times of high fuel prices. In addition, they engaged in superfluous amounts of branding which diluted profits. Should we be using taxpayer (the majority of whom make significantly less than UAW workers) funds to prop up these companies who aren’t capable of selling their intended product? Even at the expense of blocking the emergence of potential green technology industries? Nearly a century ago it would have been madness to protect the horse and carriage industry against Henry Ford and the advent of the automobile.
In spite of the decision by Congress to grant federal aid to the Detroit automakers, the Senate finance committee remained for the most part, relatively vigilant in scathing the company executives and resisted previous pressures to use amounts upwards of $50 billion for a proposed package. Yes, simply by not issuing Detroit a blank check, Congress has earned a grade of C+.
That being said, allow me to emphasize the sound argument(s) for not bailing out Detroit and allowing them to operate via chapter 11 bankruptcy:
(1) The flexibility of a chapter 11 bankruptcy in this context would effectively allow the Big Three to break atrocious labor contracts with the United Auto Workers union and cancel/renegotiate debt with creditors by transfer of future assets, all while still operating largely uninhibited (especially in several international emerging markets where they have had success). Back in 2005 Delta Airlines filed for chapter 11 with $20.5 billion in debt and 2 years later reached full year profitability goals with the majority of past layoffs recalled. At the very least Congress should require them to file for bankruptcy first and then evaluate providing government aid.
(2) What message would a bailout of domestic firms send to foreign direct investors looking in the future to compete and insource (opening jobs) in the United States? Proponents of a Detroit bailout argue it is necessary to protect the manufacturing base here. Ironically, too many similar bailouts could deter the prospects for manufacturers to invest here.
(3) Detroit is near failure primarily due to its inflated cost structure and crude business model. Foremost, the Big Three were quick to settle with the demands of the UAW and pay wages of about $29 per hour more than their foreign competitors (who still are paid handsomely despite being relatively unskilled laborers). Secondly, Detroit has long emphasized the production of inefficient SUVs for their high profit margins, even during times of high fuel prices. In addition, they engaged in superfluous amounts of branding which diluted profits. Should we be using taxpayer (the majority of whom make significantly less than UAW workers) funds to prop up these companies who aren’t capable of selling their intended product? Even at the expense of blocking the emergence of potential green technology industries? Nearly a century ago it would have been madness to protect the horse and carriage industry against Henry Ford and the advent of the automobile.
In spite of the decision by Congress to grant federal aid to the Detroit automakers, the Senate finance committee remained for the most part, relatively vigilant in scathing the company executives and resisted previous pressures to use amounts upwards of $50 billion for a proposed package. Yes, simply by not issuing Detroit a blank check, Congress has earned a grade of C+.
1 comment:
Interesting post. It gives me an idea of what this blog is about. I thought you would give them a worse grade because of your dislike for government involvement in the business world, but I think you were fair overall.
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