When Motown Becomes Notown
General Motors has 55 plants scattered about the United States, employs – directly – about 250,000 people (down from 335,000 in 2006 and 266,000 in 2007) and currently funds pensions for about 480,000 retirees. There are suppliers, dealers (6,468 of them), lenders, advertising agencies…. well you get it… a whole host of other people who owe their livelihoods directly to General Motors. Then you get the “indirect” employment, from grocery stores to pharmacies, from landlords to carpenters, who rely on the GM employees to patronize their daily economic businesses. And in the past year, GM stock has plunged over 90%, from over $30/share to under $3. GM’s problems are more immediate than those of Ford; the latter thinks it can stumble along for a year with money it has already borrowed. GM says it’s almost completely tapped out.
Autoworkers fought hard for their benefits, although many analysts complain that in healthcare costs alone, labor has added between $1500 and $2000 to the price of the average GM car making vehicle uncompetitive with foreign imports. Wages are good even as plants close and workers find themselves unemployed. Pension plans seem to be mostly funded, so those risks are not the main worry, but as America turns its focus to old-world manufacturing, U.S. automakers are under the microscope, particularly as they lobby Washington for a massive cash infusion plus support in the lending markets going forward.
Voices cry out different messages. Did Ford and GM succumb to “big is better” just once too often, missing the rocketing price of oil and its impact on consumer buying habits? Should stupid management decisions be rewarded with bailout money? Surely they don’t think the recent collapse of the price of a barrel of oil, by more than 50%, is a reason to roll out the “big is better” wagon again? Is General Motors’ new Volt – an electric car that actually looks cool – a sign of future values? With the dollar strong, is it pointless to support a manufacturing sector than does not seem to be able to compete with Japan, much less Korea and, eventually, China? Yet I have trouble believing that there is no place for well-built American cars, particularly if “Yankee” invention solves the energy and pollution problems that we have been rubbing our noses in.
The harsh reality is average consumers are not buying cars right now; it’s a purchase easily delayed, monthly payments (where you can find financing) easily avoided. The other harsh reality is that if our major carmakers ceased operations, the ripple effect through the economy could push a horrible and deep recession to a level requiring additional years of recovery. A November 13 posting by the Associated Press, noting that GM’s failure could easily drag Ford and Chrysler down with it, because they rely on many of the same vendors, suggests how the United States might fare if our automotive sector failed: “A study by the Center for Automotive Research in Ann Arbor estimated that the failure of Chrysler LLC, Ford Motor Co. and General Motors Corp. would eliminate up to 3 million jobs, including those at parts suppliers and smaller businesses that rely on the automakers.”
Taxpayers should look at this support as being in their own self-interest; a loss of GM or Ford will slam most of us and drag this recession out even longer. And as the numbers below will indicate, the loss to the taxpayers from GM’s going under would be a vast multiple of the cost of any bailout – dollar for dollar. Bottom line, we have to do something to keep those jobs in tact to the maximum extent possible, but the question is how.
In a “reorganization” under U.S. bankruptcy law, shareholder equity erodes (in this case to zero, but it is pretty close to that now) and contracts with future performance (like union agreements, warrantees, etc.) can be rejected. And there is the stigma that comes from filing under such laws as the November 13, 2008 New York Times reported: “A study of 6,000 consumers last summer by CNW Marketing found that 80 percent of them said they would switch companies if G.M. or Ford filed for bankruptcy protection in the United States, suggesting that only G.M. loyalists would stand by the automaker.”
While GM’s complete failure would have a lesser impact than the loss of Lehman Bros., the Times added: “A bankruptcy filing by a single Detroit car company could cost the economy $175 billion in the first year of the legal case in lost employee income and tax revenue, the Center for Automotive Research estimated this week. Given the complexity, a G.M. bankruptcy case could last three years or more.” The company could limp along after reorganization, might need less bailout cash, but it may well be mortally wounded, dying in a full bankruptcy in the not-too-distant future.
Can “negotiated” federal bailout money accomplish the same general result as reorganization without the formal bankruptcy? Shareholders would have to agree to subordinate to the infusion, making their stock pretty much worthless, and unions would literally be forced to accept massive give-backs as the price of keeping jobs. Executive salaries would and should be slashed, and management would have to accept a significant contraction as well. But there might not be the stigma, warrantees would be good and the automakers wouldn’t shove tens of thousands of unemployed people into a world that needs job creation, not job loss. And as one cynical observer noted, even buying time for GM is in our interest – total liquidation in bankruptcy would be intolerable in this economy at this time… it might not be so terrible as an isolated reality in a few years when there is a recovery solidly underway.
I’m Peter Dekom, and I approve this message.
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