Big Three Bailout? Not So Fast
Declan McCullagh Says A Better Solution Is To Let The Automakers Declare Bankruptcy
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GM Borders Bankruptcy
General Motors is losing $2 billion a month and is on the brink of bankruptcy. GM, Ford and Chrysler may receive emergency financial aid for the government. Anthony Mason reports.
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Financial Meltdown
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One of the best reasons why Detroit automakers should not receive a bailout can be found in a General Motors "Jobs Bank" program that, bizarrely, pays employees not to work.
A beneficiary of that program was someone named Jerry Mellon, who worked for GM until his division merged with another in 2000 and he was no longer needed. Except for a brief period in 2001, Mellon received his full salary for not working, which reached $64,500 a year by 2006. Include benefits, and the annual cost to GM exceeds $100,000.
To earn his pay, Mellon was given the formidable task of showing up in a windowless shed, sitting at a table, and doing nothing for eight hours a day for six years, according to a profile in the Wall Street Journal. Jobs Bank employees have the option of attending classes teaching such important manufacturing skills as dealing blackjack and poker. Mellon spent part of his time reading Reader's Digest, learning how to play Trivial Pursuit, napping on a makeshift bed of chairs pushed together, or simply staring at the wall for hours at a time.
During those six years, Toyota surpassed GM as the world's largest car manufacturer, thanks to innovations like the fuel-sipping Prius. Nissan developed the GT-R, a technological marvel with a 0 to 60 time of 3.2 seconds and a lower sticker price than the Corvette ZR1. Honda kept its focus on smaller cars such as the Civic and Accord, and saw its sales continue to increase this summer while GM, Ford, and Chrysler have slid.
The United Auto Workers union and Detroit executives concocted the Jobs Bank idea in the early 1980s. Now these same economic whizzes are lobbying for handouts in the form of your tax dollars. UAW President Ron Gettelfinger said in a statement last week that the Feds must "provide liquidity to auto manufacturers so they can get through the difficulties caused by an across-the-board decline in auto sales."
Not quite. Detroit's problems aren't caused by a one-time slump. They can't be fixed by another infusion of cash. One cause is that union labor and legacy costs are too high and make the so-called Big Three companies uncompetitive. Another is that their profitability is tied to large, heavy trucks and SUVs that Americans no longer want to buy, at least in such large numbers.
That's just common sense. Unfortunately, such a virtue is in short supply in Washington, D.C., where politicians are scurrying to find excuses for a handout.
President Bush has made plenty of missteps, as I wrote about last week, but at least seems somewhat skeptical this time. Democrats, on the other hand, are eager to loot taxpayers -- and reward unions and domestic automakers which made choices that benefited them handsomely in the short term, at the expense of long term competitiveness.
President-elect Barack Obama apparently agrees, saying at his first news conference that he supports "additional policy options to help the auto industry adjust" and "weather the financial crisis."
Meanwhile, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid are drafting legislation that would direct a $25 billion torrent of cash from the U.S. Treasury to bank accounts in Detroit; Pelosi said on Tuesday that a vote could happen in a lame-duck session next week. (See a related video from CBS News.)
The better solution is a simple one: Allow automakers to declare bankruptcy.
Contrary to popular belief, that will not mean the end of a company such as GM, which has indicated it may run out of cash by the end of this year. Under Chapter 11, a bankruptcy judge will weigh the different interests of GM's creditors, labor unions, shareholders, and so on, and the resulting company will emerge leaner and stronger. Many current customers of United Airlines, Texaco, Global Crossing, and Pacific Gas and Electric probably don't even know that those companies once filed for Chapter 11.
Chapter 11 also would let a judge alter gold-plated union contracts and benefits that have hamstrung the Big Three and crippled their ability to compete against Japanese and European car makers. Toyota, Honda, and other non-Big Three manufacturers that employ over 100,000 Americans, mostly in right-to-work states, have shown that they can make money building cars in the United States. The best way to keep U.S. auto workers employed in the future -- tens of thousands already have lost their jobs -- is to make it profitable to keep them on the payroll.
One explanation for Washington's haste is that while bankruptcy would alter union contracts, a bailout probably won't. The labor movement spent, according to Financial Week, a whopping $385 million to elect Obama and other Democrats last week. Nobody writes such large checks without expecting something: now it's payback time.
It's true, as bailout proponents argue, that GM employs about 263,000 people. But corporations including AT&T and IBM employ more, and by that line of argument, WalMart (2.1 million full-time employees) would always be far too big to fail. The Feds have already been profligate in doling out cash; a GM bailout would invite a long line of supplicants, with the most politically-connected companies muscling their way to the front of the queue.
If you don't like this use of your tax dollars, now's the time to phone your elected representatives. You can find contact information for your House of Representatives member on their Web site, and the Senate has a similar list. My e-mail address is below -- please let me know what you hear.
Declan McCullagh is the chief political correspondent for CNET. He previously was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is declan.mccullagh@cnet.com
By Declan McCullagh
© MMVIII, CBS Interactive Inc. All Rights Reserved.
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See all 287 CommentsTaking "ownership" of the banks, loans, credit lines, Automakers. What is next?
Someone else in South America did this. Hugo Chavez - The only difference is, he just said it outright. I''''m "nationalizing" all of this. It''''s MINE now. The Feds are using FEAR tactics to take over this nation.
We the people..... are falling for it.
WAKE UP AMERICA!
Study your unions. Their "influence" is used to prop up the middle class, the STRENGTH of America.
Why don''t you get one of those "learn in a week" high paying jobs?
$385m buys a lot of favors.
Did you MISS this part of the article? Mis - manangement!
I have no problem with the concept of unions. However, when they have the clout (and political backing) to impose ridiculous contract terms on companies, there needs to be something to keep them in check. The author described a very specific example of a completely wasteful union designed job (i.e. twiddling your thumbs in a shed for 60k + a year).
I desire cars with 1.4 litre engines that can get at least 33 MPG and last 250,000 miles.
Most of all, I desire models that don''t change every year, but instead remain constant for 3 years before models are being changed.
GM needs to build a vehicle platform that remains upgradable with interchangable parts for 35 years.
I also like a car that can be interfaced into a home computer and diagnosed with software given to the owner at the time of purchase.
I also desire engines and transmissions that are completely dependent on 100% synthetic lubricant.
I also desire engines with two spark plugs per cylinder, just as in aviation piston engines.
Those are the marching orders for an automaker that gets my business.
Cars need to hold value and not be depreciated so quickly, as in the past.
When you build a car like a chunk of metal and plastic and goes down in value each year, it will.
Giving these three auto manufacturers one dollar is a waste of money. Until they can be competitive with Toyoda/Nissan, etc. they will always be in financial trouble. If they are given the $40 billion this year, they will be back sometime in late 2009 asking for more. Also, executive pay will still be scandalous.
If you need a financial bailout, I recommend you make a call to your local Jobs Bank. They could probably help you with a bailout.
The bloat at the top is what chokes Americans the most when they try to purchase anything made in the USA!
but rely to much on trucks and SUV''s. The workers build what they are told, and do everything to make sure the quality is there. Unions are formed to protect workers with safe jobs, a living wage and health care. Workers have a huge interest in building quality autos, and should not be blamed for mis-management.
Okay so even when they''re working UAW workers are pulling in like $100k? Whereas the market rate for their services is probably somewhere more around maybe $30k?
Anybody know how much bankruptcy judges have actually succeeded in altering pay rates of union workers during reorganization on average?
GM is still the largest producer of vehicles in the US, Toyota first in cars.
Nobody held a gun to the heads of consumers to buy SUV''s. They bought them because that was what they wanted.
Business generally follows the money, for years it was SUV''s, trucks both GM and Ford were successful and profitable doing that.
Americans by and large are lemmings, the neighbor buys an SUV, you buy an SUV. In the last couple of weeks guess what has come out of hiding? SUV sales are actually up some, more SUV''s are at the pumps. Why? Gas is down around 2.20 nationwide.
Plenty of fingers to point, what Detroit did was walk away nearly completely from cars, there in lies the mistake. Management mistake, yes, but they went for the quick profit, like most American companies do.
The union situation compounds their problems and this is where bankruptcy might just make sense, renegotiation of benefits, wages etc:
Comparing the wage structure of one company VS another is a fools game if you don''t ask the whys. Much has to do with the benefit package and age of the workforce.
As to the union question, virtually all vehicle makers worldwide are union, where are they not? The US.
The simplistic answer is bankruptcy, that might not be the best answer. In case you haven''t noticed Germany, Japan and yes even China are looking at automotive bailouts or assistance.
Unions care nothing about their customers, taxpayers, or anyone else. All they want to do is soak everyone else so they can maintain their lifestyle.
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Posted by JT_Lancer at 11:06 AM : Nov 12, 2008
In case you didn''t know, union workers pay taxes also, perhaps more than you do if they make more. Hmmmm
Posted by SamTheTVCat
Nike pays their workers in Vietnam $59 a month, have you seen any $12 "Air Jordans" down at the local sporting goods store?
but rely to much on trucks and SUV''''s. The workers build what they are told, and do everything to make sure the quality is there. Unions are formed to protect workers with safe jobs, a living wage and health care. Workers have a huge interest in building quality autos, and should not be blamed for mis-management.
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Posted by hodgy67 at 11:01 AM : Nov 12, 2008
You are wrong. It used to be that unions protected workers but today they acutally harm them in the long run. I have witnessed as unions prevented their companies from mondernizing the factory (often making it safer) and hiring special skills (often because it is from a foreign competitor). America''s unions have become large and powerful (cash donations of $385 Billion) but they arent willing to do business like grown ups. The result is our union operated auto industry WILL go bankrupt. Did you notice that this so called "job bank" was an agreement between the union and management? Do you really believe management was in favor of such a thing?
I have heard complaints about what Toyota pays its workers. The lower pay for workers translates to better, more innovative cars and trucks at competitive prices. During hard times, sacrifices need to be made by workers who can be replaced at a lower cost.
Northwest Airlines is a good example of a company where the emmployees have had to make sacrifices. Pilots took a 40% pay cut and let go of thier retirements. The alternative was failure of the company. If the pilots had decided to quit instead, they would have had to go to work for another airline with no retirement, and at least 40% less pay.
Part of the agenda of President Bush is to reform fuel economy standards for cars. In this regard, he earlier announced his proposal to require automakers to meet new fuel efficiency standards. Bush, in his State of the Union address, proposed that the automakers improve the efficiency of the vehicles by 4 per cent annually starting in 2009 for passenger cars and 2011 for light trucks. The administration also intends to cut gas consumption by 20 per cent by 2017
The proposal is mainly to promote the production of green cars and it is undoubtedly helpful.
Some automakers were disappointed because the proposed $500 million budget over 5 years to speed research into advanced batteries was not contained in President Bush''s State of the Union address.
It can be recalled that General Motors Corp. has earlier asked Congress to significantly increase federal support for the development of advanced powertrain technologies and the promotion of alternative fuels. The call is also anchored on the need to improve vehicles efficiency. The automaker added that the industry needs billions of dollars to make the vision a reality. Moreover, it needs considerable aid from the government and such is expected to come in the form of cash
$12 Nike sneakers don''''t exist because Nike dominates the market, not because of Nike''''s production costs. Nike has a name and trademark that people want on their shoes and clothing so consumers are willing to pay a premium for Nike''''s goods. There are no major foreign competitors in the sports apparal market.
The comment was that cars would become cheaper if wages were reduced, I gave an example of that not being the case. In fact, I read that Toyota pays their US factory workers an average of $14 an hour and yet, a Toyota costs more than a comparable US model.
For years they could [and did] build electric cars and hybrids, but the oil mafia was calling the shots.
Let the "Big Three" ask Exxon/Mobil, Chevron, Texaco for money.
2) The job security provision also has shop-floor motivational aspects, as people are more likely to invest in firm- or career-specific skills, and it can build commitment to the company. Contrast this with Ciruit City, who several years ago fired their $11/hour workers and replaced them with $8/hour workers. This move was hailed on Wall street as cost-savings. But look at the negative aspects that resulted on the floor. And look where the company is now (in bankruptcy).
3) Also notice that Toyota (non-union) in North America is having a production slowdown, but they have publicly stated they aren''t laying off workers. Your article fails to mention this, and it somewhat negates your thesis.
4) In any event, at this point, the job security provisions are not what is driving GM''s problems. It is a secondary or tertiary concern at this point, behind issues like too many dealers and brands, no consumer credit, and low consumer confidence.
In July of 2009 we will celebrate the 40th anniversary of the historic moon landing and in 40 years the Chevy Volt is the best that the management morons at GM can come up with?
I say let them all fail for their stupidity and lack of innovation
6) A GM failure would cause a domino effect causing suppliers to go bankrupt, in turn causing other OEM''s to fail.
7) A Big 3 failure would lead to a dramatic increase in imported cars (sending the profits overseas, even though foreign automakers only make 60% of the cars in the US that are sold in the US).
8) A Big 3 failure would also drive up the price of cars for consumers in the US. The industry would be dominated by a few major players (Toyota, Honda, Nissan, etc). The result would be a return to oligopoly market pricing.
it is a lose lose situation. If they fail, will be worse than Lehman, with devastation and rust-dust bowl. If they survive as socialized "US auto", a part of the government, cars will suck even worse than in the USSR.
Nobody is buying a car today because of uncertainty; its amazing to see so many TV advertising dollars being wasted on nonresponsive consumers! Nobody will spend their "stimulus" check, just cash it and stuff the mattress.
So the next stimulus could be a 2-year-expiring $1500 rebate on a US made car which gets 25MPG or more (or maybe escalating value with fuel economy)... If you don''t want one, trade/auction it for $1000 or so on ebay, bundle them up, buy cars.
Posted by jamesm12341 at 11:34 AM : Nov 12, 2008
+ report abuse
Jimmy boy - the spelling monitor of the CBS site. You forgot to check your own spelling this time Jimmy boy!
you SHOULD have typed:
dont anybody tell me that any of them have been TOO stupid to do that!!
TOO with two o''s not one !
it is a lose lose situation. If they fail, will be worse than Lehman, with devastation and rust-dust bowl. If they survive as socialized "US auto", a part of the government, cars will suck even worse than in the USSR.
Nobody is buying a car today because of uncertainty; its amazing to see so many TV advertising dollars being wasted on nonresponsive consumers! Nobody will spend their "stimulus" check, just cash it and stuff the mattress.
So the next stimulus could be a 2-year-expiring $1500 rebate on a US made car which gets 25MPG or more (or maybe escalating value with fuel economy)... If you don''t want one, trade/auction it for $1000 or so on ebay, bundle them up, buy cars.
Part of the agenda of President Bush is to reform fuel economy standards for cars. In this regard, he earlier announced his proposal to require automakers to meet new fuel efficiency standards. Bush, in his State of the Union address, proposed that the automakers improve the efficiency of the vehicles by 4 per cent annually starting in 2009 for passenger cars and 2011 for light trucks. The administration also intends to cut gas consumption by 20 per cent by 2017
The proposal is mainly to promote the production of green cars and it is undoubtedly helpful.
Some automakers were disappointed because the proposed $500 million budget over 5 years to speed research into advanced batteries was not contained in President Bush''s State of the Union address.
It can be recalled that General Motors Corp. has earlier asked Congress to significantly increase federal support for the development of advanced powertrain technologies and the promotion of alternative fuels. The call is also anchored on the need to improve vehicles efficiency. The automaker added that the industry needs billions of dollars to make the vision a reality. Moreover, it needs considerable aid from the government and such is expected to come in the form of cash.
Hmmmmmm
Possibly one or more new, efficient and profitable companies will arise from their ashes.
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Posted by scb1111_1 at 11:46 AM : Nov 12, 2008
SOS Different day, you really should get a clue.
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Posted by scb1111_1 at 11:41 AM : Nov 12, 2008
Why would they, they''ve been making huge profits, if they come hat in hand, it''s lie. They''d hire the ex pres as there spokesperson, because he''s such an "oil guy"
Posted by jamesm12341 at 11:49 AM : Nov 12, 2008
+ report abuse
Doesn''t change the fact Jimmy-boy, that if you are going to comment on everyone else''s spelling, you need to learn to spell yourself !
You seem to have this psychological need to point out everyone else''s spelling errors rather than comment on the topic. Just giving you a taste of your own medicine Jimmy-boy. Poetic justice.
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