Big Three Bailout? Not So Fast

Declan McCullagh Says A Better Solution Is To Let The Automakers Declare Bankruptcy

(CBS)  This column, Other People's Money, is written by CNET's Declan McCullagh. It appears each Wednesday on CBSNews.com.

---

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 [e-mail]

[gl2]

The Du Pont family has owned the largest percentage of GM ever since the 1930%u2019s. A Bidermann-DuPont encouraged states of the South to secede just before the Civil War (historians write that the majority there didn%u2019t want to).

DuPonts bought Opel from Nazi Germany, then made Opel troop carriers to ferry Hitler%u2019s troops across Europe. DuPonts endorsed Mussolini. And in 1934 DuPonts combined with Morgan (yes, now featured in Morgan-Chase after merging with Rockefeller%u2019s bank) to fund an attempt to %u201Cremove%u201D Franklin Roosevelt from power by arming and paying disgruntled vets of WWI to move on Washington.

Dealey-plaza photo%u2019d Gen. Ed Lansdale, who specialized in shooter teams, was a protigi of DuPont United Fruit employee-turned-CIA-chief Allen Dulles.

Fast forward to the present: the first big oil company to sign on for taking away Iraq%u2019s national oil and drilling it as their own was DuPont-owned Conoco.

So do we pay tribute to the American Borghias, or should we let GM fail then let GM%u2019s parts reorganize and make more efficient cars instead of planet-killing monsters?

[gl2]

The Du Pont family has owned the largest percentage of GM ever since the 1930%u2019s. A Bidermann-DuPont encouraged states of the South to secede just before the Civil War (historians write that the majority there didn%u2019t want to).

DuPonts bought Opel from Nazi Germany, then made Opel troop carriers to ferry Hitler%u2019s troops across Europe. DuPonts endorsed Mussolini. And in 1934 DuPonts combined with Morgan (yes, now featured in Morgan-Chase after merging with Rockefeller%u2019s bank) to fund an attempt to %u201Cremove%u201D Franklin Roosevelt from power by arming and paying disgruntled vets of WWI to move on Washington.

Dealey-plaza photo%u2019d Gen. Ed Lansdale, who specialized in shooter teams, was a protigi of DuPont United Fruit employee-turned-CIA-chief Allen Dulles.

Fast forward to the present: the first big oil company to sign on for taking away Iraq%u2019s national oil and drilling it as their own was DuPont-owned Conoco.

So do we pay tribute to the American Borghias, or should we let GM fail then let GM%u2019s parts reorganize and make more efficient cars instead of planet-killing monsters?

[taxguydave]

You anti-union types are overlooking something here.

Toyota, Honda, Nissan, VW and BMW are all profitable operations, and are based in countries that have much stronger unions than we have here. Their workers are paid more than US workers, get more vacation time and other benefits, etc.

Yet these companies manage to turn a profit anyway. Why? How?

Well, for one thing, they make cars that people actually want to buy. US companies have focused too much on trucks and SUVs and have largely ignored the car market. The Japanese companies make trucks and SUVs as well, but it isn''t their main focus. They build nice, fuel efficient cars that are becoming increasingly attractive.

GM''s idea of a fuel efficient small car is the Chevy Cobalt. It just doesn''t compare well to most of its competition.

[hitoyou1]

Guess what, they are not. I have only owned GM cars, and they are equal in quality and superior in safety than almost anything from the Pacific Rim. Showa how dumb this person really is. Thinks a junk car is a good one. The only person that says his GM is any good. JUNK JUNK JUNK JUNK that is all GM and UAW are.

[hitoyou1]

frankie2fing, I have beed there youidiot, You don;t have any ideal what you are talking about. That is right "LET THEM ALL SLEEP IN THE STREET. You along with them. THe UAW IS NO GOOD. YOu give them your money, I forgot you don''t have any. Don''t lie and start sayimg what yopu have and telling every one what you do, It just make you look as DUMB as you are.DOWN WITH THE UAW AND THE JUNK CAR COMPANIES.

[tibu987]

No more "bailouts". Period.

Why bail out an industry with inept management that has been making unpopular cars for years and losing money doing so.

Enough! Let the chips fall where they may and someone will comne along with a better idea and we will return to the successful market we once were.

[smcarter]

If there is a bailout, it should require renegotiation of unsustainable labor contracts and a plan for getting out of this debacle. I don''t understand why the current stockholders do not demand the replacement of their current management. These problems, as stated in the article, were not caused by the current crisis, but merely exacerbated by the crisis. I don''t understand how their managements could allow the problem to get this bad.

I would not be supportive of the government requiring that certain cars be manufactured. This should be based on supply and demand economics. However, I would be supportive of the government setting strict eco-friendly standards for all auto companies regardless of national origin.

[ramos937]

No...NO...No....A thousand times no. The demand for cars is there. Should one or more of the three go under, Toyota/Nissen/Volkswagen will take its place(s). The T/N/V venture would use the same workers and the same suppliers. Only this time, unions will not be involved to drive up the auto firm''s costs.

[j_flood]

Oh ya, like who is going to buy a car from a company in bankruptcy?

Posted by william_lerd at 10:33 AM : Nov 12, 2008

Never stopped me from flying on United or Delta - whats the diff?

[frankie2fing]

Good, I hope all the UAW people sleep in the street. They are the ones that did this to the Auto companies. Greed. Greed.

Posted by Hitoyou1

First, you have no idea what you are saying. The hit to the economy would plunge us past recession into deep depression. But I forgive you, since your are GOP and obviously brain-damaged (as most are, for if they were in their right mind, they would never vote GOP). Labor is not the reason the automakers do not make money. Actually, labor is small portion of the problem. The larger problem is management (yeah, the guys in ties and vote Republican) never streamlined the corporations. They could have tooled the assembly lines to be able to switch manufacturing of types of vehicles much easier. As it is now, they have to shut down for up to 8 weeks to retool. Japanese can do it with software. Legacy is another problem. They have more retired employees than they have workers on the line. But the biggest problem is YOU! You wanted big vehicles and Detroit gave em to ya. Then when you wanted fuel efficient cars, you dumped the Big Two and ran to Japan. They have been paying high prices for fuel a long time and have leaned out decades ago. You wanted the big ***. You are responsible for this mess. Plus, you, in your ignorance, believe that the foriegn cars are built better. Guess what, they are not. I have only owned GM cars, and they are equal in quality and superior in safety than almost anything from the Pacific Rim.

[perk235]

We were in a socialistic type government under the GOP.
--------
Anyone remember Bush''s $15 billion bailout of the airline industry post 9/11 using the surplus?

[perk235]

The Prius is a joke. You pay $30-35K for a $15,000 dollar car so you don''''''''t save any money you just are "green." Not to mention it''''''''s only "green" when you ignore the inconvenient facts like lithium for batteries is strip mined largely so you trade one environmental problem for another.
-----------
In 2006 I paid $24,500 and with a $3,150 tax rebate, the net was $21,350 car.

I drive 75% on the highway and 25% in town. In summer I get 52 mpg and in the winter, with snow tires, 48 mpg. That averages to 50 mpg.

The batteries are NiMH, not Li ion.

[frankie2fing]

HOWEVER we are on our way to a Socialistic type of government and there is nothing you can do or say to stop them.

Posted by ricklf1

Yeah? NEWS FLASH: We were in a socialistic type government under the GOP, fool. Only difference the government shared the wealth with BIG business (the small fry had to fend for themselves), making it easy for them to take the wealth from the common people and deposit it into their coffers. GOP does not want the Big Two (Chrystler is not a US company, 90% of their cars are made off-shore) because they EMPLOY workers who do not vote Republican. This is not an economic issue for the GOP - Its a political issue.

[hitoyou1]

As of Friday, it does not look like there will be a bailout for the big three, Good. Let them close. No money for junk. The Democrats say they don''t have the votes to pass a auto bailout. Good, I hope all the UAW people sleep in the street. They are the ones that did this to the Auto companies. Greed. Greed.

[andylance1]

The money Detroit wants should be spent to help homeowners restructure their adjustable rate mortgages to enable them to keep their homes. The FDIC detailed a plan to prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans. The trouble is Treasury Sec. Paulson is opposed to it.

The auto companies need to go to bankruptcy court and go on a mandatory diet to get rid of brain dead CEOs and learn how to be competitive.

[ricklf1]

Let''s face the facts. No one in politics cares a *** anymore what we think, now that the elections are over. The Democrats will hand over our hard earned taxpayer money to GM,Ford and Chrysler and they will continue down the same mis-managed path. You can write here every day and complain. HOWEVER we are on our way to a Socialistic type of government and there is nothing you can do or say to stop them.

[clathrate]

If people took their "standards" to the cash register american companies would have an easier time competing.


--------------------------------------------------------------------------------

Posted by Cryos

You hit the nail o nthe head. Americans, by and large are just too *** cheap. We need to get rid of the cheaper = better mentality and get used to paying for quality.

I''m all for good deals, but fair is fair, and most of the time, you get what you pay for. If Americans would just learn to pony up a bit more, then airlines just might be worth a ***, amoung other things.

[incog-nito]

By the way, the Prius uses Nickel Metal Hydride batteries, not Lithium Ion. The Chevy Volt uses Lithium Ion.

[incog-nito]

The Prius is a joke. You pay $30-35K for a $15,000 dollar car so you don''''t save any money you just are "green." Not to mention it''''s only "green" when you ignore the inconvenient facts like lithium for batteries is strip mined largely so you trade one environmental problem for another.

Posted by Cryos at 03:09 PM : Nov 13, 2008

The 2009 Prius starts at about $22,000. If it costs more it''s only because there is so much demand that the dealers jack up the price, but still nowhere near the $35K you mentioned. Of course this only shows that there is a lot of demand for fuel-efficient vehicles, demand that is unmet by the current supply. The cost will only go down with more production.

Speaking of "pretender" vehicles, there''s the much-ballyhooed Chevy Volt, slated to roll out in 2010 (unless it''s delayed once again). The cost? $35 to $40K. I''m sure people will rush out to pay that kind of money in order to save on gas. No wonder Detroit''s in big trouble.

[inesje88]

Cryos, what about those of us who have formulated our opinions on single payer health care by living and working in countries which have such a system? I still have family living in European countries, and friends in Canada. The big ajustment for my Belgian relatives was not being able to have a dr.''s appointment the same day and waiting over night. Here, in the USA, when I did have health insurance and needed what my dr. determined to be urgent surgery, it only took my insurance 10 days to approve it and the surgery center 3 weeks to schedule it. I had a different urgent surgery in Europe several years ago and I waited 2 days. Single payer health care makes sense on many levels but it is a class war fair thing in this country. It is strange how the Republicans say they are right to life people, but once the child is born, good luck getting health care. A healthy work force creates a healthy economy. Ceo''s in health care, auto industry, and banking industry are greedy. Although I often feel like unions have too much power, if it wasn''t for them, their members wouldn''t have health care, sick leave or vacation time.