The rumor that the Obama administration is gearing to hand General Motors and Chrysler another bailout (with strings attached this time, mind you!) should come as no surprise. If it weren’t, it would have handed the two automakers an “F” with a slip to go straight to bankruptcy court when they submitted their restructuring plans last month.
But it was too much to hope that an administration elected by massive labor backing would have taken such a tough love approach.
The “restructuring” plans that the automakers submitted were long on demands and short on actual restructuring. After receiving a $17.4 billion bailout in December, the two companies demanded another $21 billion. This, they assured then and will likely to do so again on March 31 when their final report is due, would be sufficient to tide them through the economic downturn and poise them for profitability in two to three years without having to return to taxpayers again. But that claim – which the Obama auto task force seems to be swallowing hook, line and sinker -- doesn’t begin to pass the laugh test given the Beatle-sized cost cuts they put on the table.
Chrysler, who is staring at nearly 10 months worth of unsold inventory, offered to cut 100,000 cars from its 2.5 million-vehicle capacity. Given current sale trends, that translates into a million excess cars this year. GM, meanwhile, is planning to cut 47,000 jobs worldwide, close five additional plants in North America and eliminate four of its eight brands – all of which will save it a grand total of $7 billion, less than a fourth of its total ask from Uncle Sam to date.
But the bigger issues involve the companies’ debt and labor costs, neither of which are close to resolution. Both the UAW and bondholders are locked in battle, each accusing the other of being an obstructionist. The reality, however, is that neither one is willing to accept a debt-to-equity swap that would allow at least GM to pay some of its massive debt obligations in stock rather than cash. One can understand their hesitation given the freefall GM’s stock is currently experiencing – except that they would do even worse in a bankruptcy court. Indeed, given that the company’s debt – not counting its pension obligations -- is more than 24 times its current market capitalization of $1.25 billion, a bankruptcy court would likely completely write-off GM’s debt.
The only reason then the unions and creditors refused to budge is that they didn’t take the prospect of bankruptcy seriously. That’s because the administration did precious little to lay the political ground for bankruptcy by disputing the outrageous claims that the automakers were floating regarding its costs.
GM and Chrysler maintain that while keeping them alive will cost taxpayers only about $40 billion, bankruptcy, by contrast, would cost $125 billion. In fact, the exact reverse is likely to be the case. According to Mark Zandy, Moody’s chief economist, even before the worse-than-expected car sales figures to date, the price tag for keeping the industry afloat was somewhere in the range of $75 to $125 billion. (A one-million drop in vehicle sales translates into revenue losses of $25 billion.) Meanwhile, many analysts believe that a debtor-in-possession bankruptcy that would position taxpayer to be paid first if GM goes belly up could be done for less than $50 billion.
But the issue of course is not the economics but the politics of bankruptcy. An administration that has airdropped nearly a trillion dollars in stimulus funding around the country; is pushing a trillion dollar financial rescue plan; and is demanding $250 billion for home foreclosures can hardly tell the auto companies to go take a hike after labor unions spent close to half a billion dollars to put it in the White House.
In short, auto companies are living off the political capital accumulated by the labor unions. Thus the bizarre, twisted irony is that the very unions that are responsible for bringing the auto makers to the brink of bankruptcy will now keep them out of it.
The tragedy only is that taxpayers will be left holding the tab!