Bailout or bankruptcy? For General Motors, the answer is — yes. But mostly the latter.
There is no saving GM in its present state and no good argument for trying. It is currently losing $500 or more on every car it makes. As of 2007, it was paying its workers at a $20-per-hour premium over what Toyota was paying just down the road. It’s a company with terrible management, terrible unions, and not very many good products. Its shareholders already have been substantially wiped out; there’s very little left for them to lose.
Congress must be reminded to view GM as a car company. It isn’t a health-care provider for the state of Michigan or a federal jobs program, even though members of Congress talk as though it were. The same goes for Ford and Chrysler. Congress is entirely unqualified to evaluate the Big Three as businesses; its members collectively know approximately zilch about the industry, and its own finances make GM look like the gold standard of financial sobriety. Listening to Chuck Schumer describe a business model as “unacceptable,” as he did on Tuesday before specifying his own preference on automotive development, should spook business owners and taxpayers alike. It’s not Congress’s business to evaluate business models.
We have a good, proven process for dealing with companies that have short-term cash-flow problems and valuable underlying assets, and that process is called bankruptcy. There was a reasonable (though not ironclad) case to be made that government intervention was prudent in the case of the bank failures because of the risk of a systemic crisis in the credit markets. There is no comparable argument for GM. There may be a role for the government in softening the landing for GM, perhaps by offering some assistance in securing loans as the company reorganizes, specifically by guaranteeing the DIP — that’s “debtor in possession” — financing that a bankrupt GM would need to restructure its operations (as opposed to having its assets liquidated to pay its creditors).
There is no shame in bankruptcy. It can be a good thing — dozens of companies have entered bankruptcy, reorganized their finances, and emerged stronger than before. Policymakers should endeavor to make use of the time-tested institutions we already have rather than invent new solutions — also known as “making it up as we go along” — whose unintended consequences we must later endure. We have 200 years of bankruptcy law behind us; our Constitution itself touches on the subject: “The Congress shall have power to [establish] . . . uniform Laws on the subject of Bankruptcies throughout the United States.”
GM has real assets — by some estimates, the steel in its buildings is worth more than its current market capitalization of just under $2 billion. GM’s factories, distribution network, intellectual property, and inventory — as well as the expertise of its workforce — are all highly valuable assets. The United Auto Workers are keen on saving their jobs and the $70-an-hour paychecks that go with them, but GM’s payouts to UAW members are one of the major drains on the firm’s future, and a big part of why its market value as a company is less than the value of its buildings and other assets.
While we hope that most of the UAW’s members stay on the job — these highly skilled workers will be needed, whatever happens next — GM’s management has to go. Any taxpayer exposure should be contingent on the exit of every C-level executive from the company, at a minimum.
Shareholders have claims on GM. So do the UAW and its retirees, and so do creditors. The place to work out those competing claims is in bankruptcy court. GM and its taxpayer-funded lobbyist Debbie Stabenow — who moonlights as a U.S. senator — will come with their hands out, telling tales of global financial woe and talking rot about the Big Three’s being essential to national security. But GM isn’t in trouble because of the global credit crisis — it’s in trouble because it’s a poorly run company. If it is essential that American drivers have cars made in America by Americans, there are Toyotas rolling out of Kentucky. GM should roll into bankruptcy court.