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Restructuring the D.C. Three



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Detroit, Mich. – Top House Democrats empowered a presidentially designated “car czar” Monday to oversee the reorganization of the Detroit Three automakers in order to guarantee that $15 billion in taxpayer loans would not be wasted. And then the Democratic leaders assured the money would be wasted by hamstringing the czar with guarantees that the companies protect Democratic pet interests from unions to greens to mass transit to California.

Like its farcical hearings last week, the House bailout bill is long on political grandstanding and short on reality. Auto analyst Michael E. Levine, Distinguished Research Scholar and Senior Lecturer at New York University, immediately dismissed the bill [PDF] as “addressing a nonexistent fantasy world.”

The so-called Auto Industry Financing and Restructuring Act, shepherded by House Financial Services Chair Barney Frank, grandstands on limiting executive pay, executive bonuses, golden parachutes — even banning the ownership or rental of “any private passenger aircraft.” But while demanding that carmakers submit a viable business plan by March 31, the draft bill makes the viability of any such plans moot by larding the legislation with requirements that automakers preserve union jobs, build green cars not yet market-tested, and drop litigation against expensive new state emissions regulations proposed by California and 16 other states.

The legislation would even force the automakers to conduct “an analysis of potential uses of any excess production capacity to make vehicles for public transit agencies, including the current and projected demand for bus and rail cars.” This is a core auto business function?

While industry analysts fear the consequences of Chapter 11 bankruptcy for the Detroit Three in the current credit climate, they also emphasize that a loan package must address the automakers’ uncompetitive labor costs. But the House bill goes out of its way to coddle labor, declaring that the “purpose of the Act” is that it “preserves and promotes the jobs of 355,000 workers in the United States directly employed by the automobile industry and an additional 4,500,000 workers in the United States employed in related industries.”

Pay off Democratic labor constituency? Check.

Having established that Detroit cars will continue to be made at a higher cost, the legislation then guarantees that any taxpayer loan “enhances the ability and the capacity of the domestic automobile industry to pursue the timely and aggressive production of energy-efficient advanced technology vehicles.”

Pay off Democratic green constituency? Double check.

The trouble, however, is that the two demands are contradictory. The industry can’t sustain high labor overhead and invest in high-cost R&D for fuel-efficient technologies. Given the bill’s inherent conflicts, NYU’s Levin predicts that it will ultimately lead to bankruptcy when it becomes apparent “that the numbers in the auto companies plans and Congressional fantasies don’t add up to a viable auto industry.”

Bankruptcy expert Lynn Lopucki of UCLA and Harvard Law School concurs. He says that, House fantasies notwithstanding, “Congress lacks power under the Constitution to legislate the restructuring of a business.”

“This bill may create the appearance of forward motion but no real forward motion,” he says. “Time is running out for GM.”

In other words, the House bill is not a substitute for bankruptcy, but a bridge to the Detroit Three becoming the Washington Three: nationalized companies with many more billions in taxpayer money at stake.

“The good news is that the Detroit Three just got $15 billion to stay alive,” says Detroit auto analyst John McElroy. “And the bad news is that the Detroit Three just got $15 billion to stay alive. The question is whether the cure is worse than the disease.”

Indeed, since the billions secured by the bill would only meet the cash needs of General Motors and Chrysler for a few more months, a broad coalition of greens, sympathetic analysts, and union advocates have begun building a long-term case that the Detroit Three must be permanently preserved to pioneer clean technologies and guarantee U.S. jobs.

United Autoworkers president Ron Gettelfinger sees the bailout as necessary because the collapse of the Detroit Three “would deal a serious blow to the entire economy, making the current recession much deeper and longer.” But a bailout, say analysts like McElroy, would also preserve the Detroit Three until such time as the UAW can begin campaigns to organize Japanese transplants under the Employee Free Choice Act — the so-called “card-check” provision that the union covets and that President Obama has promised to sign once in office.

On another front, Michigan economist Pat Anderson and auto consultant Kriss Andrews have found that Chapter 11 would be four times more costly than a bailout due to losses in employment, income, and tax revenue. Andrews seemed to suggest, in fact, that bankruptcy could never be a viable option for GM. And Anderson warns of losing a national asset, saying it would “fundamentally shift auto technology to foreign countries.”

Greens concur, arguing that government must guarantee the domestic automakers to preserve environmental security. “We need a viable domestic auto industry,” said David Friedman of the Union for Concerned Scientists, “to tackle America’s oil addiction while avoiding the worst impacts of climate change.”

But the argument for a green, pro-union, taxpayer-dependent domestic auto industry is at odds with designing a viable business model.

Fearing the collapse of one of the Detroit Three in its last month in office, the Bush administration Monday seemed willing to accept the House bill and put the auto companies on life support until the Obama Administration assumes office. But the questions about the Detroit Three’s viability likely will return next spring when the companies submit their restructuring plans to the car czar.

Will investors risk their money in “restructured” auto companies still burdened with the UAW and even more green mandates? Or will taxpayers once again be asked to rescue the Detroit Three from the only true restructuring solution, Chapter 11?

– Henry Payne is an editorial writer and cartoonist at the Detroit News.



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