Prepackaged Bankruptcy: Be Careful of What You Wish For
Ari links to a Barry Ritholtz post reporting that President-elect Obama is considering a pre-packaged bankruptcy for the Big Two and a Half (presumably just for the one and a half that are GM and Chrysler, as Ford is not yet at that point). Ritholtz (who undoubtedly knows more about the economy than me) declares this plan a winner.
Smart:
[snip]
This remains the best option IMO for Detroit . . .
Barry? President-Elect Barry? Be careful of what you wish for.
Bankruptcy is a positively genius idea, except for the ways it isn’t a genius idea.
Bankruptcy Would Allow the Big Two and Half to Renege on Pension Claims
The first thing bankruptcy would allow the Big Two and a Half to do is get out of their overwhelming obligation to pay retirees’ pensions. That would, instantly, eliminate one of the biggest remaining competitive disadvantages between American manufacturers and the Japanese and would therefore make a lot of unprofitable car lines profitable, almost immediately.
Voila! GM can now compete with the Camry.
However, the Pension Benefit Guarantee Company would then pick up those pension obligations. Rather than giving the auto companies the money, you’d be paying it directly to the retirees. But taxpayers would still pay.
Bankruptcy Would Allow the Big Two and a Half to Break Dealer Contracts
A far more important advantage–from a competitive/restructuring standpoint–is that it would allow the manufacturers to break their contracts with a bunch of dealers. This would allow the manufacturers to shed dealers almost immediately, with the salutary effect that dealers in the same town wouldn’t be competing for the same customer, and therefore would be less tempted to make big cuts in the price of the car to keep a customer. This would, in turn, have the effect of restoring much of the value of the brand that is currently lost in the never-ending festival of rebates. And it would raise the profit on every car sold.
Furthermore, by breaking dealer contracts, the Big Two and a Half could change the profit model of dealers, such that they expect a one-time profit to sell the car itself, rather than a lifetime of service opportunities for each client. The Big Two and a Half are going to have to do this anyway to move away from the combustion engine (though that change is far down the road). So why not make that change now–move away from the entire dealer-network concept of marketing a car?
Of course, those contractual changes would have two effects. First, if you shed one third to a half of the 10,000 dealers spread out across the country, you’re going to have a lot of people out of work suddenly–in towns and cities pretty evenly spread out across the country. Those people are going to be drawing on government benefits while they look for another job–if they can find one. You’re also going to have dealers with a bunch of debt on their hands, but no business to help them pay off their debt (as opposed to the current method of shedding dealers, in which the dealers get an upside in the process). Again, that’s going to affect the economy across the country. And finally, once the dealers do move away from a service-based profit model, you’re going to find a lot of highly skilled mechanics working for smaller entities, in many cases with more marginal jobs. They’ll find new jobs easily enough, I guess–until we move to electric cars, someone will have to service the cars we’ve got. But they may give up a deal of security and prosperity with the move.
Bankruptcy Would Allow the Big Two and a Half to Miss Its VEBA Payments
One of the reasons the Big Two and a Half are so cash strapped right now is that they are due to pay the UAW installments on their big one-time payments next year (this is not immediate, but it is a looming cost). If they miss those payments, presumably the union wouldn’t have the cash to fund the health care fund–designated to provide health care for the UAW retirees, particularly those between the age of 48 and 85 who are not yet eligible for Medicare. If those retirees lose their healthcare, they’re either going to have to go without healthcare or, depending on other factors, they’re going to go on Medicaid.
Bankruptcy Would Allow the Big Two and a Half to Break the Union
Ah, breaking the union. Every bankruptcy advocate’s wet dream.
If the Big Two and a Half went bankrupt, you would break the union, renegotiating existing contracts, presumably by cutting the skilled workers’ pay, but not raising the second tier of workers negotiated in the last contract. This would (because the second UAW tier is actually much lower than the Toyota or Honda tier) actually bring labor costs down below those of the Japanese rivals, again making smaller more efficient cars much more profitable overnight.
Maybe those skilled workers will muddle through. Maybe you’ll see a big increase in credit defaults and individual bankruptcy as people try to adjust to dramatically smaller salaries.
Sure, you might sacrifice safety at the plants. Sure you might even sacrifice some of the quality in the plants.
And golly, if you’re a President-elect who just won the Mid-West–including Indiana, for chrissakes!!–largely with the help of the UAW, you’d be facing big electoral problems.
But it’d accomplish something that the union has already set into place to accomplish, evening out the pay disparity between the Big Two and a Half and their Japanese competitors.
Now, as you can see, there’s a lot to like in a bankruptcy, as it would allow the Big Two and a Half to do immediately some things they’re doing more slowly (evening out wage disparities and shedding dealers) or not yet doing (reneging on pension guarantees and health care promises). Of course, you’d be doing that at a time when such an immediate shock to the system might well be the shock we’re all trying to avoid with a Big Two and a Half collapse. And you’d also accelerate the process by which the federal government picks up some of these costs, but in a way that has little upside for the economy.
[Note, this was a bit flip–I invite those of you who work in bankruptcy to straighten out my misconceptions.]
It makes me think about the series “Zeitgeist” on Democracy Now. Interesting thoughts and discussion about the nature of corporations, humans and greed.
It’s already been discussed and rejected:
It doesn’t matter what they think if DC wants to jam it down their throats.
Well, now Obama is denying it, too, as Ian’s mentioning over at the mothership.
So, we have the automakers’ representatives telling Congress that they’ve already studied and rejected prepacks, and Obama saying that he’s not planning any prepacks. The proof will be in the pudding, but it sure sounds like they won’t be doing any prepacks. My guess is that Congress will give the Big Three the dough, but only after going through some motions to make it look prettier to a skeptical public.
If you’re referring to…
That’s hardly authoritative economic or practical summary. With all due respect, if you watched these guys testimony it appears they’ve got their hand out but have no idea… no plans, how they’re gon’a pull this off. As has been clear from their public statements, big part of their concern in going chapt 11 is “image”… eg. scaring customers off concerned about their long term viability.
I’m not saying voting on that, just saying seems pretty clear to me that given their current conundrums, longterm viability already major factor. And given they’d elevate this POV w/out hard plans to change things, at least from my viewpoint questions about (especially) GM management’s ability to pull this off are in serious question.
One thing that would come from reorg is, presumably, new management. And it’s hard for me to think of anything GM needs more.
Haven’t heard it mentioned (did I miss it?), but (from memory) somewhere 1-2 yrs ago Honda had announced withholding introduction of much more effecient cars to US in order to allow GM to catch up. They were, as I recall, actively training GM management/engineers in this process. Explicit in that was their recognition and acknowledgement of value in keeping GM viable in the marketplace.
I’d bet $$ to donuts Honda would be willing to, at least in part, participate in post chapt 11 management. And from what I’ve seen for many years now they may be best manufacturing corp. management on the planet.
Honda isn’t acting out of the kindness of their hearts; only one reason for what you believe is magnanimity klynn points out.
There’s cost savings to Honda, too, in slowing down roll out of new models; they can continue to obtain profits over decreasing fixed costs per unit if they don’t have to retool to roll out new cars.
And why would any corporation with smarts allow a competitor to manage them? that’s just asking for antitrust problems anyhow.
That’s never been Honda’s style, just the opposite. Sure sounds like way GM does things, however.
Allow? GM management is going to “allow” or “choose” their replacements in Chapt 11?
AFAIC, the answer to your question: HONDA mgmnt has demonstrated, for decades now, it knows how to do what Detroit has utterly failed to do.
That’s the reason.
If this thing goes Chapt 11, new management a very likely outcome. Having watched this process many times, more often than not new mngmt are finance guys… “effeciencies” boil down to cutting this and that, laying off (xxx) workers, “maximizing profits”… and more often than not doing little to improve/change product.
“New” Enron management still out tring to enforce contracts they got during gun-to-the-head Ca. “energy crisis”… their “vision” for retaining Enron viability.
Assuming for sake of discussion GM goes through this Chapt 11 process: who is new management? Where do they come from? Pepsi’s making money… how ’bout them, right? After all, that’s what Apple did back when they had market share…
And I’d remind: good portion of Honda’s top management are American’s that Detroit told to get lost some years back. You don’t think they’d be interested in this?
My degree was in ME. At intervals since my teens continuing to present, I’ve tinkered and tooled a lot. I built a custom road bike out of ‘73 Honda 750 in ‘78… took 2 years. At the time, compared to anything else (Harley, British twins) the elegance, effeciency, smoothness… everything about those Honda motors was huge leap over all the rest (I had Triumphs as well). Their CVCC head design, same thing. Over and over they’ve done it.
On construction sites our Briggs & Stratton generators of 80’s good for about a year. Honda generators lasted a lifetime. B&S’s you could hear a block away. Honda’s you could barely hear 25 ft. away. And the Hondas took less space and weighed about 1/2 less.
On and on it goes.
I have small classic car restoration biz now, (I’m up to my ass in Microsoft certs, CS degree, huge resume/succes on corp. software dev: all that work died here) & am very familiar w/all the technology out there for everthing… suspension/fuel/ignition etc. etc. There other “stuff” out there now very good, but Honda continuously has broken barriers. We have a little lab in the shop, we’ve sawed open parts from nearly every major car made looking for best stuff. Long/short: whole bunch of Honda’s parts made their way into 100% restoration of SAAB’s we do ’cause: all parts best in their class.
Personally, I don’t really care where good stuff comes from. I’ve long thought acknowledging good stuff from wherever is and idea/practice that works for me. Over the years, really… I can’t think of a single brand name that means more in way of quality than Honda.
Sure seems to me that folks in competing business would do well to learn from ‘em.
You want to go that far back? Honda probably benefited from Deming.
And GM was on its way to rediscovering Deming in the late 1980’s, until that lying asshole Spaniard Jose Ignacio Lopez de Arriortua turned GM and the rest of the entire industry upside down with his race to the bottom on supplier costs.
That’s where Honda was better off, by staying with TQM and by answering to different cultural pressures for performance versus GM (and the rest of the Big Three) answering to American’s pressure for profits quarter-after-quarter.
Not to mention where health care fits into this entire equation.
It’s not as simple as “Honda is smarter and better.” Until Americans take a deep look into the mirror and recognize that their culture is a fundamental reason why the Big Three has had issues for more than 30 years, they aren’t really going to fix this mess; even your sense of competitiveness is part of that same cultural problem.
One can only hope that an economic threat this size will snap them out of their torpor.
I don’t have citations, only unspecific memory of reading articles over last +/- 10 years on management style, comparisons, how it translated to production line and design… all that. There were a lot of American and American trained/educated engineers & managers that made their way to Honda over the years.
Sorry, but that’s about as specific as I can get.
I don’t understand what you’re saying at all. What do you mean by American culture is fundamental cause (…)? Same w/”my sense of competiveness”. Not trying to be obtuse here, I just don’t know what you’re getting at.
Doesn’t matter whether Obama has rejected it–the entire idea needs to be rejected, including by people like Ritholtz.
I will now do my Caranc the Magnificent routine and state, before googling, that the Pension Benefit Guarantee Company is not sufficiently funded at present to take on the auto industry retirees (just as FDIC would not have been able to handle the wave of bank failures had the banks not grabbed the TARP money).
Would also like to point out a few things as to the dealer end of this paradigm. First off, most of the dealers kept will be large, modern suburban and “autopark or autoplex” dealerships that have the newest, most modern and largest facilities. Which means that the ones axed unceremoniously will be dealerships that have been around forever. That communities and cites grew up around. That have been around for generations and, while not performing like the modern behemoths, are linchpins of their towns and cities. They are people, not corporate entities.
A lot of what is left of goodwill and warm and fuzzy thoughts among the populous for car dealerships resides with these joints, not with the Huzienga/AutoNations, Van Tuyls, Penskes and Larry Millers of life. This is going to assist the predatory dealer conglomerates to rule everything. The resulting loss of goodwill could be very problematic in the long run.
Some of this will happen no matter what, but the sudden action contemplated here will result in the predators having more of a heightened advantage than they already do. This should be thought out a little better I think.
Sounds like it’ll fly. It’s a win-win-lose proposition. Obama/Congress looks tough on bad business practices and CEO pay, Business gets to bust union chops & continues to constrain wages and benefits, retirees and tax payers get the shaft once again. Typical Beltway gambit brought to you by the change candidate.
Um, except that as Ian says, he’s already denied this.
Why would we believe some Pig Missile like flack from somewhere in Obama’s camp?? I sure as hell don’t. They fib just like every other politician, glossy bunk about change notwithstanding. They may have quickly decided it was a craptastic idea, which it is, but that they never considered it? I dunno.
Thanks ew.
digg
IMHO, the biggest point is that as long as other options are available, Americans won’t buy cars from corporations who have filed bankruptcy.
There are small town dealerships on both sides of my family. I’m not sure about the status of the one from my father’s family, but my wife’s cousin is the third generation owner of that family dealership. We had heard from him a couple of months ago that he was considering joining forces with the other big 2.5 dealer in town to cut down on their cost structure. Those two dealerships are just about all that’s left in that small town. Last time I was there, driving around the traditional town square was a very depressing event because of the number of empty storefronts.
I have no doubts that the end of this process will be that the people of this small town will be forced to drive a hundred miles or so to a regional superdealer of the sort you describe. Think the Wal-Martization of cars, but the dealerships will be distributed about the same as airports.
Yeah. Better distributed than airports, but the analogy is valid. A few autoplexes here and there. We are headed to that type of situation anyway, but it needs to play out naturally, or you risk alienating too many people too fast.
Wow, funny timing!
I literally just got an email from my brother. He’s a Ford parts guy – he’s been at his current dealership for 15 years I’d say at least. They just announced they are closing the dealership in January, to merge operations with the big autogroup in town.
Apparently a lot of the local dealers have been losing money the past couple of years.
He’ll be ok – he’s a senior guy, he’ll land at one of their other shops in town.
Jeebus. Yeah, um, that’s what I’m talking about.
Thing is, as bmaz and I have been saying, that’s gonna happen in any case. But the goal is to come to a soft landing, and to give the small dealers some way to get out of the huge debt burden they’re under.
Right. Ford did it with Mercury; when they cut the marque, they bought out and consolidated in a lot of unnecessary and underperforming dealerships. Now, before people go off half cocked saying GM should have thought of this and taken action sooner; they did and have. Remember Oldsmobile? I thought so. They have also been reigning in Buick slowly, and have been consolidating some Caddy dealerships quietly too. Thing is, GM was so much bigger that Ford or Chrysler that it is just harder and takes longer to pull off. The simple fact is that there was a long time where GM had to actively work to insure that the other two were not taken out of business. (Not that GM wanted them healthy; just not out of business).
Bottom line though is Marcy is right, this needs to be done, but with some compensation and with an eye to preserving the good will in the communities.
>>the Wal-Martization of cars
As per usual you lay out everything with unbelieveable economy.
I think the deflation you describe has to happen (although as you mention, it would be nice if we could cushion it), but I think bankruptcy is the wrong way to do it.
In addition to an infrastructure stimulus, I think Vertical Farms offer the possibility of construction investment and a lot of jobs in a style of agriculture that is much more sustainable than what we have. (It’s paramount however, that we prototype it in U.S. cities to get real time data on things such as mildew, as well as real-time data on costs to market and productivity.)
And bankruptcy would allow automakers to break contracts and commitments to suppliers, as well as renegotiate payments on goods/services already being provided.
I have a conflict here since my spouse works for a supplier.
But knowing that the bidding process for many goods and services already encourages a race to the bottom on pricing, and that many of the goods/services providers are barely scraping by, means that many people in the supply chain will lose their jobs, more so than if there were bridge loans.
Yeah, as another spouse of a supplier employee, I didn’t point that out either. I think the effect on suppliers would be bad–but not as bad as the rest of this. Though I’m sure there’s outstanding debt on tools that the OEMs didn’t use that the suppliers would be forced to forgive.
happened again.. i work a post thru and none of it gets thru..
i like your analogy.. it describes usa/canada circa 2008… home depotization of hardware, mcdonaldization of food.. it is like corporate dinosaurs have taken back the planet from people, thanks to people looking for a better deal.. in the long run it doesn’t look like a better deal..
wonder how much of this post gets chopped off…
Having Honda at my back door, and many friends and family involved…Honda is interested in GM staying afloat because of the number of parts plants that would tank that provide to both and need the profits from both to remain in production. The time lost by Honda finding replacement parts manufacturers would shut their production down, perhaps for months. They cannot afford that. Bankruptcy would effectively shut down many parts manufacturers.
This is not just the opinion of the Three CEO’s. Economists in Ohio, Indiana and Michigan have figured this out.
Perhaps, (and with all due respect) but I’m not convinced. Having been around the block a few times, and heard just what you’re saying before, I hear a lot of “defending-my-turf” attitude in that at expense of honestly evaluating processes/economy of auto mfg etc. And I saw exact same thing many times in my union days, especially from machinists.
Honda has led innovation in what suppliers do… where Honda goes, they follow… and have done so for decades now.
People resentful of Honda “in their own back yard” may not like ‘em as Honda’s speeding up the ladder past ‘em, but passing ‘em is exactly what they’ve been doing for a long time now. And doing so in a whole lot more than benefits: their engineering, manufacturing efficiency, and quality of product speaks for itself.
Let me help you with the context of my comment. Many of the family and friends work at Honda. I am not defending my own turf.
There is a bigger economic picture.
Sorry, didn’t mean to imply you were. I’d be curious to know source of these family/friends knowledge from whence said opinions flow.
In a frozen credit market, where’s the bankruptcy financing supposed to come from? If it’s coming from a bank that we’re already bailing out, why don’t we bail out the car companies separately so that our bank bailout money is available to lend to someone else, as was planned? Why give the banks big fees on lending taxpayer money to the Big2.5 as part of their reorg?
Anyway you look at it, the last six months of BushCo are a bustout, pure and simple. Now with bonus union busting!
Paulson should be in prison.
Bingo
Best suggestion I’ve heard in months.
Marcy:
Seems pretty clear from your recent posts you are for GM “bailout”, supportive of maintaining UAW standing there, advocating continued standards of benefits etc etc.
As pertains to condition of US economy, $USD and everything else, would you be willing to explain to me (eg. us) your underlying philosophy in doing so?
EG. I’m wondering in your view… what will bailout accomplish… is it just to catch UAW and associated supplier workers? What effect will doing this have on larger economic woes, if anything? Do you see this bailout as line in the sand, hoping (or assuming) more macro corrections will be made later? Do you take this position in consideration of state of US treasury (broke), much less debt obligations?
I ask because, as I’ve stated my POV in several lengthy (longwinded?) posts here in last week, sure looks to me like unprecedented/cascading failure in US economy is occurring w/no hope in sight. Finance, fed oversight, domestic economic engine(s)… all in tatters.
Also looks clear to me their are no larger, systemic changes/corrections/??? on the horizon: BO has been silent there, really on everything econ except Detroit bailout. (have no idea if you’ve read what I’ve said. However, all my doom/gloom prognostications pretty much distillation of plenty out there from the guys who’ve been warning of this for some years now. Or maybe you see it another way?)
I ask you this because, from where I sit, I’m ambivalent about Detroit bailout. Sure looks to me that, unless much much bigger “change” is made in almost everything Americans take for granted that constitutes an “economy”, we’re going to go toes up. And unless that happens (change), any kind of “fix” for detroit isn’t going to matter much ’cause Americans aren’t going to have the dough to buy cars (or much else).
US Treasury printing $$ as fast as presses run, all looks like funny money to me. Surely this can’t continue long w/out everything hitting the wall.
I was a tradesman first 18 yrs of adulthood, had journeyman’s card in 3 unions at one time or another: glazier (glass), machinist & floor cover (Painter’s union in california). I was also contractor for about 1/2 that time (in Ca./Az during those years, contractors themselves not union but sometimes had union employees). I’ve seen really good unions, really really bad (entirely corrupt), and everything in between.
As a matter of principle, I most certainly want to see workers of any stipe get a fair shake/deal. When I was contractor/employer, I always paid my guys 5-15% above prevailing wage, took less for myself. Longterm payoff in not just loyalty but good friends who trusted me over the longhaul, much stronger respect and everything else… dividends were huge.
I fully understand the union thing, I really do. UAW/Miller’s role in Chrysler turnaround was textbook. But his is much different time.
Summary: no matter what happens, there’s going to be weeping and gnashing of teeth here from loss of paper $$ (WS/401k’s etc), unemployment, depleted savings etc etc., no matter what happens or what BO does: that’s a foregone conclusion AFAIC. A whole lot of assumptions ‘mericans have are very much at risk, right down to a viable currency.
WRT Detroit situation, even w/the bailout their viability is anything but certain. And if UAW workers go through some type of restructuring and lose some (all?) benefits, they’re still going to be better off than many. If Chinese (or anyone else) takes over there’s still going to be jobs and people are not going to starve. Right?
A precondition for union representation is that there’s an economic pie to divvy up. When $$’s flowing, greedy hands want bigger share regardless of their contribution go generating those $$. Last century, in many labor/union disputes, this condition was present. So good for the unions then.
But there’s not much of a pie right now. Maybe burnt crust at best. I mean, you can’t sqeeze water from a dry sponge.
Am I missing something here?
I’m not trying to be argumentative or demeaning of your POV at all, rather I’ve come to respect it. I just can’t connect the dots to comprehend why you’re advocating as your are.
Watching CNBC panel discuss things after yesterdays DOW 4(xx) point drop on closing, heard some things I haven’t before. EG. they (and WS pundits in general) have been talking about “finding a bottom”, “finding performers” etc. etc. Has looked like wishful (hope?) thinking to me, as so much of that $50t global CDO stuff still getting on the books in only drip, drip drip fashion. So seeing this new bottom yesterday I heard one of ‘em say (my summary): “the market doesn’t wait for regulators to get their shit together.”
Indeed.
Everyone… Paulson, Bush (if he even cares), WS and pundits that watch ‘em all, everything here has happened in rear view mirror. I see know plan on the table. “Hope” for recovery to this point has been more like wishful thinking. Habits die hard.
I just don’t see what’s going to happen between Detroit bailout and establishing some kind of viable US domestic economy. What am I missing here?
You’re missing, first and foremost, the reasons why it’s not viable. It’s no longer product. It’s legacy costs and dealer structure. SO the question is, do you fix those two problems through bankruptcy (which most people believe would simply kill the companies, as no one would want to buy the cars), or do you do it through legislation. Note, union wages is no longer a reason why it’s not viable, so the question of whether to keep the union or not, when getting rid of the union isn’t going to affect wage costs, is almost purely ideological.
As to this question:
First, restructuring isn’t going to affect the UAW’s current workers much, if at all. Who it is going to affect is UAW’s hundreds of thousands of retirees, who in fact won’t be better off than many, because they will have basically lost their pensions and healthcare. There’s no upside of ongoing employment there.
As to your question about the Chinese–yes, some jobs would remain. But in the 2-10 year frame, auto plant workers would begin to lose their jobs to Chinsese plant workers. ANd in the 10-20 time frame, the engineers would lose their job. So in the long run, the jobs would be gone–as would the jobs of people currently employed by the Japanese manufacturers, because there would be no reason to assemble in this country anymore.
Finally, two reasons why you do the bailout, in light of the doom and gloom you’re talking about. First, because there is arguably no other industry (military employment would be the other, but it’s not subject to market conditions in teh same way) that translates to as many jobs in as many parts o fthe country. Facing a soft landing for auto companies after a recession or a hard landing that will tip a recession into a depression, the former is the no-brainer decision.
Also, going foward, we as a country HAVE to get off our reliance on finance and into something that still makes something. If not, there will be no recovery. You don’t do that by getting rid of one of the segments that still does make somsething (and one in which you are still competitive overseas).
Agree on last 2. Don’t agree on “product”. Yes they’ve improved… a lot. And they’re still couple steps behind NISSAN/HONDA/AUDI etc. @ models on virtually every price point. Only exception is P/U’s.
Yes. (not a unique problem BTW, and likely to cascade/amplify w/losses of recent months). What a bailout could do, if everyone involved is serious about this, is separate these things… funds and all. ‘Cause GM’s not alone in this, as I said. Maybe create some separate entity to administer all this stuff.
It is going to affect wage costs.
“some people” do, not most. Whole host of major US corps successfully gone through Chapt 11. That Wagoner thinks so, with all due respect, personally… I find unpersuasive.
GM currently on deathwatch. “Do it through legislation” implies a lot… like turning GM upside down, shaking out all the broken stuff, and getting their house in order.
Certainly you know more about this than I, but I have been watching for a long while and most everything I’ve seen suggests current mngment doesn’t have what it takes. Their fat, been resting on laurels for years.
Ok Marcy… thanks for your time responding.
I sure agree w/2nd reason (get off reliance on finance)… as I’ve said elsewhere, I’d tear current system apart and start from scratch myself.
I don’t see how GM bailout will solve that, however.
I also don’t see you explaining how this bailout fits into reality of our larger economic woes. Maybe you think things not as bad as I say?
I get # of jobs and all that. I don’t get where income is going to be generated to pay for ‘em. And I also don’t see new economic engines here on the horizon.
In my view, that’s the real issue that’s going to flip things one way or the other… what do we do next? So far, there’s nothing meaningful out there on this at all.
What’s that scripture about putting new wine in old wineskins?
Seeing as how 80% of consumers polled said they would not buy a GM if GM were in bankruptcy (and the number for Chrysler is 95%), I think I’m utterly justified in using the word “most.”
I am absolutely aware of the larger crisis.
Given the crisis, we’ve got an incentive to have as many people–particularly those people who have little to fall back on and would have greater difficulty finding new jobs–retain some kind of job for the least money we can. A GM bailout is, among the options we’ve talked about and with a view toward short and long term, by far the biggest bargain.
I agree that car purchases are going to be lower than the manufacturers have realized so far. BUt they’ll presumably be about 10% higher than if they weren’t.
As for where we go from here, I think we need to refocus on localism in all things where it makes sense–not erect trade barriers, but remove the externalities that make shipping cars from China a viable position. I’ve always thought you start it with Ag. Because Ag is going to flip, too, you mgiht as well fund the transition of people to high intensity localized organic production. Food’ll cost more, but that money wlil stay in communities at more concentrated levels.
And obviously, a lot of new engine is going to have to be sustainability. To be sustainable, we’ve got to rethink transport; not just cars, but whether we own or just lease them and whether we need cars for most functions altogehter. But that’s one thing that a govt restructuring does for you–turns the govt and auto companies into partners that can make this kind of long-term shift.
As to quality–I don’t dispute what you’re saying about Honda. I notice, though, you haven’t mentioned Toyota, against which teh US companies are reaching parity on most measures, except for brand. That’s where we need to start this discussion, since that’s the first hurdle for these companies.
ok, thanks again for taking the time Marcy.
And just in case, I’d like to apologize if I ruffled any feathers here… sure not my intention. I’ve been reading your writing for a while now, well back into NextHurrah days, and have a high regard for all you do… big contribution. Same w/long time commenters here… whole lot of really smart, insightful people and I appreciate all of ‘em. I spent a lot of time refining my reading to most useful/informative sites, and EW is great resource.
So thanks, and thanks to all.
I just don’t agree w/you’all on this one. I don’t see where any of this money’s gon’a come from, whole bunch of other things too. But I’ve already said my piece, so thanks for opportunity to do that.
I’ve never understood why Toyota had such strong sales. Camray’s had significant FOR for years now, significantly lower service life than MAXIMA and couple other’s in it’s class. And from what I hear, they’ve slipped lately.
You don’t mention Hyundai/Kia. Frankly I think it’s remarkable how good they’ve gotten in short amount of time. Last year, Hyundai most dependable car on road in any class. Not quite the amenities of Japanese, but far less expensive. For good reliable transportation on a budget… awful lot of value there.
Anyway, that’s quibbling / OT @ this point.
Cheers!
I’m not sure that much comment is necessary if the concept is not really one the Obama crew are floating, but I’ll toss this in on a fwiw.
A pre-pak would mean that there is already agreement of all the significant players going into the filing. If you are doing something that will be screwing over dealers, pension recipients, the union, etc. – you pretty much are not, by definition, going to be looking at a pre-pak bc they won’t be in pre-agreement on the “screw me screw me” plan. Doesn’t mean that they couldn’t file and use some cram down and exigency and other provisions to accomplish the “screw everyone” plan, but it wouldn’t be as a pre-pak, generally speaking. This is most likely why the spokespersons told Congress they had considered, and rejected. They probably couldn’t find a way to get financing in a plan that would also get all the other special interests to pre-sign off.
In contrast to a Company orchestrated pre-pak, I would have thought that what the Obama crew – if they really were ever considering something – are looking at is a pre-pak where really it is Gov, not the Company or its potential financer, that puts everyone together and Gov basically stands in for the roles of financer and pretty much boxes Company into a plan that addresses the special intersts in a way acceptable to Gov, in exchange for Gov anteing up the financing and/or guarantees and/or R&D-retraining-purchase supports etc. aspects. So I’m not going to say that a Gov directed pre-pak would or would not be a good thing, bc it quite possibly wouldn’t be the same as an insider directed or financer directed pre-pak.
But it looks like it doesn’t matter in any event.
Without a lot of background on the car industry front, I am wondering why the take on dealers is that many would be dumped.
Thanks Mary, that’s really helpful.
If a government financed a pre-pak, how would that differ from a bailout (except that the government proposed the solution, rather than the CEOs)?
As to why the dealers get whacked? 1) because you had a huge overcapacity throughout the system, which is one of the things the auto companies have been addressing. They have got the plant capacity much closer to where it needs to go (though it’s not quite where it needs to be). But the dealer capacity is nowhere near where it needs to be. The structural problem with dealers actually preceded, IMO, the overcapacity at plants, because the market is simply more competitive, so towns can no longer support two or three dealers selling the same brand car. And that’s one of the things that makes it impossible for AMerican companies to demand the same prices as the Japanese. The Japanese dealers are often the only ones withing 30 miles where you can buy the car, whereas the American dealers are competing against someone selling precisely the same product no more than 10 miles away, which means the American is forced to compete on price rather than product, which leads to a cheapening of the brand all around.
Exactly; and you can force CEOs out as part of a
bailoutrestructuring assistance too. Pre-Pak schmee pak, if it is BK, you are chopping off wings of the bird you are trying to save for flight. BK of any variety will kill the sales and confidence. Why insist on that when you can get the same effective results without it?Political preening and cowardice that is why.
I think the way to improve fringes while removing burdens from employers is by a delicate rebalancing of industries which have known liquidity, a project which is redolent of nearly as much socialism as the Paulson bailout. I suppose the remaining pieslice for unions could continue to be in wages proper, if municipalities, states, and even the federal government, continue to avoid over-regulation of wages.
30- I’ve never really seen gov involvement as the entity calling the shots in a pre-pak, but if they are the only option the car companies have and are willing to step in, then I could see that as a possible innovative approach – emphasis on the “possible”
Without having a proposed pre-pak and a bailout side by side for real comparisons, in general what I would toss out as possible differences would be the overall control for how gov resources are allocated (as set forh in the plan and not as a turnover to CEOs to allocate) While a bailout would no dobut have strings, the overall flexibility (but also potential difficulty in pinning down costs) for gov on directional funding would be increased by funneling in $$ or guarantees through an approved plan.
You also have a pre-set oversight schematic in bankruptcy court proceeding – bankruptcy courts are used to setting up compliance rulings for complex reorganizations. In addition, you have a court at ready hand, both to more quickly resolve disputes that might arise during implementation, but also to issue orders that carry criminal consequences for non-compliance.
Rather than having to try to invent, from whole cloth, strictures within a bailout plan that give gov “enough” without “too much” control over where money goes and creates some newbie overseer, you can use a Chap 11 trustee program/process that is pre-set and a whole code and series of court precedents to help set operational and compliance parameters. You also have some flexibility regarding rejection of executory contracts (which might well be needed to make a reorg viable from what you are saying) and preference recoveries and several other areas where the bankruptcy code already gives some extraordinary options that would be difficult to structure (even with parties mostly in agreement bc of other sweeteners gov might offer to entities disadvantaged by the reord) outside of bankruptcy by contract and without the fairly extraordinary powers available in an 11.
But it does sound like the 11 option just isn’t in the works (although, the other issue might be that some of the Obama crew have been working on it as a creative approach, but know that it can’t really be an option until Obama is in office and that the crisis might not wait that long, so they aren’t selling it now, although it may raise its head later).
All fwiw – without real plans to compare, its mostly shooting in the dark.
31 – BK of any variety will kill the sales and confidence I won’t say yeah or nay on that, but a BK that is a restructure backed by gov guarantees and support would be a different creature.
I’m probably projecting here, but me personally, I’d probably feel more secure buying from a company in a reorg that is a gov backed reorg than from one that has had all kinds of PR as being on the brink of doom and with irresponsible CEOs and who have just been given money from gov (even money with strings) to see if they can redefine themselves as viable. But that’s projection, not analysis, so I won’t say you’re wrong.
Um, you might be a bit brighter, more educated and pragmatic than the average American car buyer. Just saying…
Secondly, lets be honest, the BK crapola is, at its heart, yet again, a pean to the conservative Rethug union busting mentality. That is the real net difference. Either way, the government is going to end up with pensions and other legacy costs either on their hands or effectively on their hands. But the BK union busts. This is still about placating the idiot asshole right that put this country, and the automakers, in this position to start with. Fuck those people; they don’t get to keep winning after making us all losers. Just. Say. No.
I’m inclined to agree with Mary’s analysis. The point of bankruptcy is flexibility in handling things. As Mary says, a pre-pak will require all of the major constituencies to agree in advance. That means dealers, unions and suppliers.
There is no doubt that the government is going to eat a mountain of liabilities if GM fails. The retiree health benefits will fall on medicaid. The pension benefits, which will be huge, will fall on the PBGC. The losses to suppliers will mean bankruptcy for lots of them, which will fall on their banks, and eventually onto the taxpayer. Same for dealers. Their obligations include bank borrowings and floor plans. Don’t forget that these are entities that pay taxes, employ people, pay FICA taxes, keep the unemployment funds paid up and so on.
This certainly justifies loans to tide us over. The pre-pak can be reinforced by properly drawn legislation.
Getting ready to hit the road in a few minutes, so I’m going to jump the gun on the trash talk thread for the weekend.
I don’t think the Gigantic Red Battle will be close. If you use my Jayhawks as the barometer, Texas Tech is superior by a large margin. In Norman, Kansas was in the game until the very end of the third quarter. In Lawrence, the Red Raiders were the second coming of Quantrill’s Raiders and the game was over before the first quarter was over. Look for Texas Tech to win by at least three touchdowns. Oklahoma’s defense is just not up to Stoops’ usual level and it will show tomorrow night.
A BCS Championship match-up of Texas Tech and Florida is looking more and more likely.
As for Michigan-Ohio State? Don’t make me laugh. I really don’t care at all.
Man, Ann Arbor is getting a brutal load this week. They’re taking flak from all comers.
Ouch!
Would love to see Michigan win that game.
Well, you missed Blue Texan and I chatting in the background about how Big Blue beat UCLA in hoops.
I mentioned that after the Dingell and the Big Three loss this week, we were due for one.
At least one of those Mountaineer coaches you robbed from Christy is working out….
Agree.
I am only concerned about Beilein’s ability to recruit.
I think Michigan’s AD took RRod as a minority hire. If RRod doesn’t do better next year, I think he could be gone. IMHO, unless you’ve got Vince Young, it’s real tough to win the Mythical National Championship with RRod’s run heavy version of the read option. QB gets hit too much over the course of the year. FWIW, I love watching a run-heavy option team, see GaTech last night against Miami.
The effort took a hellacious blow when the kid they needed desperately, and who is the perfect fit, for the Rodriquez spread/run offense, signed with Ohio State instead. Now he is going to kill Big Blue a second time in his short career.
Agree, but I think a big part of Pryor’s decision was that RRod isn’t going to get him ready for the NFL.
Stud quarterbacks coming out of high school who want a shot at the NFL aren’t going to play for RRod. Once you lose those guys, you also lose the stud wide receivers who want to play in the NFL. RRod’s offensive lines tend to be smaller and do a lot of run blocking. It’s not exactly what the NFL is looking for, but I don’t think it’s as much a problem as qb and wr.
On the other hand his system helps him at running back. He gets a lot of small shifty running backs who will transition well to the NFL.
Also playing outdoors in Ann Arbor, it makes some sense to have a run heavy offense.
Wow Jim – we like your confidence!
Only if you think it is remotely relevant, the velocity at which Westerners are accustomed to buying vehicles imho is a very interesting question. I think it has a great deal to do with the profitability calculation of all automakers.
AFAIK, every few years (iirc Asian manufacturers do it more often) manufacturer’s change the shape of a model’s steel. Again drawing on my massive ignorance of vehicle marketing, within the consumers of that model, that’s the subtle cue that a consumer needs a new car. As long as used cars continue to provide good value (and fuel economy), I’m not sure how big an issue this is.
I continue to think the US market will segment and look more like the rest of the world. bmaz will continue to be able to buy his high end import, but it’s going to cost more. I think families will still want a mini-van, but their other vehicle will be smaller and more fuel efficient than the Corrolla or Civic.
OT, captain obvious here, it’s good for consumers if we can extend the number of months we own a vehicle. That’s however, a big hit to manufacturers. IMHO that adds a another layer of complexity if the U.S. government nationalized the Big 2.5.
OT, software manufacturers want income from subscriptions, not a one time purchases.
In lower end, fuel efficient cars, I would be really interested if anyone has run the numbers on leasing. What could the Big 2.5 lease in the sub compact range for $125.00 a month (with a trade-in?)? The devil is in the details, I could see a lot of scams. But at least you give the Big 2.5 a shot at a constant revenue stream through this depression. In order for this to work, car insurance magnates would have to be on board. There could be a real plus for the environment depending on how you wanted to handle oil changes. If the Big 2.5 own the vehicle throughout it’s life, there’s no incentive for planned obsolescence.
Riffing off the lease idea is that the consumer pays less each year they hold on to the vehicle. When they want to upgrade, they have to make a higher lease payment or make a partial down payment.
A plan like this might make inventory issues a lot easier, because at $125 a month, the Big 2.5 don’t have to give everyone exactly what they want. It also paves the way for big advancements in battery technology (or something else).
This is going to be too long for many, so don’t think I’m going to feel bad if you skip it. However, it does come from someone who’s been involved as a lawyer in some pretty frickin big bankruptcy and insolvency proceedings.
Now, please don’t shoot the messenger here, because bullets tend to make me bleed – but with all due respect for the many smart, knowledgeable folks posting here, most if not all of this thread has grown off some basic semantics misconceptions.
Let’s start with what ‘bankruptcy’ means: The concept predates court involvement, and derives from a means by which a moneylender could signify the failure of his business – that is, by breaking [”rupt”] the bench [”bank”] from which he has been running his business.
Note also that such an act is both DECLARATORY and VOLUNTARY on the part of the person doing it.
Moving into the equivalent concept for a person OTHER than a bank, the better term would be ‘insolvency’ – in other words, that person is unable to ‘meet his obligations’ i.e. pay back those to whom he owes money as they demand repayment within the terms of the loans or credit arrangements they granted him.
There are some important distinctions at work here, and the simplistic illustration works better to show some of the big ones:
Consider what might happen when Joe the Creditor approaches that non-banker business person, someone who makes wooden hat boxes, and says – Hey, it’s Friday noon, which is when you promised to pay me those 10 fish – and the debtor says – Sorry, no can do, and here’s why [insert possibly reasonable sounding explanation].
Note that, as with the example here, there are going to be situations where the box maker is going to want to stay in business to, among other things, pay Joe back, and that Joe might well find that a more attractive option than ‘realizing on his security’, for example, seizing the debtor’s box making tools and thereby putting him out of business
[a rather typically boorish bank approach, and one which cannot make the slightest sense if there’s any chance the debtor might actually be able to pay back at least some part of his debt in an amount greater than the intrinsic value of his tools].
To go back to using more general language, this means that with insolvency, it is far more likely to the point of being iconic that the plug is not going to be pulled voluntarily, but as a function of a decision made by the creditor, or the effect of various decisions made by others – such as fore-bearing from calling for repayment, either entirely or for some period of time, or re-structuring the terms of the loan or credit. or seizing some tools, or taking away something else of some value to the debtors – putting one the creditors in the position of deciding effectively to put the debtor out of business.
I don’t think anyone can argue against it being critical to the orderliness of a nation run in accordance with the rule of law to have, among a great many other institutions of course, the availability of an option to resort to an independent arbitrator who can work transparently under a set of publicly-availalbe rules to do an inventory on everything in possible dispute, put some value on it all, put the facts into some order to resolve what makes the most sense, hear the various arguments, do what can be done to get those involved to agree on whatever can be agreed up, make decisions on what can’t, and then oversee the steps to bring those decisions into reality.
That’s the ‘bankruptcy’ I think many here are thinking of, when they point to powers and rules with possible, even plainly necessarily, unfortunate down stream effects, unintended consequence, or inconvenient outcomes.
That thing, Bankruptcy Court if you will, contains, as we all know, the highly evocative chapter 11, and the sad spectacle of chapter 7 – neither of which is going to make everyone happy, but in particular the first of which would make a lot less folks unhappy, but still risks going to the second, and the second of which would make an awful lot of folks unhappy to the point of risking national despair.
However, bear in mind that the entire Bankruptcy Court scenario presumes that the creditors, of varying amounts under different terms with some having claims over distinct security and others having claims to the same ‘general’ security, are all prepared to live within the jurisdiction of the Court, because the law says they must.
But that law is made by some session of Congress, with some President’s actual or effective consent; and both would know that, regardless the wording of it, that law, intended for the scenario of orderly disposition of actually and possibly competing claims, doesn’t work if the entity to be disposed of in an orderly way under court supervision is an ENTIRE INDUSTRY.
Resorting back to the simple example, what possible good does it do anyone to divide up the box maker’s tools if in the act of division the entire industry of box making is put to an end. Don’t we need box making anymore? And how’s that poor little old box maker going to provide for his family if he can’t even ply his trade for someone else?
The way the “smart” article is worded, IMO, is to make it more available to be understood at some level by us ordinary schmoes. It isn’t truly chapter 11 or chapter 7 or any part of the bankruptcy laws at all: its the GOVERNMENT setting the priorities, and assigning out some features it thinks are going to be better handled by the courts, than by a Car Claims Czar or an executive agency or by an independent national commission.
But, presuming those who put such a deal together know what they’re doing [The last 8 years have tended to skew our view of government efficacy somewhat to the jaded.], whatever jurisdiction is left to the court will not have any real capacity to destroy the industry, or even disrupt the basic elements the government moves to preserve. Indeed, even in the court oversight process, one can expect a big government process guiding the judge[s] in what the court[s] can and cannot do.
Bottom line – or lines, since there are two:
[1] While it is worthwhile to discuss the various features of the bankruptcy and insolvency laws and regulations that will have to be turned off to allow a ‘pre-set’ plan to have a chance to work – simply looking at those laws and regulations and rejecting all resort to the courts, and some of the tools involved in those laws and regulations, holus bolus, is borderline Chicken Little babble [No insult intended – I exaggerate for effect].
[2] Lord only knows what Paulsen and his Goldman Sachs nibelungen are up to with the merchant banks and regular banks et al, but the impending “auto industry bailout” [There must be one.] is going to be mostly if not entirely transparent,
and engage such an amount of government supervision as to not just skirt socialism
[FoxNews might actually appear mainstream on this front.]
but as well engage “The Sky Is Falling” anxieties about WTO infractions
[to which I would say, like John Cleese’s black knight in Monty Python and the Holy Grail: Ni!]
ew: can you explain how one could fix the problem with dealers through legislation? (I know how it would work under bankruptcy, but it’s not clear to me how you write a law that voids a previous PRIVATE agreement being two parties that are not changing in status.)
As to the question of what to do with people laid off from dealerships: my experience is that they would actually fit in quite well at WalMart (with those in Jim’s family, I’m sure, being exceptions). The only difference that I’ve seen in a majority of cases is that the people already working at WalMart know a lot more about cars than those working in car sales, probably because WalMart employees have to fix their own cars.
“being” = “between”
(and the “undoubtedly knows more about the economy than me” in the original post should be “undoubtedly knows more about the economy than I”)
38 – having the industry crater will trend towards union busting, one way or the other, IMO, without some kind of Gov input.
OT – but apparently after being fineOK with the 2005 reports on the CIA-tied Peruvian shootdown of Baptist Ministers, Hoekstra (who chaired the hearings in 2005) now thinks maybe people were fibby and should be investigated.
http://www.washingtonpost.com/…..s/congress
But what is the point if they can’t sell the cars. People would have to be out of their minds to buy crappy cars from companies in bankruptcy.
They have to be able to sell something for any of this to make sense.
Timothy Geithner just announced as Treasury Secretary…as predicted. The masters of the universe are in charge. He’s Rockefeller’s IMF/CFR/FED boy.
Watch for a massive short squeeze on the financials starting this afternoon and accelerating on Monday.
10%?? Whoo boy, it’s a bigger spread than that I would think.
Okay, maybe not that high. But if 10% of the economy is tied in some way to the auto industry, and your taking that part of the economy into a slow retraction, then it’d make that 10% of the economy somewhat more likely to retain normal buying patterns.
5%?
Oh, I think I misread you. Though you were saying there would only be a 10% dropoff.
My bad.
No. What I’m saying is that, aside from the military and related contractors, this is probably the biggest single segment in our economy, in terms of people employed as opposed to dollars made). So you make sure this segment, at least, comes to a slow landing and if you’re lucky does thing to improve while the economy sucks.
The only thing missing from this afternoons coverage of the Geithner announcement on CNBS is a laugh track.
What a rigged “market.”
I predicted they’d announce his name today at noon. I missed it by three hours.
There is no “market.”
link?
Oh, good lord, don’t get that nonsense going….
Agreed with dat