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Could bankruptcy be worse than this?
On Monday, President Barack Obama said that two of the three largest U.S. automakers, General Motors and Chrysler, failed to find a viable plan for their own survival. So the government’s going to do it for them.
The Treasury Department will now help GM restructure by, among other things, suggesting which brands to keep or phase out. Just for good measure, Obama ousted GM Chairman Rick Wagoner.
Robert Nardelli, the head of Chrysler, got to keep his job. No doubt the administration recalls that the last time somebody fired the King of Failure they had to pay him $210 million.
The irony, though, is that Wagoner argued so vociferously against bankruptcy as an option for fixing what ails the automakers, yet it probably would have preserved his job.
The reality facing GM and Chrysler, which even the companies themselves acknowledge, is that they simply have too much of everything: too many dealers, too many employees, too many health care and pension obligations, and too much inventory that no one wants anymore.
Bankruptcy is the best way to solve those problems if the companies can’t. Yes, it would be painful, but jobs already are being lost, dealerships are already shutting down and suppliers are already hurting.
Prolonging it
What we got Monday was a plan to prolong the suffering and uncertainty.
Chrysler, for example, was deemed too small to succeed, so the administration is providing working capital to keep it running for 30 days with the mandate that it complete a merger with Italy’s Fiat. Given that mergers of this size are nettlesome under the best circumstances, imagine the future pitfalls from this shotgun wedding.
Still, Alan Helfman, vice president of River Oaks Chrysler Dodge, said he believes the plan will force automakers to boost revenue, reduce costs and become profitable.
Fiat’s models will give dealers like him something to sell when gasoline prices soar again and buyers start looking for smaller cars, he said. Last summer, when prices spiked, Chrysler didn’t have many fuel-efficient options.
“The credit challenges and the gas crunch are a lot of the reasons we are where we are,” Helfman said. “You haven’t been able to get a lot of middle class America that you used to be able to get pretty easily.”
He’s encouraged by Obama’s plan for the government to guarantee the warranties from both companies.
“That’s kind of like buying a Treasury bond,” Helfman said. “They took a lot of the trepidation away from buying a new GM or Chrysler product.”
Meanwhile, lobbyists must already be drooling over Obama’s plan to sort out good assets from bad. Is GM’s plant in Arlington a “good” asset? How about the one in Lordstown, Ohio? You can bet the lawmakers representing those cities will have an opinion.
Obama, in other words, offers a political solution to a business problem.
Cold eye of a judge
After all the inevitable haggling, bickering and earmarking, the automakers may still wind up on the courthouse steps. Obama himself said bankruptcy remains an option. Despite its tough talk and Donald Trump routine with Wagoner, the administration has done nothing to assuage concerns of investors, workers or customers. It’s simply paying billions to delay a solution yet again.
Is all of this better than bankruptcy? Helfman says yes, because the public has such a stigma about companies in Chapter 11.
But there’s also a stigma with buying from companies working under the persistent threat of bankruptcy that rely on government handouts every few months to stay in business.
What the auto industry needs isn’t the compromise of politics, but the cold eye of an impartial judge. Only that can address the problem quickly enough to give these companies a chance of rebuilding themselves.
What the industry got Monday wasn’t a bailout. It was a cop-out.
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