U.S. Auto Industry Can Be Saved Only By Bankruptcy

What do you do with a business with an artificially bloated cost-structure that sells a product that has steadily lost consumer favor for decades? And refuses to take the necessary steps to turn itself around? There are two choices: let it fail or save it, and each involves bankruptcy. Chrysler is headed for Chapter 7 Bankruptcy and will probably be liquidated if it can’t strike a deal soon to partner with Italy’s Fiat SpA. General Motors’ (GM) will probably pursue some kind of government-sponsored reorganization, which is a euphemism for Chapter 11 Bankruptcy. The Ford Company, the other member of the Detroit Three (Stooges?), appears to be surviving on its own without the need for Government subsidy, at least for now.

The automakers are understandably in denial and doing their best to delay the inevitable. President Obama is understandably reluctant to force severe terms on the auto workers union (UAW) that got him elected. However, the Obama Administration rejected both GM’s and Chrysler’s latest reorganization plans and indicated it will not continue to subsidize the auto companies in their current form. It also says preservation of a U.S. auto industry is important to our economic and national security. Consequently, it is clear that the substantial reforms needed are not likely to occur without the assistance of a formal bankruptcy.

So, why don’t they just get on with it? Instead, the Obama Administration is further delaying the inevitable and announced on March 30th that it is giving GM 60 more days to present yet another reorganization plan and Chrysler 30 more days to reach an agreement to partner with Fiat or another automaker. Besides the agonizing and futile time extension, this supposedly last extension is likely to cost U.S. taxpayers another $16.6 billion for GM and $5 billion for Chrysler on top of the $17.4 billion they collectively received last December. Will the Administration pull the trigger and force terms for a viable reorganization on GM and the UAW and let Chrysler fail, if those companies don’t successfully execute their respective dispositions by deadline? If the Administration is serious about getting this done, shouldn’t it have called for the resignation of UAW’s President, Ron Gettelfinger, when it forced GM’s CEO Rick Wagoner to resign?

Senator Bob Corker’s reorganization plan presented last December is most likely to be the template for the inevitable course of action that will occur once the decision-makers reach the conclusion most of us already, if reluctantly, accept. The Corker Plan proposed letting Chrysler go into liquidation and a reorganization of GM according to terms that a bankruptcy proceeding might require. According to Corker’s analysis: GM bondholders would need to accept 30 cents on the dollar to help reduce GM’s $27 billion debt load; worker wages should be reduced to be consistent with foreign competitors operating here; and payments to workers receiving almost full compensation up to four years after termination would need to be eliminated. It should be noted that rank-and-file employees under UAW contracts earn $70-74/hour including benefits, while competing foreign companies operating in the U.S. earn $42-44/hour. In addition, half of the $24 billion GM owes to the UAW’s health care account for retirees would need to be paid in GM stock.

With the passage of time and the further deterioration in the auto business generally, it is likely that the terms of the ultimate reorganization plan will be even more draconian than those proposed by Senator Corker. This problem isn’t going to resolve itself. So the question is: When will the Obama Administration do what is necessary to save the U.S. auto industry?