Mr. Ludwig, a former U.S. Comptroller of the Currency, is founder and CEO of consulting firm Promontory Financial Group. Any opinions are his own; GMAC Financial Services is one of Promontory’s clients.
The economic upheaval wreaking havoc on the global financial system is threatening to claim another victim: the domestic automobile industry and its financing arms.
General Motors Corp. could run out of cash by January without help. Ford Motor Co. and Chrysler LLC also need fast government intervention to stay solvent. Automakers and the UAW are making their case to Congress this week for emergency help. But even the supporters of a $25 billion aid package for the auto industry are dubious about whether they have the votes to pass it.
This raises the question, why not just let them go bankrupt? The domestic auto industry is everyone’s favorite whipping boy, and its problems have been growing for decades. Some are of its own making; many are circumstantial. But we cannot blithely accept its failure as somehow inevitable or deserved.
Our economy has been badly battered in recent months, and has become increasingly fragile. The erosion of our industrial base already presents real security risks to our nation. Why would we accelerate this sorry state of affairs at a time of national crisis by sitting on our hands and letting a signature American industry collapse?
The American auto industry is well worth saving, for many reasons. One reason is that for the past decade Detroit has made heavy investment and steady progress in improving its competitiveness, what it calls “altering the DNA” of American cars. US automakers spend $22 billion annually on plants, equipment, research and development. Breakthroughs are at hand in developing alternative fuel propulsion systems, and our national well-being and security depend upon seeing them through to completion.
If we allow U.S. automakers to go under out of anger, resignation, or ideology, it will only mean all the work and investment of the last decade will be ceded to our foreign competitors instead of being plowed back into the U.S. economy.
Another reason is the industry’s importance to the job market and the wider economy. Automobile manufacturing directly employs a quarter of a million workers and indirectly about one in ten U.S. jobs are related to some degree to the automotive sector, according to GM estimates. So the effects of a collapsed U.S. auto sector would not be limited to Detroit – they would be magnified as the ripples spread to related industries.
If we allow U.S. automakers to fail, millions of retirees depending on auto company pensions will be at risk and auto manufacturing jobs will disappear. The ripple effect won’t end there; millions of jobs in related sectors, such as U.S. manufacturers of steel, aluminum, iron, copper, plastics, rubber, electronics, and computer chips, will also feel the pain.
Worse yet, the promise of a meaningful future for American manufacturing would fade. As that promise dims, the role played by manufacturing jobs as a passport to the middle class would likewise disappear.
The auto manufacturers did not cause this crisis; they were working hard to reinvent the quintessential American invention when high oil prices and economic upheaval hit, dragging them into the vortex. There is a tendency to think that an example must be made, that someone must be allowed to fail. But do we really need to cut out of the heart of the real economy? When the patient is in the middle of a full blown coronary, it’s no time to discuss lifestyle changes.
We can and should revisit subjects like executive pay scales and expense controls when the industry isn’t at death’s door. For now, we should recognize the gravity of the moment, and use the TARP funds and pass necessary auto-related financial stabilization legislation to avoid digging a bigger hole for the national economy.
People seem to think that bankruptcy is the end. It's not. The airlines have proven this several times.
Chapter 11 will allow the auto makers to restructure their costs. Hopefully that restructuring would go from the factroy floor to the board room. In fact the feds should use the $25B loan as leverage to make a few changes.
There is no point putting Americans further in debt to finance the foolishness of high paid execs. It's time to pay the piper.
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I can’t fault the auto makers too much.
The big three could have built all the fuel efficient vehicles in the world but the American consumer would not have bought them.
SUVs are around for a reason … because that’s the market.
The airline carrier bankruptcy example is a poor analogue to the outomotive industry, and is not a valid comparison.
A valid comparison to the airline carrier industry would be the car rental industry - a bankruptcy there would not threaten a national competence and industrial base, but merely reorganize a retail-like chain that rents cars to move people around.
Bankrupting GM, Ford, Chryser is like bankrupting Boeing and the US airplane manufactureres - laying waste to a national asset and industrial base that is a competence, a core security asset, and a strategic industrial base. It is based on engineering expertise, production expertise and unique physical assets, and deep technological experience and know-how.
People need to see the bigger picture and what is really at stake.
GM is not like an airline carrier, and such comparisons are illogical and ludicrous.
A bailout that is conditional on revamping the industry will still put the 98% of employees, not involved in engineering and design, out of work for two years while these new, competitive vehicles are being created. Unless - of course, we pay them to continue building those same old non-competitive cars, that won’t get bought, in the meantime.
I say let them go into bankruptcy. This will force them to rethink how they should move forward. Nobody helped my mom when she couldn’t make the mortgage payment on more than one occasion, she went out and got another job and we didn’t get to order pizza that month, or get that new GI Joe.
The big 3 have some significant improvements to make:
Restart with non-Union workers and non-Union suppliers. They may have done a lot of good 30+ years ago and that should always be remembered, but they are not necessary anymore.
They need to concentrate on reduced costs, start doing things lean and reduce the amount of different products they produce. Instead of GM offering 10-15 (or however many) models, offer 4-6 with few variations. Reduce the amount of options on the vehicle (who doesn’t want AC, CC, PB, PL, PW and a CD player? Make them all standard). You can increase the velocity of manufacturing, reduce the cost of inventory and be more profitable. Let the aftermarket folks “Pimp your ride” instead having a 1 unique car after another roll off the assembly line. It’s really easy, just simplify your product offering.
If the auto industry in America had done everything possible to cut costs, improve quality, and reduce risk, I’d say fine, lets help them get back up and get going again. But they have consistently mismanaged their operations and it is going to cost them…unfortunately, it will cost 250,000+ employees who had no say in it their jobs, but I chalk that up to the Union’s involvement as much as the big 3. Good luck to all involved, I’m not sure there is a Silver Bullet here, but there can still be a positive outcome if folks are willing to make some significant changes to the way they’ve historically done them.
I own a small manufacturing company. The current economy has caused great stress to us as well. The difference is that we have to find solutions to deal with it on our own, because there is no bailout for us.
The main cost differential of the US auto industry is the impact of staff benefits. No union has(can ?) agree to any serious salary reductions, so in many ways allowing GM to enter into Chapter 11 is the “quick fix” that the industry needs to regain some competitive position…
Just adding money to the industry without fixing up the inherent weaknesses is throwing good money after bad…
1. I do not like the use of the phrase “bail out” in this context that the media likes to use it. When we talk about “main street”, applying the label “bail out” or “hand out” is appropriate. When we talk about “wall street” or the business community, the label “investment” is more appropriate.
2. No investor will invest without a business plan that seems to have a reasonable chance of returning the investment with interest. This should be true of current government activities as well, although the return may not satisfy a Venture Capitalist.
3. The Auto Industry needs capital, which can only come from the Government or the Oil companies (what about them, by the way?). The money should be made available by the government if they have a viable business plan for the future. If there is not a viable business plan, then we would be just throwing good money after bad. In addition, strings should be attached to focus these companies on the national interest as well.
If these criteria are not met, let them go into bankruptcy protection.
4. By the way, very few people will make a major investment, such as a car, in a product from a company in bankruptcy protection. Too many concerns about service and support for such a large investment. Any auto company that seeks bankruptcy protection will completely fail without a doubt. Bankruptcy protection just is not an alternative option for an auto company. It is not a service company, unlike an airline.
5. Another by the way - someone wrote here that we let our locomotive industry die, so why not autos. Well, this is not the late 40s or early 50s when we had 50% of the world’s GNP and no economic competitors. This is the 21st century where through our enlightened global leadership there are hundreds of millions of people world wide realizing the American dream and providing real competition that just did not exist 50 odd years ago. We could afford to be Laissez-Faire about our economy then and let the locomotives die, along with fountain pens, etc.
We are not junking the auto industry, they are doing it to themselves. The executives are arrogant and undeserving of help. Until they are forced to liquidate their excess assets, they will continue to burn money. It will be throwing our money away. Chapter 11 would send a very necessary message.
I drive a Ford truck. I love my vehicle. I am Canadian. Canada has a lot of oil. We stand to benefit from oil shortages. But the free market is something beautiful and worth defending. So is our air and water. If we let the market do its thing, allowing risk to be rewarded and letting dinosaurs become extinct, we would all be better off. We would have wind turbines - and probably natural gas micoturbines powering homes with heat and electricity. We would have natural gas vehicles - and of course cars with electric motors powered by fuel cells.
When I bought my car - after not driving for years - I told myself that my Ranger would be the last gasoline vehicle I would ever buy. I am looking forward to huge economic growth as we build different types of factories to penetrate new markets. I want the rulers of the glorified gasoline stations in the Middle East out of our lives permanently and completely. I want the free market to decide how the chips fall. For sure I really don’t want folks taking my cash to pay others with much higher salaries. That’s like rubbing salt in the wound.
Please do *not* provide loans or other federal funds to GM, Chrysler, and Ford.
None of the reasons cited in the press make sense.
If GM goes down, the demand (for cars & parts) shifts to Ford and Chrysler–it won’t go away. If the demand for cars isn’t there, you help no one by splitting demand across 3 car co’s.
If the bailout is supposed to cause GM to make more fuel efficient and low pollution vehicles:
Why support the weakest most insincere car company in the lot? The Volt is all promotion and no reality. Remember that this is the company that killed the electric car…etc.
If you’re just trying to help the GM employees:
Why them instead of WaMoo-lians or Circuit City folk? Makes no sense to play favorites.
If you’re trying to help auto industry in general:
Why help one player (GM) at the expense of all the *US* employees and parts makers for Honda, Toyota, etc?
If you simply want to stimulate the economy:
Invest the same $ in new national assets with *lasting* value–NOT more cars. What’s better for America: more new cars or asbestos-free schools, fire-safe nursing home, clean/fast transit, hospitals without staph-infections, better-insulated homes? Isn’t this a no-brainer?
So *don’t* help GM. As Barack says, this is a time for *transformational* change. Bailing out Detroit is more of the same. Don’t do it. Please.
While I do not like bailouts, auto company bankrupcies at this time would likely be devastating to the American economy.
Those who urge bankrupcy may have conflicts of interest: The Republican party wants to kill the unions. Many hedge funds likely own credit default swaps, which will pay off if the auto companies go under. Many of those contracts will likely be paid by AIG, out of taxpayer dollars. The taxpayer would also foot the bill for failed pensions and unemployment insurance.
Congress should make the funds available to save our auto industry, with strings attached to modernize the companies.
Tariff all imported vehicles.
Use the monies to maintain domestic auto solvency.
Tariffs are constitutional, (not)”Free” trade agreements are not.
And govt does not take ownership in private business.
Lastly, the American consumer does NOT always deserve the lowest possible price regardless of job loss, toxic assembly, defective design, child labour, & environmental damage.
Politicans need to find the the guts to say that to the public.
It already has failed. The “economy” just pushed the failure to now instead of next year or the year after that. The only reason this has a chance of being proped up is to guarantee the Union Labor Vote. There is no other reason why you cannot be “allowed” to fail, reorganize, clean house and actualy build something that people want to buy, at a price they are willing to pay. In the old days, only the winner got to go home with the tropy, now they give them to the winer’s.
I think we should let the auto industry fail. The author says breakthroughs are at hand with alternative fuel propulsion, but provides no evidence and no time line of ‘what at hand means’.
Secondly let the free market function. If these three companies die or come out of bankruptcy leaner and meaner, perhaps that is a better solution. Other smaller car companies might prop up given the chance and in time people will be re-employed.
I don’t believe the tax payer should help the auto companies survive. Let them do that on their own. Otherwise they will simply repeat their errors and expect another rescue in the future.
If the auto industry is having a coronary, I, as a taxpayer should not be looked upon as Medicare. This IS the time for our government to impose restrictions on the use of our money. Will this $25B lead to more? GM runs 6 domestic auto companies and 6 foreign. It has partnerships with many more domestic and foreign auto companies. Is it unfair of the US to ask GM to SELL some of its foreign assets to make up part, if not all of the $25B + it and other US auto makers are asking for? When a poverty-stricken american asks for government assistance, and they had $181B in income and $55B in assets, would they get even a penny?
By the way, Toyota has 3 product lines and is the #1 car company in the world.
I agree with the comment about them filing Bankruptcy. Why should we the American people continue to help these people get richer. More and more business’ are doing away with Pensions, and retirement packages. It seems that if we cut the top dawgs pay, and event he employees for that matter. Imagine if every business were part of a union, the price of everything we have to have to survive would be triple the price of what it is currently. They do not need to be making what they do. Let them pay part of their own medical expenses just like every other red blooded American.
No matter how much money had been invested, no matter what it had cost, no matter how many jobs depended upon it, on 15 April 1912 attempting to bail out the RMS Titanic would not have been a wise investment of time or money.
Bankruptcy for the airlines: let me think about those worthy entrants in the famed hall of bankruptcy. Braniff, TWA,Peoples Express,Northwest are entrants into that dark night. But I think I have seen some of their planes sitting on the tarmac in Arizona just the other day. I believe that tarmac is called the Resthome for Jets. So, I guess you’re right, there is life after bankruptcy.
Amen and thank you. This is a real, honest look @ the current state of affairs for not only the for the auto industry but the entire world economy. This is the biggest issue to hit since the great depression. People who believe this is a minimal issue do not comprehend the long-reaching affects of such a demise. The ENTIRE world economy relies on this industry. To assume otherwise is naive at best. Congress is the last place to look for a line of credit. Additionally, if one thinks this only affects the Detroit 3, think again. Look at Toyota idling plants as well as the retail industry looking at bleak holiday results. This is a matter of life and death for the world economy. Besides, $25 billion is only 3% of the amount given to the banking industry - without a blink of an eye. Nobody in the world should be against this loan/credit.
I think you should ‘Junk’ the industry,
Let the old school companies go to the Chinese or the Japanese. At least they know how to run a Manufacturing company. I think the US has become a little too Maternal. Too many mommy’s boys in charge now, forgotten your heritage.
It looks like the countries that you call 3rd world have turned the tables. Everyone might have to line up on the Chinese job que soon. How embarrassing, a World Power? To who?
If you still think that the SUV is agreat car you have major problems. Good Luck.