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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Any company which produce products which do not sell is allowed to go bankrupt, why the big 3 be given an exception? Jobs lost as excuses….etc? What have happened to free market concept and belief?
Unless the BIG 3 with its super rich CEOs know that their companies can go bankrupt and they can go unemployed( hopefully no golden handshakes have been arranged in their contracts other the incentive to fail has already been embedded), flying in their private jets to beg for bailouts, only then they may be able to find a better way to compete with other car makers and keep their jobs as well.
It is incredible that we even have this debate flooded with irresponsible, lynch-mob mentality against one of our key industries. Obviously, bankruptcy is not a solution for any automotive company, especially in the present economy. Would you buy a car from a bankrupt company or do you know of anyone who’s done it lately? Mr. Ludwig presented an excellent rational case in support of a bridge loan for our domestic auto industry, which, if one judges by the only existing precedent - Chrysler’s “bailout” 30 years ago - at the end may very well turn out to be a good investment for us the taxpayers. The prospects for Chrysler survival back then seemed at least as bleak as for the Big 3 now (note that Ford had profits earlier this year until wild swings in gasoline prices and subsequent credit crisis hit it hard). At the end Chrysler paid the loan seven years before the deadline with $300M profit for taxpayers on a loan of $1.5B, which would be roughly equivalent to $7-10B in todays dollars.
It is interesting that the Big 3 have been profitable almost everywhere else but in the States. One of the main reasons is that in Europe and elsewhere there are stable national energy policies that facilitate good planning. For example, they have stable gasoline prices around $6-8 with the help of taxes used for infrastructure and similar. As it became brutally clear now at the end of these disastrous eight years of George W. Bush administration, we have no energy policy or industrial policy for that matter. This is a great opportunity for President-elect to develop one. It should include stabilizing gasoline at $3-4 with implied taxes to be used for improving our infrastructure and promoting green transportation. Then watch the Big 3 returning the loans well before time, with ample profits for taxpayers and with some great new green technologies in their again profitable vehicles.
The big 3 make smaller vehicles - and they sit on the dealer lots because Americans are buying SUV’s. Even the so called enviromentalists in CA government are driving SUV’s (check out thier fleet vehicles on the city websites!) -> not the small, environmentally friendly, green cars that they are trying to force the big 3 to make. In capitalism, manufacturing builds what is selling - not what folks are preaching. It is not only the managment that is at fault - but every American that bought a large vehicle instead of a small one….
The problem is firstly sales. The government is no good at sales (or manufacturing or finance…). GM wasn’t ready for the double whammy of a gas price escalation and a credit crisis. Now the gas prices have moderated but the credit crisis has not. The credit crisis should be fixed, by bailout and regulation/oversight.
As for the manufacturers, they should make and sell cars until they go broke. The government can pick up the pieces more cheaply then, and soon thereafter we’ll be back to normal with no hangover.
they’re already dead. any attempt to undo decades of misteps in a matter of months is wishful thinking. $25B won’t save them. only WW3 can save these dinosaurs
Lets face it America,
Your so-called Auto industry is in its final death throws. Foreign companies have been whipping your butt for years, and you’ve ignored it. This industry has no hope for you, it’s over unless you lead the way with the plug-in electric car. A subsidised economy is no more than a magic trick, and we all know they’re not real. Just look at your Agriculture industry, it’s just another form of welfare. Now because of your in-ept government led by a fool who couldn’t even put together 2 words, your Auto ‘Welfare’ Industry is just about to start doling out the welfare cheques as well. ‘Henry Ford’ would be turning in his grave. Surely you people are smarter than this.
If you choose to prop up industry the inevitable outcome is they eventually fail. Unfortuanately welfare doesn’t fix the problems only new ideas do.
If you all keeping living in this fantasy land you will have nothing left. As far as I can see the only industry you have that makes any real money is war, and soon you won’t even own that.
You see you can only make money 2 ways. 1/ You Plunder, 2/ You create. Unfortuantely the plundering is over for you, it’s now time to create.
Yes, the impact will be massive. But this $25bn isn’t going to change these car-makers into profitable companies; it’s only going to delay their bankruptcy for 6 months or 1 year by paying a price of $25bn which will be burnt away by these auto-makers? What good is this going to do to America? It is like just pouring water into a vase with a hole, hoping that it will be filled up; it won’t - let them go bust and we should be able to clean it up although it seems impossible.
I was in the
I believe the matter is incredible easy: the US goverment is like any other credit source, it can set standards and goals for their money:
a)reduce wages
b)reduce all the ridicule union benefits.
c)trim top company officials salaries and benefits.
d)focus on the business of making new cars that the public wants.
Mr. Hardenburg, please retain your mindless comments, and don’t waste people’s time with your foolishness.
Anyways, the problem is the whole system a mess. Big companies, from which the economy is highly dependant need more government regulation (call it socialism, or w.e.). These companies can’t take foolish risks, then allow for the execs to retain their multi-million dollar salaries. Economic freedom sure, but economic responsibility must also be taken into account. When companies begin to take the wrong path, government intervention is pivotal,so that economic downturn can be prevented before it starts.
GM burned through $7 billion in the last quater. Their share of the $25 billion, was reported to be $10 billion.
At best this ammounts to 6 months of operating costs, and then what?
It seems unlikely that this ship which has been trying to turn around for the last 10 years, will manage to spin on a dime in 6 months.
Hi
Why not cut the pay of automakers from 80 dollars an hour to 50 dollar an hour
Why not put a cap on CEO income, Dispose off all private jets , and pay should be based on performance.
Doctors lose licence if they make mistakes , Why not sue the CEO and take them to the cleaners if they fail
Resident, New York
What is wrong with the US,
You want your Government to give your money to obscenely rich business people, when you can’t even go and see a Doctor in your so-called Democratic country. Give the 25 Billion to small enterprising Business’ that employ many more people and might come up with some new revolutionary ideas. Don’t forget Henry Ford. The belief that large organisations create more jobs is a myth you gullable people all fell for. Take a minute and have a good think about it. Who employs & supports most of middle America? It’s not the corporations, it’s the small business’. Remember the small butcher, baker, fruit shop. How many families did they employ, many more than your mega stores of today. Remember the bulk of a corporate profits go to shareholders & company executives not to the workers. Why bail these fools out, let them sink and give other people a go. Do you realise that corporations usually pay less than 10% in taxes, while the individual or small business has to pay 30-50%. These bail outs are just a redistribution of wealth from the small business & taxpayer to the mega wealthy, and let me tell you many of the owners of your corporations aren’t even Americans. Don’t be fools.
While the bailout sounds like a corporate handout, it is not. It is a loan needed by a company that has junk bond status yet is too big to get corporate financing. Chrysler already did this in the early 80’s, and the government profited from the interest on the payments. Also realize that ‘dumping union contracts’ to be cost competitive won’t work. The UAW will still be the employer of choice for any newly reborn GM. Experienced employees will still demand high wages/benefits (the current UAW wage is very comparable to those offered by non-UAW plants). And the taxpayer would still be on the hook for the unemployment benefits given to the 425,000 employees waiting for the bankruptcy to settle, along with the pension plans thrown to the PBCG (Federal Pension guarantee). Pensioners get only a portion of what they paid in, leading to more stress on Social Security. While a restructured GM might be desirable, bankruptcy filing are far from ‘taxpayer neutral’.
Congress referred to the Detroit Automotive industry as “dinosaurs” isn’t this the pot calling the kettle black? Our Federal, Michigan State and Detroit City governments are much more in need of a overhaul than the Detroit Automotive industry.
“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.”
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You forgot to add: a passport to the middle class for high school dropouts thinking they’re entitled just because they were lucky to be born in America, and because their father and grandfathers and all the uncles are/were the union members.
The times have changed. As soon as it was discovered that a Mexican or a Chinese can do the same job just as well for just a fraction of pay and no benefits, and the cost of manufacturing elsewhere, including shipping, tariffs, bribes to local honchos, etc.etc. is less than local production costs, guess what? The jobs moved to wherever it’s most cost-effective to produce. The only jobs that stay are the ones that can’t be done elsewhere (your drain can’t be unclogged in China, so plumbers are safe) or require special skills not available out there. The artificial preservation of jobs and compensation levels through labor agreements can’t be sustained anymore.
Manufacturing used to be High Tech in XIX and 1st half of XX Century - not anymore. It moved down the food chain. These days, the passport to the middle class is at least a college diploma - and more and more it’s less so with time passing. Now beside a diploma (especially “liberal arts” meaning “no marketable skills”) one needs to have also some certain skills to be hired into a middle class level job. Of course the night with a boring professional book is less appealing than a night with a 6-pack of beer and TV, but that’s how you get into the middle class these days. And manufacturing jobs, with very few exclusions (but how many of new Abrams tanks and 5th generation fighter jets we need?) are being more and more working class jobs (by definition, below the middle class threshold).
How many of the “big 3″ executives flew to congress on a commercial airline (as opposed to the company jet)? If the big shots are not willing to show a little constraint, why should I, as a slave to taxes, pay for their excess while they lay off other taxpayers for whom I will have to pick up the slack? Double whammy to me - if I manage to keep my job.
I have worked as Ford management. I have worked as Honda management. The Big 3 deserve NOTHING. The pivotal question taxpayers should be asking is: “How can Canadian & American executive and workers at foreign manufacturer plants in North America make the best cars in the world but the Big 3 can’t?”
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- Posted by turismo
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If you, as you’ve claimed, worked at both, what prevents you from figuring out the answer? It’s just 3 letters: UAW - as simple as that. There’s no unions at foreign auto plants in the USA, and the management would do everything they can to keep it that way.
It’s well known that the Big3 are losing (yes, losing!) about $1500 (give or take some - depends on the model and current “incentives”) on each vehicle they sell. It’s also known that about $2500 in each car cost represent retirement and health care expenses for current and former employees. Remove this extra cost - and all of a sudden there’s profit instead of loss.
Whoever tells the workers would be abused without union representation - it’s shameless lie. When Nissan started hiring in Canton, MS, people were queuing for jobs despite of no union being there (or maybe because of?). The pay is somewhat below UAW rate - but there’s no union dues to be paid regardless of being employed or receiving unemployment benefits. There are benefits, too - not as luxurious as UAW package, but in line with other non-union jobs throughout America. And - the most important part - NO retirees to provide pensions and benefits to.
Just let the Big 3 to break free of UAW stranglehold - and they’ll be viable again. The bailout would not help with that - after all, the Congress Dems are the best buddies of the unions. The Chapter 11 will.
The Big 3 have made fiscally irresponsible decisions that have led to their current cash flow disaster. Don’t be fooled into thinking that “American” cars are made with “American” parts. They are not. I am in the automotive industry and sell parts to repair shops. The parts that are used in original equipment manufacturing are more often than not made in China, France, Mexico, Brazil, India and other off-shore countries. The big 3 committed themselves to producing an inferior product and only lately have been trying to correct the errors of their ways. After several years of their $0 down - 0% percent financing they are experiencing a cash crunch. Who’s going to bail out the numerous repair shops that went belly up during those years because everyone and their mother was taking advantage of the Big 3’s short-sighted effort to increase sales of their vehicles? The Big 3 tried to crush our industry by selling cars at a rate they ultimately couldn’t afford and now we’re going to have to foot the bill for their greed and stupidity. Not fair! Detroit will undoubtedly loss jobs and money…but who’s speaking for our customers who have lost their entire life’s work and savings? It’s time people are held accountable for their actions.
Bravo Mr. Ludwig!
You’ve put into words much of what I’ve been thinking for the last week.
If the Big Three stubbornly resisted the change to smaller more efficient cars it was not “their idea” to do so. I think the auto industry is perhaps best understood as a reflection of its shareholders and customers priorities.
I’m afraid that the media, the President, and some outspoken Senators are pretty well explained by the insensitivity and hubris they’ve been spewing.
The automotive industry paid for the birthing of the middle class in America. It brought a good living to its workers and customers for a hundred years. It gave us products that were recognized worldwide as the best of the best.
Why in the hell would we bail out a bunch of overpaid leeches who’ve gambled away half of our retirement funds and turn our backs on the folks who gave us what we wanted for all those years?
The difficultly is that these are multinational corps. Who will just siphon off any funds supplied to foriegn shores.
Any bailout funds.
1. Must be kept inside the US.
2. Other funds that were designated for US operations,
must remain in the US. (no bait and switch)
3. Priority must be to retain US jobs.
4. All levels of management must take pay cuts equal to or greater than that of the UAW benefits.
5. All future management pay increases must be tied to percentage increase in UAW benefits.
6. All checks and agreements to be signed must be done by congressional auditors.
Anything else, and you’ll end up with the same result as if they went chapter 11. The big 3 will use these funds to offshore the remaining US jobs.
Oh, as if someone was sending a subliminal message, Reuters security word for this posting is “toast” !!!!