While we’re still trying to digest the implications of the $ 700 financial services industry bailout, the Bush Administration is looking at stepping up efforts to bailout the American auto industry:
The Bush administration is in negotiations to broaden its $700 billion financial rescue plan to include U.S. auto companies, potentially opening the door to an array of industries to seek federal aid.
Detroit’s Big Three are eligible for aid under a broad interpretation of the law that authorized the $700 billion financial rescue, Treasury Department officials said yesterday. But they declined to discuss the details of any assistance.
“The law grants the secretary broad authority to purchase troubled assets that he deems important to improving financial stability,” said Treasury spokeswoman Jennifer Zuccarelli.
Ford and General Motors are eligible because they are both chartered as thrift holding companies, so they can establish banks to make car loans nationwide. Other businesses, such as General Electric, Nordstrom, John Deere and Macy’s, are chartered in the same way to issue credit cards or make loans to their customers. Chrysler would also be eligible, Treasury officials said.
Helping such businesses could put the Treasury in the tricky situation of picking winners and losers within the economy, a far cry from restoring the free flow of credit in the financial system, which was the original intention of the rescue package, some analysts said. It could lead to a long line of companies heading to the Treasury for aid, especially if the holiday shopping season is as disastrous as retailers are forecasting.
Of course, the auto industry is already in line to receive a bailout — at the same time that Congress was still debating the $ 700 billion bailout, they passed, without notice and without comment, a $ 25 billion loan guarantee package for each of the “Big Three” automakers.
Of course, the auto industry and it’s paid lobbyists in Washington are telling us that they need more money:
Last week, the Michigan congressional delegation, headed by Rep. John D. Dingell (D), implored Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke to use their “broad regulatory authority” to “promote liquidity in the U.S. auto industry.”
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“Look at the footprint the auto industry has on our economy,” said Liz Boyd, spokeswoman for Michigan Gov. Jennifer M. Granholm (D). “It is critical the federal government help this industry in a time of transition.”
The Washington Post’s Steven Pearlstein, though, says that the Federal Goverment should say no to this deal:
The rationale for this scheme is pretty simple: If nothing is done, the financial situation of both of these companies is so dire that one or both of them will be forced to file for bankruptcy protection in the next several months. And a bankruptcy filing, we are told, will send an already weakened economy over the cliff, wiping out 2 million jobs, shifting tens of billions of dollars in pension obligations to the government and lopping two percentage points off the nation’s gross domestic product.
Although somewhat exaggerated, there is a kernel of truth in this doomsday scenario: This would be a particularly bad time for the U.S. economy to have GM or Chrysler go under. It would have devastating effects on many communities in the Midwest, deal another blow to consumer and investor confidence, and put further strain on already shaky government budgets.
But even with a government-financed merger, the companies are going to have to shrink by at least 25 percent to reflect the realities of a shrinking market and much-reduced market shares. That translates into the direct loss of an additional 40,000 jobs and the indirect loss of several hundred thousand more. There is simply no way to avoid this pain without making the company a permanent ward of the federal government.
The solution, Pearlstein says, isn’t a bailout but bankruptcy:
The real flaw in the government-financed merger proposal is that it spares the companies from bankruptcy reorganization, the very process they need to get their costs and structure in line with market realities.
Only a bankruptcy court can reduce the burden of pension and health benefits to 600,000 retirees that are slated to cost the companies $90 billion over the next decade.
Only a bankruptcy court can override the state laws that make it difficult and expensive for Chrysler and GM to pare back a combined network of 10,000 dealerships, about 10 times more than Toyota has in the United States.
And only a bankruptcy court can impose on members of the United Auto Workers pay and benefit packages comparable to those paid at the nonunionized plants of foreign manufacturers that have been stealing market share from the Big Three for decades.
If the Treasury were to commit government funds without getting this kind of long-overdue restructuring, it would simply be throwing good money after bad.
Pearlstein is right. Unless the structural defects that put General Motors, Chrysler, and Ford in the situation they are today are addressed and dealt with as only the bankruptcy laws can, then any recovery they experience will only be temporary.
