Tuesday, November 18, 2008

No Bailout of Big Three: What Happens?

If the Big 2.014 do not get bailed out by the taxpayers, what happens?


So what?

It sounds worse than it is. Under Chapter XI (the most likely scenario), the automakers will reorganize, meaning that they will continue to operate but many of their contractural obligations will be re-worked--such as those with the UAW (and, correspondingly, with their white-collar employees).

But manufacturing, parts-distribution, etc., will continue.

Shareholders will get clobbered, temporarily. There will be some grinding of the gears. There will be staff cuts. And it's entirely possible that some operations will be under new ownership and/or management after a few years.

Think of it as an interlude in a hospital. There will be surgery, and sutures. There will be a recovery period. Painful, but necessary.

Another set of points, here from RedStates:

The issue comes down fundamentally to this: should the taxpayers throw an enormous of money that is unlikely ever to be repaid into General Motors, to keep them operating in their current bloated state? They have far too much production capacity, their labor costs are far too high, and they have far too many dealers.

GM needs to shut down some capacity, renegotiate with the UAW, and change their production mix to more fuel-efficient vehicles. And in all candor, they’ve known this for decades. Rather than complete these reforms over time (which would have exposed them to market risk), they instead very effectively negotiated with Congress for an endless parade of market-distorting regulations that shielded them from competition.

The case to provide an emergency bridge loan for GM is basically this: they expect that sales will recover quickly from October’s extremely depressed levels. And they also expect that the North American market will rebound to at least 16 million vehicles sold per year by 2010

(Note well, however: GM was barely profitable from AUTOMOTIVE OPERATIONS even at 16 million vehicles-sales rate.)

And news:

...GM announced today that they’re postponing by a month the incentive payments that they owe their dealers for sales made in October. Outside estimates are that about half a billion dollars are being withheld from dealers.

This of course is being presented as a cash-preserving move. It also has the surely-unintended side-effect of causing GM’s dealers some very direct pain. Those dealers are all burning up the phone lines to their Congressmen right now, threatening to dump lots of employees on the street right before the holidays unless GM gets their bailout

For some reason, RedStates' essayist mentioned Chapter VII, but not Chapter XI.


Shoebox said...

Blackhedd's point on VII is that no one will loan them the money to operate while they "reorganize." That may likely be so. That is the only point where I could have some softness on a "bailout". If I trusted that someone was actually overseeing the reorganization I could support the Govt providing the interim financing.

Dad29 said...

Precisely where I come down, Shoebox.

Take John Shiely out of Briggs and put him where he can have a big impact...

Shoebox said...

The problem with this approach is that the Dems are going to put a bunch of new rules on what and how they make things...those rules alone would likely doom any reorganized company. Can you imagine anyone taking over the reorganization task for a max salary of $200K? They only "talent" they will get will be the same "talent" that is advising Paulson on how to funnel money to his homeys!