Bankruptcy benefits for auto makers

Steven Pearlstein:

Not content with $25 billion in government loans to retool factories for fuel-efficient cars, the auto industry is already back at the trough, this time angling for a taxpayer investment in the firm that would result from a merger of General Motors and Chrysler.

You can just imagine the pitch from the populists of the Michigan congressional delegation: If the government is willing to invest $250 billion to bail out pinstriped bankers, then the least it could do is throw an extra $10 billion to rescue the domestic auto industry and the millions of workers and retirees who depend on it.

There's only one difference: The government will make money on its bank investment, while the GM-Chrysler deal is a lemon.

As reported by Reuters, GM and Chrysler would have the Treasury invest $3 billion directly in the newly merged automaker in exchange for preferred shares with warrants, as with the banks. The government would take over $3 billion of the company's pension obligation. To deal with the industry's short-term liquidity problem, the government would also commit to buying $4 billion in commercial paper issued by the new company.

All that for two companies whose market values today are each less than $4 billion.

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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.

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Bankruptcy would also wipe out the shareholders' stake in the company which may hurt many of the pension funds in other industries as well as government pension funds. However Pearlstein makes many good points. Not mentioned is the competitive advantage either solution gives these companies over Ford which has its own struggle.

We also need to examine how the lower cost of fuel will effect the market for their product.