Bailing out bthe auto industry is a bad idea. Use the money instead for extended unemployment benefits and worker retraining.

I imagine this is why Rahm Emanuel, Nancy Pelosi, and Harry Reid are calling for the bailout -- everybody except, for Obama, whose silence is quite pointed. There's no hope for a complicated solution (especially one based around a meaty "let them fail" center) while Bush is in office. And a complicated solution is needed.

Therefore, Democrats are inviting Paulson to use his unlimited powers as Money Czar to keep Detroit afloat through the transition period -- which doesn't require new legislation, or put Obama on the hook for an unpopular bailout. Obama can then hope to roll a more productive solution into the massive economic stimulus package that Obama will surely pass before spring.

The auto industry falls into the same category as AIG, and the same category which Lehman Brothers SHOULD'VE fallen into: "Desperately mismanaged, but too big to fail without crushing countless innocents." The only way to fix these institutions is to restructure and repurpose them as a condition of their grabbing onto the government lifeline. That won't happen until Obama is president. Paulson is the wrong man for the job; he refuses to take responsibility for anything, not even requiring the banks to make an occasional business loan with their freshly-borrowed mountains of cash.

A difference between aig/lehman/banks and the auto cos:

The finances of the auto companies have been in decline for many years.  Debt ratings have been very low for some time.  Counterparties have had time to prepare for a bankruptcy filing, so there will  be less systemic risk.

Remember, industrial companies operating in Ch 11 don't need to close or liquidate.  It may be that the outcome in terms of job losses aren't meaningfully different in or out of bankruptcy- these firms have been reducing headcount continuously already.

Goverment aid can come in post bankrupty and go more directly to help workers/communities - not just help financial counterparties.

Exactly. Bankruptcy _is_ a form of government assistance.

I plan to do my part by buying a new car in second quarter 2009, but frankly the odds are against buying from any of the Big Three. On the one hand, I've heard good things about GM's product lines in the last year, but the Chevy models I drove as rentals in 2005 and 2006 were catastrophically crappy cars, to the point that I changed rental agencies just to be sure I never got stuck with a Chevy again. Ford just redesigned the model that had been on the top of my new-car list, replacing the rear disc brakes with drum brakes, so that's off my list entirely. I'm down to a Mazda, a Nissan, a Chrysler, and a Chevy that I'll test-drive just to give GM a new look.

But back to the industrial policy. GM has shown signs that it is doing the right things to recover, though perhaps too late to save the company. Chrysler is a basket case, and Ford's management doesn't seem to have learned any lessons at all. Is there any way to bail out only GM but not Ford and Chrysler?

My first impulse is: let the fuckers go down.

But on second thought, do you know how many Chevys, Fords, and, umm, whatever Chrysler makes, we can buy with 25 billion dollars?   My guess is: probably a whole heckuva lot.  The Federal government can then give them away to reward America's friends, or, more likely, punish America's enemies.  If we give the Taliban free Saturns, car bombings will probably drop by at least 50%, just due to maintenance issues.

Also, if GM fails, what will happen to the Transformers?

I see great synergy with health-care reform here. If BHO can make the case that what's crushing the auto companies is their health-care expenses (largely true) and that this puts them at an unfair disadvantage vis-a-vis foreign makers (also true) he can re-brand health care from "socialized medicine" to "Mom, apple pie, and Chevrolet".

Don't bail out the auto companies and their less than brilliant managers.  This sector is entirely unlike the financial sector.   The plant and equipment and infrasturcture that make up most of the value of the auto industry aren't going anywhere if the companies failed.  By comparison, the financial sector, if it failed, would leave nothing.    

I basically agree with raylward, and a variety of the other comments above, but I would put it a little differently.

We consistently fail to make the distinction between doing what may be necessary to  keep an operating business in operation and bailing out its investors -- both creditors and stockholders.  Of course, where there is any case for public support to keep the business operating, the investors want to maximize the confusion precisely so that they will get bailed out too.  But there is no logical reason whatsoever why we have to bailout the investors of a failed business, and we shouldn't for both practical and moral reasons.  It is a waste of taxpayer money and the owners of and investors in a failed business deserve the losses; the public does not.

In the case of a financial company, the capital can literally go up in smoke.  Thus, to continue in operation, such a business may need a new source of capital even if the old investors are wiped out or so thoroughly subordinated to new capital that they might as well be.  If it is important to continue such a business in operation, it can make sense for the gov't to inject capital once the investors have been wiped out.  Unfortunately, the US is busily injecting capital without first wiping out the interests of non-customer claimants (such as the counter-party's of derivative contracts).  This is a big mistake, but the fact that Paulson and company are completely screwing up the execution, does not by itself prove that keeping financial companies functioning is not in our best interest as a society.

Industrial companies are quite different.  As raylward says, their capital, plant and equipment, isn't going anywhere just because existing investors take losses.  It is just a question of who owns it.  There is no reason that I can see why auto companies should not be allowed to go into chapter 11.  Lots of airlines have and, where the underlying business is sound, they have emerged stronger.  See, e.g., Continental Airlines, my favorite choice to Europe these days.  The auto companies need to shuck off their liabilities, including onerous union agreements, in order to move into the future.  If they don't, they are never going to turn around.  For that very reason, it makes no sense for the US to add capital while all the liabilities are still there.  We should let the bankruptcy process wipe them out and THEN add capital if it is needed because the reorganized company cannot yet access the capital markets directly.

The auto companies are busy arguing that no one will buy a car from a company in chapter 11 because they think they will not be able to get parts.  That is the biggest load of bullshit I have heard in a long time.  The auto companies don't produce most of the parts and, even if they did, the supply chain is more secure with the company in reorganization and liberated from its liabilities than if it is simply haemorrhaging cash, and most consumers wouldn't know the difference anyways.  If the US wants a show of confidence, better off to make it in support of the company in Chapter 11.  Why do the auto companies make this argument?  See above.  They want to confuse us into bailing out the investors.  It is outrageous.

Finally, if in fact a company cannot be reorganized by getting rid of its liabilities in Chapter 11 because it is losing cash on an operating basis, what possible reason is there to believe that public money will save it?  The US doesn't know how to run an auto company.  We would in that case be pouring money down a black hole.  Better to let Toyota come in and buy the husk of GM if it came to it than dump public money into a losing operation because no purpose is served pumping money into the loser other than slightly delaying the inevitable at huge public expense.  Similarly, the notion that a "bailout" is going to save jobs is fatuous.  If the company cannot make a profit with those jobs,, if it does not in fact need those workers to make a profit, they are doomed and the sooner the better.  Subsidizing the jobs in order to stretch out the decline is what doomed Soviet enterprise.  We don't need that.

Having said all that, it should be noted that we have major flaws in our Chapter 11 process that need to be addressed.  We need a much simpler and faster mechanism for getting the liabilities off of the operating business and setting them aside to be settled later out of whatever value the company is able to generate.  Our current process keeps creditors and shareholders  and employees much too involved in the ongoing control of the business.  What we really need is a bankruptcy process that is tantamount to a virtual sale of assets to a new entity -- the reorganized company -- free of all old liabilities, starting fresh with the broadest possible opportunity to establish new, profitable commercial relationships.  If the auto companies need anything, it is special legislation beefing up the power of the bankruptcy courts quickly to achieve just that.

Meanwhile, allowing the auto companies to exhaust billions of cash reserves before the inevitable bankruptcies occur is just plain stupid.  But for the fact that they are playing chicken with the Federal gov't trying to salvage value for their shareholders, the smart thing to do would be to file now while they still have a lot of cash, not later when it is all gone.  Who cares if GM doesn't have enough cash to survive more than a few months?  The answer to that is to conserve the cash by filing, not throw it away. merely for a few more months outside of formal reorganization.  This is a scam.  If I were a big creditor of GM, I would be hot on the tail of a couple of others to join in an involuntary petition right now.

(Postscript:  I practiced a bit of bankruptcy law as part of my commercial banking practice and had a ringside seat at the Chrysler reorganization in 1981(?) representing about $500 million of debt held by foreign banks.  It was a fascinating experience, but at least in that case the gov't bought creditor forbearance with a relatively modest investment.  I was amazed they brought it off and in hindsight I do not for the life of me see why the same thing could not have been achieved in reorganization.   If Chrysler had no cash for reorganization, the Feds could have walked off with the whole company in exchange for operating cash and stiffed the banks (my clients at the time), bondholders, and shareholders.  They gov't made a profit, bu only a fraction of what a private investor would have earned for the same risk.)  

From Detroit, let me give you folks a bit of perspective.

OK, let GM File for banckruptcy, but that opens a can of worms.  For starters, there are thousands that lose substantial amounts of money.  Company and folks who really did nothing wrong, except keep the wrong company.  No problem, there are winners or losers.

But think of these consequences.  

Obama and the Democratic Congress ask for a tax increase.  You have hundreds of thousands of folks who just lost money in the largest industrial backruptcy and agitate for letting the US Governement fail.  Talk about mismangement and incompetence.  There will be serious resistance to any attempts to increase taxes for many years to come.

The State Department wants an initiative to develop Iraq and a new Middle East Peace Initiative.  There will Domestic resistance to any attempt to send aid to other countries.  Why send billions to Israel every year if we can't get help here in the states.  Part of industrial policy is in support of foriegn policy, even if it's just tit for tat.

If you've been through a Reorganization you are aware that it's really not a place for libereal politics.  Letting GM settle it's problems on it's own through bancruptcy will gut the Union and put the governement on the hook for a lot of social costs like Medicare and Pension gaurantees.  As the negoitiations take place with smaller companies, the effects will be harder.

There could be cascading losses at the City and State level that would require assistance from the Feds.  Michigan, Ohio & Missiouri have a lot of jobs in the domestic auto industry.  These losses would strian social services and reduce tax bases at the same time.

And the questions would start, why should a US Car Maker file bancruptcy when the Europeans and Japanese are supporting their weak sisters?  Mitsiubishi and Fiat should have been gone years ago.  Suzuki and Reanault aren't exactly world beaters, but they roll on.  A failure of one of the Detoirt Automakers would throw the Free Trade ideology out the window.  Popular resistance to Trade with Asian countries would increase.

But the point is, Detroit will deal with this issue like they always do.  Just tell us how you want us to handle this.  We can do it the easy way, or we can do it the hard way.

The Big 3 pissed away their brands years ago.  The sad fact is that there are consumers who simply will not consider a domestic car *because it's domestic,* not because they hate America or even really hate the car on its merits but because the products' reputation, as a group, is piss-poor, buying a car is an emotional decision often dependent on brand identification (and, roid, bankruptcy don't help), and dometic brands are for hicks, old fogies, gangsters, etc.  The quality of the product, I think, is secondary.  VW's and Mercedes have average to poor reliability.  But they have strong brands.  VW is particularly ingenious at appealing to young buyers, and have been since the '60's when they made Hitler's people's car the vehicle of choice for left-thinking Americans.  You know those hip Brooke Shields commercials for the VW Routan?  Don't have a baby for German engineering?  Except it's not German engineering.  That car is a rebadged Chrysler minivan.  Those Saab SUV's?  Chevy Trailblazers.  You could put an L-for-Lexus on a made-in-Detroit, not-bad-at-all Buick Lucerne, and it would fly out of showrooms, and you would get more for your money than you do with the fancy Camry's at your local Lexus dealer.  But Buick means Near Death.  Same with Lincoln.  And Cadillac seems intent on marketing its well-built products (the CTS, anyway) to obnoxious assholes.  Most girls I know throw up a little in their mouths at the prospect of a dude with an American car.  Serious brand failure is the bottom line, especially here at home.  (Buicks do great in China.  The British love their Fords.  Germans aspire to Bimmers but drive GM Opels, now available at your inexplicably named Saturn dealer -- several planets away from the real world.)

In short, as I see it, the decline and fall of the American auto industry is primarily, today anyway, a marketing problem, a brand problem, a failure to connect emotionally with enough consumers, especially young ones.  Boomers learned that American cars are shit, and they passed that wisdom on to their kids.  Tough nut to crack.  The greatest hope I see is if the Big 3 focus on affordable, seriously environmentally friendly, high-volume cars.  The best way to reinvent the brand is to reinvent the product, in a way that the Japanese and Germans aren't doing.  Hell, reinvent the car.  The Chevy Volt is the closest I've seen, from any manufacturer, but it will be expensive.  Any government assistance will hopefully be but a part of the government's investment in green technology.

Obama's already asking Bush to bail out the auto industry, he's not 'remaining pointedly silent' as someone suggested above.

In exchange for the bailout, he wants considerably tougher fuel efficiency regulations, I think this is sound economics.

We'll have an auto industry one way or another, I'm as appalled as anyone that these companies, which racked up obscene profits from 1996-2004 are begging for a public handout, but it would seem the most efficient to just bail them out (forcing them to re-tool and swallow the regulations necessary to pay for the negative externalities) than watch them fail and have to start up again later.

This Times piece on the matter actually doesn't suck:

www.nytimes.com/.../11auto.html

CRS9TNR  seems to be the only critical and compassionate liberal contributor.

What is left wing?  Damn the workers, I want a horny auto?

It is perhaps "inevitable" that Detroit will "go under"--fine and good, if that is

truly the case.  So what about the tens of thosands of working class people?

Oh, let them eat cake--as long as I'm okay.

Am I on the wrong website? Where is the solidarity? Where are the plans

to help those crushed by these developments? Longer unemployment insurance?

People actually like to work, to bring home the bacon.....

"People actually like to work, to bring home the bacon....."

Well, we want people to do productive work, and the basic assertion is that if no one's buying U.S. cars, then U.S. autoworkers aren't producing efficiently.

I agree with you though, they could be doing productive work, once the factories retool, so I say let the gov't.  bail out the auto companies in exchange for tougher fuel standards, these factories are in the process of retooling anyway, let's help them along until they're on their feet.

Ken, *I'm* compassionate!  I don't want to just let the industry fail.  I want to see it revived by having them build the environmentally friendly car of the future ahead of the competition.

Chrystler's owned by private equity firm Cerberus which was the name of a three headed hound that guarded the gates of hell. Indeed, it would seem he's screwed up two jobs.

Bankruptcy for any of the big three is not an option at least if you like to work for a living and aren't so much into bread lines. This is less to do with the myriad jobs or even the mortgages those wages secure, and more to do with the hundreds of billions in liabilities, attendant financing companies and mountains of CDS, CDOs etc.

Of course, that end appears increasingly likely to be inevitable no matter what we do.

Rhubarbs: Look at Saturn.  Our family is on its 3rd since 1996 (a manual transmission SL sedan, which is still running with minor tweaking; the 2004 I traded in/up to the current one).  I live in Chicago and the "plastic" body doesn't rust and bounces back from minor incursions with shopping carts, sticks, etc.  Oil change every 3-4K miles, new tires, that's just about it.  25-28 MPG. And they're cheap!  And most of the time, interest-free (my 2006 Ion is 6 years, 0% interest).  Unless you want something flashier...

I STILL can't believe new giant trucks, SUVs, "crossovers", etc are being rolled out...

Getting healthcare for retirees (and current employees) off of the Big 3's list of financial liability would help them more than a bailout.  That being said, that will take to long.  The earlier suggestion about using government funds for extended unemployment benefits and re-training is not a bad idea.  Using those plants to make wind turbines or other elements of "new energy" would be phenemonal because then you'd be retraining people for something specific right away and you would only have to "remodel" facilities, not build from scratch.

Why prop up a dying industry? The age of mass private car ownership is coming to an end. Given the financial crisis and the coming drop in global petroleum production, we will no longer have the money or cheap energy supplies to keep all those private cars going. The government should only help the people being surplussed to get new jobs in industries that have a future. And a genuine single payer national health insurance system would liberate corporate serfs from s(t)inking employers and promote labor mobility.

JHildner, As a "obnoxious asshole" CTS owner, I'd say it's a pretty nice car and gets decent (23-24) gas mileage.  As an Obama volunteer/member of the ultra-liberal Unitarian church, I enjoy pulling the CTS into the parking lot amongst the gaggle of Priuses/Elements etc. (which to me give off an "obnoxious self-righteousness" aura).

I recognize that the government can't bailout GM/Ford/Chrysler forever, but I also think that they were hit by a double whammy of rising gas prices and the credit crunch.  Toyota is suffering huge market declines as well and just a year or ago was competing with the Big 3 to show how many gas guzzlers it could bring out.

Amidut, where are 2-3 million new jobs of the future that are currently going unfilled?  Do we need that many windmill and solar panel makers.

OK, bail out the creeps, but make it clear that you're not doing it for the American auto industry, which probably is not worth saving, but to mitigate the economic damage that is inevitable no matter who does what, because the auto companies been such lousy custodians of their products and managers of their employees' welfare.  

One thing Obama can and certainly should do that Bush failed at miserably is articulate why he's doing what he's doing -- in other words, teach, not leave all the explication to the commentator parrots.  If he doesn't start doing that right now, he'll be failing in a big way.  I'm beginning to be afraid that the famed Obama eloquence isn't up to this, that it's good for fuzzy inspirational messages only, not for real-world analyses.

jhildner writes:  "The greatest hope I see is if the Big 3 focus on affordable, seriously environmentally friendly, high-volume cars.  The best way to reinvent the brand is to reinvent the product, in a way that the Japanese and Germans aren't doing.  Hell, reinvent the car."

If they were capable of doing that, they'd have already done it, long ago.  The reason they've failed is that they've lacked the combination of intelligence, imagination and inspiration necessary to connect with the contemporary consumer, who needs to feel that the personal tank he's devoting a large amount of his life paying for comes from and is supported by a company that cares actively about quality and customer satisfaction.  Detroit projects the attitude that it thinks it's selling image.  That was yesterday, to say the least.

If we want to help Detroit avoid the huge legal costs of bankruptcy, we should insist on a pre-packaged settlement that would do the same thing. Make it clear there will be no bailout of the existing stockholder owned enterprises. Offer DIP financing. Then offer to provide the same financing if the creditors will agree to accept a reduction in their existing claims...and that includes the unions, who have bled Detroit dry.

The problem here is that Nancy Pelosi and her Democrat buds will never take on the co-conspirators: management may have been incompetent, but the unions were holding a gun to their head. Let the truth be known that the reason Detroit is bankrupt is the ridiculous retiree liabilities that the unions negotiated. Until you wipe those out, or reduce them to something manageable, Detroit will never survive and compete.

winnie2001:  Oh, yes, the CTS is a very fine car -- a BMW 5 for BMW 3 (or less) money -- and I'm sure that many owners are as nice as can be, even on the road.  I test-drove one, but went instead with the Infinity G37 coupe, mainly because it's the prettiest car on the road today IMHO.  I was referring to the marketing, which is somewhere south of classy in my opinion -- nothing like BMW or Lexus or Mercedes, which ought to be thought of as its competition -- this in the context of my thesis that brand failure and image meltdown is probably the domestic automakers' biggest hurdle.

dsmth:  Well, they are doing it.  See the Chevy Volt.  That shit's for real.  The problem, as I said, is that it will be expensive initially, because the batteries will be expensive initially.  That's something the government can help with.  The investment in this huge part of the economy is ideally tied to the energy and environment piece -- I think that's where Obama's mind is at.

I think the Detroit situation threatens to get the new administration off to a very bad start.  First, the Democrats ponied up $25 billion dollars for the industry with lots of environmental strings attached; as usual, they think the government can design cars better than private industry.  Maybe GM should change the name of the Volt to the Gore or the Friedman.  Now the Democrats want to pony up another $25 billion, no serious strings attached.  Of course, they want to control executive compensation, but will they ask any sacrifice from the UAW?  Just joking!  In any event, the UAW has no interest in contributing anything to the survival of the big three.  There are a hell of a lot of unionized workers, to say nothing of non-union workers, who are going to wonder why they have to contribute to their health insurance while the ever-dwindling active UAW cohort and the vast army of UAW retirees don't contribute one thin dime to their health coverage.   After the Dems keep everything as-is for the auto workers do they really believe the rest of the country will tolerate, much less support, card check legislation?