Tuesday, November 18, 2008

Detroit's long overdue toughlove

The NYT this morning covers all the opposition from left, right and center to the Detroit Three’s groveling for a Federal blank check. The article concludes:

It all feels excessive to some in Detroit. “I didn’t know that some really, really hate us,” said Ms. Tompor of The Free Press.
No, it’s actually toughlove: a refusal to continue to be the enabler of prior destructive behaviors.

Everyone reconizes the terrible precedent. As Charles Krauthammer asks
Where do you stop? Once you've gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout.
As Detroit native (and Congressional political guru) Michael Barone wrote:
And, of course, the Detroit Three will not be the last flagging enterprises to line up for government subsidy. Michigan is not the only state that has a talented congressional delegation capable of enlisting allies on relevant committees and from states with economic stakes in failing companies. Other unions, noting the UAW’s success in maintaining benefits, will be standing in line.

[Gary Varvel]
In recommending that the Feds help auto workers but not automakers, NYU prof David Yermack notes nearly a half-trillion in private capital squandered by two Detroit auto makers in the past decade:
Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.
An interesting thought experiment: GM buying Toyota would have been like Yahoo buying Google or the railroads buying the airlines. Alas, in all three cases, I’m sure they would have mucked it up.

Former Northwest Airlines exec Michael E. Levine argues that bankruptcy is the right solution to GM’s problems. After all, they worked for airlines.
The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it'll be just as large and there will be less money to soften the blow and even more blame to go around.

But unless we are willing to support GM as it is indefinitely, the downsizing and asset-shedding will have to come anyway. Even if it builds cars as attractive and environmentally responsible as those Honda and Toyota will be building, they won't be able to carry the weight of GM's past.

GM as it is cannot survive without long-term government life support. If it gets that support, it can't change enough and won't change fast enough. Contrary to Mr. Wagoner's brave declaration, bankruptcy is an option. In fact, it's the only option that merits public support and actually has a chance at succeeding.

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