Bailout Baloney

They were at it again today.

The CEOs of the three top US automakers appealed to the Senate Banking Committee yesterday for $34 billion in bailout.

That's right. Not $25 billion. That's so last week. This week, it's $34 billion. That's the hip new number that these guys say will stop the bleeding -- for now.

Frankly, I don't think that's such a great argument.

Economist Mark Zandi of Moody's Economy.com predicted that the actual number needed to save the automakers is closer to $125 billion and that if Congress bows and pays them their $34 billion, they'll be back again next fall asking for more.

A friend of mine, whose financial opinions I respect, is convinced that if the automakers don't get this bsailout, the recession will become a depression. My friend is a wholesaler in the car business; he deals primarily in "high-line" cars, which means he's largely out of the domestic market.

"Millions of people are going to lose their jobs if they don't get this money," he told me. "The economy just can't take another hit -- especially one like this."

I agree that the economy will suffer if the automakers don't get the bailout they're seeking, but I think the economy will suffer anyway, even if they do get it. It is inevitable. Giving these guys a bailout is like putting a band-aid on a gunshot wound.

So ... what then? Just let them go out of business?

The cold hard reality that is beginning to emerge is that these companies have been woefully mismanaged for years, perhaps even decades. They've failed to keep up with foreign competitors. They've failed to properly deal with the move to hybridization. They haven't put enough affordable vehicles in showrooms. They've been followers in the industry, not leaders. They've overpaid their staff, they've hired executives who are used to a particular lifestyle and until the eye of the public has been cast upon them, they've failed to change their ways. Only after the media massacred them for swooping in to Washington on their private jets did they change their ways and drive. This was a nice gesture, but if they had just flown coach from the beginning (like most of us do), they wouldn't have been mocked so vociferously.

As bad as these companies have been run, there are other factors that have contributed to their downfall. Unionized labor is a major factor. Union workers complain when jobs go overseas, but jobs are also being lost at home to technology and non-unionized regions. When this happens -- or when it appears as though it might happen -- unionized labor puts up a fight and winds up costing the automaker millions. There is a fundamental problem between big business and big labor: they both want to maximize their portion of the surplus value. In the end, labor costs are so high that automakers can't get the returns they need on their vehicles and the price for the consumer goes through the roof. And I won't even begin to discuss the problems that arise because of the unions' blind embrace of the Democratic party.

The credit slump is also hurting the auto industry. Being unable to make loans or having to repossess vehicles after customers fail to follow through on their commitments adds up in a negative way for the automaker. And that's on the retail end. On the back end, the automakers are having trouble getting credit. One industry advocate maintained a few weeks ago that "nobody's going to want to buy a car from a bankrupt company." The fact, however, is that no finance company is going to want to give credit to a company screaming about how it's going to go out of business. While Chrysler recently tapped into a $2 billion credit line, the company knows it's going to need much more than that to stay afloat -- and the government is the only entity willing to throw them a life preserver. Not even Cerebrus, which owns 80 percent of Chrysler is willing to invest any more of its own cash, as David M. Herszenhorn and Bill Vlasic write in a New York Times business article today.

But Chrysler, GM and Ford are not the only automakers that have to deal with unionized labor and a stingy credit market. Other foreign-owned, domestically manufactured vehicle companies are dealing with the same problems, and they're not begging the US government for a way out. Nissan, Toyota and Hyundai may be hurting, but they're still in the black. This is because they are managed well.

If Congress refuses to give the Big Three the bailout they want, it may hurt the economy, but at least it won't be a slow excruciating pain over the course of several years. The refusal would force the automakers to deal with their problems or fold -- just like any other capitalist company. The good news for one of them is that whoever manages to stay open the longest, might get the meager leftovers of the ones who don't make it.

There are alternatives to bankruptcy and bailouts, but the automakers don't want to acknowledge them because they require hard work. They can sell assets, cut dividends, and try to find deep-pocket investors who believe a turnaround is possible. There are other ways Washington can help besides throwing money at the problem. Lawmakers can find solutions to alleviate the industry's enormous financial burden of union health care plans; they can provide financial incentives for the discovery and implementation of clean-energy technology; they can provide incentives for credit companies and other investors willing to take a chance on the ailing auto industry; they can enact insurance programs for loans to the Big Three that are similar to the same way the Federal Deposit Insurance Corporation insures bank loans.

For automakers, it's time to roll up your sleeves, pull up your britches and get to work. For lawmakers, don't cave. Think of the auto industry as a helpless wino. Don't give him a quarter to go out and buy more booze; take some time and go buy him a meal instead.