If the administration and the union had just richened the deal offered the bondholders from 4-5 cents to maybe 10-12-15 cents on the dollar

TO BE NOTED: From the FT:

"Long road to a ‘good GM’ filing

By John Dizard

Published: May 10 2009 11:07 | Last updated: May 10 2009 11:07

Flushed with the immediate tactical success of the Chrysler bankruptcy, the US administration’s plans for the subsequent GM filing are moving forward, along the lines laid out a couple of weeks ago. The White House’s auto task force, with the UAW, the car workers’ union, behind it, could have had a quick, consensual trip in and out of court, but apparently that wasn’t what they wanted.

The “363” plan (a provision under the Bankruptcy Act that allows the company to sell assets), is the means for a “good GM” funded by the government to buy assets from the existing company, or “bad GM”. The plan, based on a review of some fairly clear precedents from past cases, is a legally flawed way to disregard the rights of certain creditors – in GM’s case, their public bondholders.

The unsecured bondholders are being offered somewhere between 4 and 5 cents on the dollar for their claims. In contrast, unsecured claims (with equal legal rank) by the union retirees’ healthcare plan are being offered a recovery of 74 cents on the dollar.

Nevertheless, the plan will probably work, in the sense of achieving the intended short-term effect. The key to the tactic’s success is not its integrity, but the current lack of available exit financing for companies emerging from bankruptcy.

The 363 loophole, (really 363(b)), was intended to give a judge the authority to allow for the quick disposal of wasting assets, or assets that are not part of the core business, without waiting for creditors to vote their permission. It was not intended as a way to impose what is called a “sub rosa plan of reorganisation”. That is a plan of reorganisation of the entire company on which creditors do not get a vote.

In GM’s case, the “sub rosa plan” is to sell the valuable assets, with accompanying union contracts, to a new, “good” GM, and leave the money-losing assets in the original company, which is left in the street to bleed cash and die.

GM’s law firm, Weil Gotschal, has attempted to use this section of the bankruptcy code in the past, and had only mixed success in doing so. For example, a bankruptcy judge in New York ruled against a similar Weil Gotschal tactic in the Westpoint Stevens case, saying: “The fact that a transaction including a 363(b) sale of assets may ultimately be in the best economic interests of a debtor’s various constituencies does not authorise the court to ignore the creditors’ rights and procedural requirements of Chapter 11.”

Here’s how I believe the GM bankruptcy case will play out. The government, the UAW and GM are in a good position to “forum shop”, or find a bankruptcy judge who will be sympathetic to the government-UAW plan. That judge may be in New York (convenient for Weil Gotschal, headquartered in New York’s GM building), or Michigan (hometown advantage for GM). That judge will almost certainly grant the request of GM, the union and the government for the 363(b) sale.

Then the bondholders do some forum shopping of their own. They could well find a judge in a Federal district court (one level up from bankruptcy court) willing to grant a temporary restraining order blocking the 363(b) sale.

Given the facts of the case, and the precedent on the side of the bondholders, I think it’s quite possible that the judge will issue a TRO, and set a hearing on a motion by the bondholders to enjoin the sale.

That will be the end of the good news for the bondholders. The judge will read through the law, and the facts, and then ask an unpleasant question of the bondholders: what’s your alternative?

They won’t have one. There will be a great deal of back and forth, but at the end of the day the bondholders need – not just the law – but a big cheque book on their side, and the money isn’t there. Not for the $35bn (£23bn, €26bn) or so they would need to pay off the government and step into its commanding position.

Their problem is that the US government will be offering not just working capital for GM during its bankruptcy, but “exit financing” for GM’s emergence from Chapter 11. That is hard to get now on commercial terms, even on a smaller scale than would be needed for GM.

There are other problems with the government/union plan. The suppliers to the remaining “good” brands will need to spread their fixed costs over fewer parts, and transferring and revising all the contracts is logistically very difficult. Getting effective, decisive management, when the major shareholders have made unconvincing pledges to be hands off and avoid conflicts . . . very uncertain.

The bondholders still fight a hard, continuing, rearguard action, since they have little or nothing to lose, and want to preserve their rights and legal precedents for future reorganisations.

If the administration and the union had just richened the deal offered the bondholders from 4-5 cents to maybe 10-12-15 cents on the dollar, they might have got an agreed, prepackaged deal, and avoided a lot of sturm und drang.

johndizard@hotmail.com"

Bondholders probably have the most leverage in the talks. The president gave away his stick

TO BE NOTED: From the NY Times:

"G.M.’s Bondholders Speak in the Voice of the Aggrieved

By ANDREW ROSS SORKIN

President Obama had scarcely outlined his plan to save General Motors and already, the big money was pushing back.

Not three hours after the president spoke on Monday I received an e-mail message from a group representing G.M. bondholders — people who are likely to have an enormous influence over the future of the Detroit carmakers.

The e-mail message, from advisers for an “ad hoc committee” whose members collectively hold G.M.’s $28 billion of debt, started by suggesting that they wanted to be part of the solution.

But by the end of the e-mail message, they were complaining that they were “very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan.”

The e-mail message came from the same group that two weeks ago grumbled that “G.M. bondholders have been asked to make deeper cuts than other stakeholders,” and threatened to send G.M. into bankruptcy. “Unless the framework we suggested is utilized,” the group said, “the restructuring currently contemplated will not achieve the required level of acceptance to succeed on an out-of-court basis.”

During the next 60 days, G.M. and its stakeholder have the last opportunity to save the company — or risk letting a bankruptcy judge do it for them. To do so, G.M. will almost certainly need concessions from two groups: workers and bondholders.

The workers, represented by the United Automobile Workers, have made concessions already. And the president said they need to make even more, as painful as it will be. The workers — despite often appearing recalcitrant — have the most to lose. If G.M. falls into bankruptcy protection, they could lose not only their jobs but also much of their retiree health care plan.

Then there are the bondholders. Their motivation is very different. For them, this is not about keeping their jobs or, frankly, about patriotism. It is about dollars and cents. And, according to some analysts, there is a chance they would actually do better in bankruptcy court than they would negotiating against G.M. or the government, which is seeking to reduce G.M.’s debt by two-thirds.

“If I’m a bondholder, the best forum for me is in front of a judge,” said Daniel Alpert, a founding managing director of Westwood Capital, an investment bank. “Let’s face it: the biggest problem at G.M. is still its cost basis, and that’s chiefly labor,” he added, suggesting a judge would look at the situation dispassionately.

So far, bondholders have been offered 8 cents on the dollar in cash, 16 cents on the dollar in new, unsecured debt, and a 90 percent stake in G.M. G.M.’s bonds closed Monday at 16 cents on the dollar. Hoping to apply some public pressure to the bondholders, Senator Carl Levin, Democrat of Michigan, said Monday that if G.M.’s bondholders “refuse to work out a deal, they will likely end up empty-handed.” (That is not exactly true.)

Hoping to attract a bit of public sympathy themselves, the ad hoc committee has said, “G.M. bondholders are not a collection of Wall Street banks. Many of these bonds are owned by average citizens, who purchased them to support their own retirement and college expenses and other critical needs.”

That’s a bit of misdirection, however. While it is true that there are some “retail” investors that own G.M., about 80 percent of the bonds are held by large investors and hedge funds, many of which play in distressed debt markets. Some of them would less politely be called “vultures.” Indeed, G.M. bonds have been changing hands rapidly, suggesting that some hedge funds have been plowing into them, gambling that these investments soon will be worth even more.

It seemed unlikely to me that students or grandmothers had formed this ad hoc committee and would hire Paul, Weiss, Rifkind, Wharton & Garrison, the law firm, and Houlihan Lokey Howard & Zukin, the restructuring advisory firm, to advise them. That takes millions of dollars. Whoever these investors are, they must have billions at stake.

So I called Gabe Roth, the spokesman listed at the bottom of the message, and asked if I could speak with some of the bondholders the committee represents. The answer: “No. We’re not making them available.”

I followed up by asking which investors were members of this ad hoc committee. “We’re not making that public,” Mr. Roth said.

I reminded Mr. Roth that government money was at stake, and that we taxpayers might end up bailing out the bondholders. Doesn’t the public have a right to know whom they are negotiating with — or against? He demurred, suggesting that he needed to protect the bondholders’ identities.

But the identities of big G.M. bondholders are not a secret. They are disclosed in regulatory filings. Here are some of them: Capital Research & Management; Loomis, Sayles; and the Pacific Investment Management Company. Those are not exactly the mom-and-pop investors.

To be fair, many bondholders have lost a small fortune on G.M.’s bonds. And they have been frustrated that they have not been part of the dialogue in Washington and are worried the negotiations will be hijacked by the U.A.W., which has said it wants bondholders to make concessions before it does. (Bondholders say they have only had one official meeting with the administration.)

What is less clear, however, is how many new bondholders stand to make a small fortune if G.M. gets bailed out. (The government has a track record, which deserves scrutiny, of regularly bailing out bondholders and other Wall Street heavies.)

To its credit, the ad hoc committee was right about one thing: G.M.’s own restructuring plan clearly did not go far enough. In its e-mail message two weeks ago, the group said that “we are concerned that the company is putting too much faith in a near-term turnaround in the economy that would enable annual car and truck sales to reach previous levels. We do not know if the plan would, in fact, keep the company out of bankruptcy.”

President Obama concurred, pressing G.M. to come up with a better, more aggressive plan in the next 60 days.

Bondholders probably have the most leverage in the talks. The president gave away his stick — of threatening liquidation — when he said, “we will not let our auto industry simply vanish.”

The outcome for G.M. may still be bankruptcy, a plan that many have advocated. But if there is any chance of keeping the company out of Chapter 11, odds are bondholders — and not just workers — will have to come to the table with an open mind."

"Neither gives a reliable figure for the future cost currently being incurred and it is not obvious which is better. "

David Friedman makes a good point about wages and the Big Three:

"The one problem I can see with estimating the labor cost per hour using current expenditures for both current and past workers is that the number of employees and their terms of employment change over time. If, as seems likely—I haven't checked—the number of employees is substantially less than it was in the past, then dividing current pension payments by the current number of workers gives too high an estimate for the per worker cost being incurred for pensions to current workers. On the other hand, if pension terms now are more generous than they were for many of the currently retired workers, that would bias the numbers the other way. Similarly for medical costs--if we assume they will be higher in the future than they are now, then using current costs paid underestimates future costs currently incurred.

All of those are details and none of them were mentioned in Eric Boehlert's column. At the simplest level, and assuming the companies aren't trying to include both pension costs incurred and pension costs paid, which would be double counting, he is wrong. What he regards as a blatant deception is a better estimate for the real cost per hour of employing auto workers than it would be if corrected in the way he wants it to be."

However, the point he is making applies to the total money that the company pays on wages and compensation. It might well be that those costs need to adjusted downward to save the company. It is also possible that Bankruptcy would do that.

On the other hand, it doesn't address the issue of each individual worker's compensation, since a reduction in total compensation could take many forms. I do not believe that the UAW workers are wealthy. That seemed to be the point of much of the criticism of the worker's wages. In other words, why have sympathy for such well off workers?The workers know that their company can go bankrupt, that they can be laid off, that they might have to accept lower compensation, that they might never receive their pension money, etc. Being a UAW member doesn't preclude hardship.

How you view the issues of wages in this situation depends on what you want to know or to show. If you want to show that worker's compensation is too high, then you can make that point by looking at total wages. If you want to know what workers earn, you can look at their current wages and benefits. That's all that they are sure that they are going to get. I can agree that wages might need to come down, but I do not believe that these auto workers are wealthy or greedy.

The argument that these workers are wealthy is, from a Burkean perspective, dangerous. This system exists because people accept that it is either fair or reformable. When enough people start believing differently, things could go very sideways. I don't want to bet on things working out. It is one thing to claim that a company needs to cut labor costs, it is another to belittle the wages and aspirations of individual workers.

"Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. "

I have a different take on this than James Henley on Postive Liberty. I believe that the Automaker's Bailout is happening precisely to ward off posts like his:

"Not so widely reported in the auto bailout story is the link between Bush and principals of Chrysler owner Cerberus Financial Management. Amost immediately after stepping down as Bush’s Secretary of the Treasury, John Snow became chairman of Cerberus. Former Republican Veep Dan Quayle, who has been lobbying hard on this issue, runs one of Cerberus’s investment units. And Cerberus has just received a $4 billion loan from the government, thanks to Bush’s decisiont to tap the Troubled Asset Relief Program (TARP) funds. This decision is troubling on multiple dimensions.

First, the hint of crony capitalism just can’t be waved away by noting that Bush also made a loan, a bigger one, to GM. GM’s failure is a more serious issue than Chrysler’s by far, because it employs far more people, not just directly, but because of its larger production level, indirectly as well. And the death of Chrysler is not likely to be wholesale–the Jeep brand remains a valuable commodity that Cerberus could sell to recoup at least some of its loss, and thereby keep some of their production plants going.

Second, we once again see the president making decisions that bypass the legislative process and distort the purposes of legislation he himself has signed. The TARP money was authorized by Congress for the purpose of bailing out the financial markets. However good an idea it may be to also bail out the auto industry, the people’s representatives have chosen not to do so. But Congress’s decisions no longer matter to presidents. The evisceration of representative democracy continues apace, and we all collectively yawn as legislative power continues to shift away from the legislative branch to the executive branch.

Third, Cerberus may have gotten what they most wanted, the ability to avoid responsibility for the loan if Chrysler doesn’t survive. They originally asked for $7 billion, curiously similar to the $7.4 billion they paid Daimler to acquire Chrysler just last year. Although that was $30 billion less than Daimler paid for Chrysler nine years earlier, most observers still couldn’t figure out why Cerberus thought it was a good deal, even at the fire sale price. The amount Cerberus asked led to the suspicion that they were looking for the taxpayers to cover the upfront price of their bad business decision.

But that’s not the really bad part of it. One of the reasons Congress balked at giving Chrysler a loan was that Cerberus did not want to open their books. The suspicion remains that Cerberus’s coffers are capable of providing the funding needed, but Cerberus closely guards its figures and wasn’t willing to make them public in order to disprove that notion.

But that’s not yet the really bad part of it. Another reason Congress balked was that Cerberus wanted Chrysler alone to be responsible for repayment of the loan. That way, if Chrysler still went under, Cerberus would be wholly off the hook for the taxpayer money it begged for. A nice trick, if you can swing it, and it appears that Bush has allowed his former Sec Treas to do so. At least as reported so far, the details of the loan don’t hold Cerberus responsible for repayment. Yet again we see that Republicans, despite their long-standing claim, are not a party of fiscal responsibliity. If one group of them isn’t spending the public’s money like drunken sailors, another group of them will quickly step in to do so.

My prediction for the new year? Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. If only Carter had let Chrysler die 30 years ago."

The bailouts cannot be confined to simply a financial bailout. That already has plenty of charges of conflict of interest and cronyism. Many people see the Automaker's Bailout as a Jobs Bill, as opposed to a bailout of the employers. That is the reason the Fed and Treasury Department are working so hard to do something for the Automakers and Home Buyers. They need some Bailout money to effect the lives of Middle Class Citizens. Solely bailing out the Financial Sector will be perceived as Cronyism by Definition.

Also, if unemployment were to drastically rise after a failure to Bailout the Automakers, and bailing out the Financial Sector had failed to keep that from happening, that would be a disaster of enormous proportions for the Bush Administration.

By definition, the Big 3 are Bush Cronies in the minds of many people. That is why my bailout plan included replacing the management, even though their incompetence was more than enough reason. But the UAW and the auxiliary jobs associated with the auto industry are viewed as a Middle Class issue, and dearly important to some people, especially the ones who find the Financial Sector Bailout dubious.

The Cerberus connection should be investigated, in order to make sure that they did not receive special treatment in this bailout, but their power and connections with the Bush Administration are not enough to kill this deal. We are battling Deflation. Some people don't see that as a big deal, but I disagree. We do not know how to deal with deflation other than causing inflation, which is what we are trying to do now. Failure to bail out the automakers could be a second Lehman, and two Lehmans could send us into a Deflationary Spiral. Beyond a certain point, in order to get inflation, the result could actually be hyperinflation. We're not there yet, and we don't want to be.

This crisis has taxed all of our knowledge and expectations as it is. We cannot afford to move the battle to territory we have no real map or experience for. That could lead to not only economic, but social problems. Problems that this Burkean takes very seriously.

"And Senate Republicans now run the risk of being portrayed as Marie Antoinettes with Southern accents."

William Kristol with a post that takes a perspective that I believe is more effective for the GOP:

"In 1953, the president of General Motors, Charles Wilson, was nominated by President Eisenhower to be secretary of defense. During his confirmation hearings, Wilson was asked if he’d be able, as defense secretary, to make decisions contrary to the interests of G.M. He answered yes, but added that he couldn’t imagine such a situation, because “for years I thought what was good for our country was good for General Motors, and vice versa.”

It wasn’t a ridiculous view. It was widely shared — by big-business-loving Republicans and big-union-embracing Democrats, by big-car-driving suburbanites and big-tank-occupying soldiers.

Today, G.M., Ford and Chrysler get no respect. Maybe they don’t deserve much. Detroit has many sins to answer for, and it’s been doing plenty of answering. But — and I say this as someone who grew up in non-car-driving family in New York and who is the furthest thing from an auto aficionado — there is a kind of undeserved disdain, even casual contempt, that seems to characterize the attitude of the political and media elites toward the American auto industry.

As Warren Brown, who writes about cars for The Washington Post, recently put it, “There is a feeling in this country — apparent in the often condescending, dismissive way Detroit’s automobile companies have been treated on Capitol Hill — that people who work with their hands and the companies that employ them are inferior to those who work with their minds and plow profit from information. How else to explain the clearly disparate treatment given to companies such as Citigroup and General Motors?”

Now there are other ways to explain the disparate treatment of G.M. and Citigroup. Finance is different from manufacturing, and banks from auto companies. It may be that the case for a huge bank bailout was strong, and that the case for a more modest auto package is not. Still, it seems to me true that the financial big shots haven’t been treated nearly as roughly in Congress or in the media as the auto executives, who have done nothing remotely as irresponsible as their Wall Street counterparts."

I think that this is a widely held view. It accords with the view that the Financial Bailout is a Crony Bailout.

"What’s more, in their disdain for the American auto companies, the left and right wings of the establishment agree. Of course, the particular foci of criticism are different — the left berates the auto companies’ management, the right the United Automobile Workers. But even on the left, while Democratic politicians still try to look out for the interests of the U.A.W., there’s not really that much sympathy for the workers. The ascendant environmentalists disdain (to say the least) the internal combustion engine and everyone associated with it. Most of today’s limousine liberals are embarrassed by their political alliance with the workers who built those limousines.

Meanwhile, on the right, free-market analysts have explained that our regulatory scheme of fuel-efficiency standards is counterproductive. But despite the fact that the government is partly responsible for the Big Three’s problems, the right hasn’t really been stirred to enthusiastically promote a deregulatory agenda to help the auto companies. What excites it is mobilizing to oppose bailouts for unionized workers.

Last week, Senate Republicans picked a fight with the U.A.W. on union pay scales — despite the fact that it’s the legacy benefits for retirees, not pay for current workers, that’s really hurting Detroit, and despite the additional fact that, in any case, labor amounts to only about 10 percent of the cost of a car. But the Republicans were fighting Big Labor! They were standing firm against bailouts! Some of the same conservatives who (correctly, in my view) made the case for $700 billion for Wall Street pitched a fit over $14 billion in loans for the automakers.

So Senate Republicans chose to threaten to filibuster the House-passed legislation embodying the George Bush-Nancy Pelosi deal. The bill would have allowed President Bush to name a car czar, who could have begun to force concessions from all sides. It also would have averted for now a collapse of the auto industry, and shifted difficult decisions to the Obama administration."

This is pure Interest Group Politics.

"Instead, Bush will now probably have to use the financial rescue funds to save G.M. — instead of being able to draw from sums previously authorized for the green transformation of the auto industry, a fight he had won in the negotiations with Pelosi. And Senate Republicans now run the risk of being portrayed as Marie Antoinettes with Southern accents.

Whichever party can liberate itself from its well-worn rut to propose policies that help both American businesses and workers has a great opportunity. That party’s leaders could begin by offering management and labor at the Big Three a little more sympathy, and heaping upon them a little less calumny. Where’s Charles Wilson when we need him? "

The French Revolution again. Along with Posner, Kristol makes two people considered to be on the right of our political spectrum who get the Political Economy of the situation. Perhaps we can't count them out yet.

As for the final point, he makes a case of it. However, I do believe that the UAW should make major concessions and the Management be replaced, quite simply because the Taxpayer's money is being invested. For me, it follows from Bagehot's notion of onerous conditions.

"I still fear the psychological effect of a formal declaration of bankruptcy at a time when many--probably most--Americans are anxious"

I've already written that Richard Posner has the view closest to my own on the Big 3 Bailout:

"We blogged on November 18 about whether the government should provide money to the U.S. auto manufacturers to keep them alive. (I was for; Becker was against.) In the short period since then, there have been important developments bearing on the issue, culminating this past Friday in the blocking by Senate Republicans of the Democrats' modest ($15 billion) auto bailout bill, and the announcement by the Bush Administration that it might, after all, agree to use part of the $700 billion financial-sector bailout to keep the U.S. auto manufacturers going until President-elect Obama takes office. So Becker and I have decided to return to the issue.

The issue has a political and an economic dimension. From a political standpoint, the current position--no bailout legislation, but possible allocation of part of the financial-sector bailout money to the domestic auto manufacturers--represents, unusually, a victory for both political parties. The Republican Senators have stood up for principle--that freedom to fail is basic to capitalism, that wages and benefits should be set by free labor markets rather than by powerful unions, which are worker cartels, that government should not manage businesses, and that government expenditures should be minimized--and for the interests of Toyota and the other foreign manufacturers that have plants in the United States; for those plants are mainly in the South, which is the stronghold of the Republican Party. By opposing an auto bailout the Republican Senators have also distanced themselves from the Bush Administration, which is at once unpopular and believed by many Republicans to have betrayed Republican small-government principles. There is a grave risk that, as I argued in my November 18 posting, a collapse of the domestic auto industry could have serious adverse consequences for the U.S. economy as a whole, which would expose the Republican Senators to criticism. But that risk is buffered by the Administration’s apparent willingness to bail out the auto industry without new legislation."

I might take that "Free Labor Markets" line seriously if I could find businesses and businessmen who really believe in such a thing, where it doesn't mean free in this particular instance, but not in the ones that we deem inappropriate. The word "Free" is used mighty loosely. I completely agree with the characterization of what I term the difference between Economics and Political Economy, and how the politics of this is playing out.

"The Democrats (including the incoming administration) have scored points among their constituencies by standing up for union workers, for the “greening” of the automobile industry, for states in which the domestic auto industry is centered that voted Democratic in the November election (Michigan, Ohio, and Indiana), for the principle of active government, and for trying to avert a deepening of the current depression. ( I AGREE )

The bailout bill was a mess, but a harmless one, if I am right that the domestic producers should not be allowed to collapse at a time of profound and, it appears, worsening economic distress. The bill was a mess because of the conditions that it would have imposed on the industry, conditions that earned the justified ire of the Republican Senators because of its failure to lean hard on the collective bargaining agreements negotiated by the United Auto Workers, because of the divided control of the industry that the bill if enacted would have brought about--divided among the manufacturers, a federal "car czar," and intrusive congressional oversight--and because of the considerable element of fantasy in the idea that Congress plus the President can revitalize the domestic auto industry. Nowhere is it written that the United States, let alone the midwest, where the domestic auto manufacturers are centered, has a comparative advantage over other countries, or other regions of the United States, in manufacturing motor vehicles. Evidently it does not, and Congress and the President cannot change that, as Japan learned from the failure of its "industrial policy" administered by Japan’s once-admired Ministry of International Trade and Industry."

I do not believe that this deal will actually pass my stated conditions for a bailout, but we'll see.

"For the problem of the Detroit manufacturers is not just a matter of higher wages, to be solved by renegotiation of their collective bargaining agreements. The wage difference (actually the benefits difference--the hourly wages of the auto workers employed by the domestic manufacturers are only slightly higher than the wages of the workers employed in the U.S. plants of Toyota and other foreign manufacturers) is an important but not the decisive factor in the decline of the domestic auto industry. The difference in the wage and benefits package between employees of the domestic manufacturers and of the foreign ones in the United States has been exaggerated by treating as a part of that package the annual payments to retired workers divided by the number of hours worked annually by current workers. The money owed the retirees is a fixed cost, like any other debt. Eliminating those payments, like reducing the industry's bond debt, would improve the industry's balance sheet by reducing its fixed costs, but would not reduce the cost of making cars, or increase their quality. Merely wiping out existing debt, the main consequence of reorganization in bankruptcy, does not improve the efficiency or competitive position of the reorganized firm, which is why most reorganizations end in liquidation. What would improve the efficiency of the domestic auto manufacturers, besides reducing wages and current workers’ benefits, would be jettisoning union-imposed work rules; that was part of Republican Senator Corker’s ingenious proposal (of course rejected by the union) to condition a bailout on the union’s agreeing to a reduction in the wages and benefits of the Detroit auto makers' workers to the level prevailing in the southern automobile plants of the foreign auto companies. The adoption of his proposal would have been tantamount to putting the United Auto Workers out of business--if unionized workers have the identical wages, benefits, and working conditions as nonunionized ones, why would anyone pay union dues?"

I can think of a number of reasons:

1) Not every business treats its workers the same.

2) There might incentives involved in the places where these southern plants are located, that are not available or possible in other areas of the country.

3) If there's no retirement plan or health plan, workers might want to join together to get such coverage.

4) The negotiations are effected by many government rules besides labor related ones, like tax incentives for health and retirement plans, etc., that need to be bargained out between workers and employers.

5) History. This situation involves similar issues with conflicts between countries and tribes; namely, when do you date the beginning of the process that led you to the current negotiations. Oftentimes, each side has a different irreconcilable starting point than the other side.

However, if I took a close look at the actual negotiations, I might well want more concessions from the workers. But I would need to know all of the specifics.

"I doubt that anyone in Congress or in either the outgoing or the incoming Administration really thinks that a bailout bill will place the domestic industry on the path to salvation. The conditions imposed to achieve the "reform" of the industry are window dressing. All three domestic manufacturers (yes, Ford included) are insolvent, and while they are unlikely to close down and liquidate completely if forced into bankruptcy--Americans will probably buy 10 million motor vehicles in 2009 and they are unlikely all to be made by foreign companies (the foreign share of the U.S. car market, including both imports and cars manufactured in the U.S. plants of foreign companies, is about 50 percent, though they could take up some of the slack created by the collapse of the Detroit manufacturers, since the foreign companies’ sales are down too). Even with an infusion of federal money, there will be many plant closings and layoffs and many bankruptcies and liquidations of auto parts suppliers and auto dealers."

This seems correct.

"But formal declarations of bankruptcy by the domestic manufacturers would, I believe (as I argued in my November 18 posting), have a substantial added negative effect on the economy. Consumers are markedly reducing their purchases of durable goods because their savings are so depleted that they cannot, as in previous economic downturns, reallocate savings to consumption. Instead they are reallocating income from consumption to savings. The result is a downward spiral: consumers spend less, so output drops, resulting in layoffs that result in further reductions in consumption and in turn in output. The spiral will eventually bottom out, but it will bottom out at a lower level if hundreds of thousands of employees of auto manufacturers, auto parts suppliers, and auto dealers are terminated more or less all at once and consumers planning to buy a car in 2009 are scared off by the uncertainties associated with bankruptcy. (Will warranties be honored? Will parts be available? Will the dealership from which one bought a car survive? Will service standards slip? What about the car’s resale value? And should one believe the soothing assurances that bankruptcy is no big deal for the customers of the bankrupt firm, as long as it does not liquidate, when all the other soothing assurances by the government have proved unfounded?) Because motor vehicles are highly durable, it is easy to be prudent and defer replacing one’s existing vehicle until one’s economic situation clarifies."

I agree.

"Granted, with General Motors having publicly acknowledged hiring a leading bankruptcy lawyer to counsel it and announced that it will be shutting much of its North American operations for a period of months, there is increasing public recognition that the Detroit automobile industry is bankrupt in all but name. But I still fear the psychological effect of a formal declaration of bankruptcy at a time when many--probably most--Americans are anxious about their economic situation. Individually, consumer prudence is wise; collectively, it will exacerbate the depression."

This is one of my fears as well. It will increase the fear and aversion to risk and flight into safety, thereby exacerbating this crisis.

"The realistic goal of an auto-industry bailout is not to reform, revitalize, or restructure the domestic industry; it is merely to postpone its bankruptcy for a year or two, until the end of the depression is at least in sight and consumer confidence is restored to the point at which the bankruptcy of the domestic manufacturers can be taken in stride. To attain this goal does not require imposing conditions on the use that the auto manufacturers make of the bailout moneys. The conditions that the bill would have imposed and that any other form of government funding will impose are not an economic but a political necessity because of widespread anger at the incompetence of the industry; a majority of Americans oppose any bailout of the Detroit manufacturers. At the very least, the Obama administration should be allowed to decide the fate of the companies; that argues for a modest government loan that will keep them out of bankruptcy until, say, February."

I agree with this although, again, I have pretty stringent requirements, including on the UAW, which will probably not be met in order to support a bailout. My main reason for supporting this bailout, even though there's a lot of anger at the Car Executives, whom I would need to see replaced before I would accept the bailout, is that the government cannot be seen as bailing out only the financial services sector. However, the sincere attempt being made to help the automakers out in order to keep people employed might have deadened the impact of such a fear.

"but the rescue should require tough conditions that neither the Democratic Congress nor the incoming Obama administration yet supports. "

Robert Samuelson comes through with a column that echoes my own thinking:

"In a booming economy, a GM bankruptcy might be tolerable and useful. It would remind everyone of the social costs of mediocre management and overpriced unionized labor. But far from booming, the economy is declining at an apparently accelerating rate. By one survey, confidence among small businesses is at a 28-year low; in October, retail sales dropped a stunning 2.8 percent. "

Yes, Creative Destruction and all that.

"No one knows what further havoc a GM bankruptcy might inflict. The Center for Automotive Research (CAR) estimates an initial job loss of 2.5 million. The logic: If any of the "Big Three" went bankrupt, many suppliers would also fail; because car companies share suppliers, all U.S.-based manufacturers would suffer parts shortages. American production would virtually stop until new supplier arrangements emerged. "It takes 6,000 to 14,000 parts to make a vehicle," says Sean McAlinden, CAR's chief economist. "If you don't have one, you can't make it."

This may be too pessimistic. In a Chapter 11 bankruptcy, GM would "reorganize." It would suspend many existing debt payments and continue normal operations. Perhaps. The snag is that even in "reorganization," GM would require new loans that might be unavailable. "Historically, when companies go bankrupt, there's 'debtor in possession' financing -- investors lend you money, but they get repaid first. That market has evaporated because of the credit crunch," says auto analyst Rod Lache of Deutsche Bank.

Why run these risks when the 6.5 percent unemployment rate seems headed toward 8 percent? Just to satisfy a purist "free market" ideal? It doesn't make sense. But neither does it make sense simply to heave taxpayers' money at automakers. The goal is not to rescue the companies or workers; it's to shore up the economy and improve the U.S. industry's competitiveness. A bailout won't succeed unless other things also happen."

Absolutely.

Here's what I recently said:

Okay. Here it is clear that some businesses do survive bankruptcy. So, he seems to be claiming that the government intervention will keep the employees from the onerous terms of bankruptcy. This is a factual question. It isn't a question of principle. I have demands that I would include in any government intervention. Absent them, I would agree, they'll have to declare bankruptcy. But that's an argument about the conditions of the bailout, not whether one would favor a bailout or not. So, Krauthammer could be correct, but it's not obviously so.

Let's continue with Samuelson:

"First, auto companies' existing creditors need to write down their debts. Even with federal aid, companies will shrink. McAlinden estimates that the country has surplus assembly capacity of about 4 million vehicles, much of it owned by the Big Three and destined to be shut. GM will need a $25 billion government loan to get through the recession and cover closing costs, says Lache. But GM already has $48 billion of debt. Unless the old debt is sharply written down, GM would be overburdened, and its rendezvous with bankruptcy would merely be delayed.

Second, labor costs need to be cut. By Lache's estimates, GM's hourly compensation -- wage plus fringe benefits -- totaled $71 in 2007, compared with $47 for Toyota's U.S. plants. Health benefits for retirees (many in their 50s, having retired after 30 years) are expensive. But the United Auto Workers opposes concessions. Government aid, says UAW President Ron Gettelfinger, is needed "so that auto companies can meet their health-care obligations to more than 780,000 retirees and dependents." The bailout should be more than union welfare.

Finally, automakers need a consistent energy policy. Congress demands that companies produce more fuel-efficient vehicles (35 miles per gallon by 2020, up from 25 mpg now). But politicians also want low gas prices. These goals are contradictory. To encourage consumers to buy fuel-efficient vehicles, Congress should mandate higher gas prices. Gasoline taxes could be raised gradually (say, a penny a month for four years, possibly offset by other tax cuts). Wild swings between low and high fuel prices have crippled the U.S. industry by erratically shifting buyer preferences -- to and from SUVs.

In bankruptcy, a judge can modify a firm's labor contracts and debts. GM needs the benefits of bankruptcy without the uncertainties, but the political process -- so far -- disdains that desirable bargain. The conditions that Democrats mention are mostly rhetorical gestures against high executive compensation and in favor of more fuel efficiency. The Bush administration resists additional assistance without saying why."

I would also have to see a management change. But note this:

"We are seeing the fallout of the open-ended $700 billion rescue of financial institutions. Boundaries need to be established. Who deserves support and why? Imposing tough conditions on automakers not only improves the odds of success but also -- by the sacrifices required -- makes the process sufficiently unpleasant to deter a stampede of other industries seeking handouts. In 1979, when the Carter administration rescued Chrysler from bankruptcy, the price was concessions from management, investors and labor. We should do as much."

Thank God someone gets it. He sees the problem in terms of Political Economy. As I said:

So, here's an example of organic logic. Contrary to what has been put forth, that, if we allow this auto bailout, the world will be bailed out like a mechanical process, it might work in exactly the opposite way by being the compromise that allows the opposition to agree with you and settle here, in this place, for now. And the reason that this can happen, is because, unlike a mechanical process, this one involves human agency, which is in no sense mechanical.

So, let's recap:

1) Arbitrary: True, but where on continuum? Cuts both ways.
2) Efficiency: Empirical matter. Must be explained. Not a priori.
3) Moral Considerations
4) Political Considerations

My own opinion:
1) At least as intelligent as TARP
2) Probably true, but not certain
3) In this case, given TARP, this seems a worthwhile bailout
4) More likely to end avalanche than continue it, but, if the avalanche continues, more of the blame lies with TARP and how it has been handled and presented

Doesn't this involve qualifying principles? Yes, that's what makes it politics, as opposed to political theory.

Jeffrey Sachs also with a good point:

"A government-supported restructuring of the auto industry is urgently needed for our economic and energy security. If the Bush administration allows the auto industry to collapse, it will compound the panic that started with the bankruptcy of Lehman Brothers. Washington should seize the opportunity to begin a new era of U.S. technological leadership in the global auto industry, starting with an immediate loan."

Precisely. This problem exists on a continuum. As I said:

There is some truth to the precedent point, but for the fact that this question exists in time, which is a continuum, and there have already been precedents. It's as if by putting his foot down, Brooks can say, " It all begins here!". Sorry, you're not that powerful. The automaker's bailout exists on a continuum of precedents. No analysis can prove fruitful without comprehending that simple fact. I've already made that point. That's the difference between politics and political theory.

Sachs again:

"Second, the sudden closure of an automaker would be catastrophic, possibly pushing our economy from recession to depression. Because of the impact on parts suppliers, the shutdown of one company would imperil domestic production across the board, and the jobs at risk include not only the 1 million in vehicle assembly and parts but millions more that would be caught in the resulting cascade of failures. The industrial Midwest -- especially Michigan, Ohio, Indiana, Illinois and Tennessee -- would be devastated, and the shock waves would reverberate across the world. "

Here I agree. Now, he then veers off into the future, a place where I said Krauthammer and Brooks shouldn't go, because we can't predict it, but, if I have to choose, I see a future a bit more like Krauthammer and Brooks than Sachs. Let's not get carried away. We're doing this, if we do, for some decent reasons, but predicting the car of tomorrow and all that is a possible, and only that, scenario. So lighten up on the industrial planning.