Month: June 2009

Whatever the woes of General Motors — and they are substantial — it does not follow that the government needed to drive the company into bankruptcy. With at least $50 billion in government supports undergirding the new GM, the Obama administration auto task force deciding GM’s fate could have steered the company away from bankruptcy court. If it had so chosen, it could have acquired the company outright — a much better course to advance the legitimate public interest in rescuing GM.

The purported rationale for bankruptcy was to deal with the problem of recalcitrant bondholders, owed $27 billion by GM and rejecting the GM/government offer of exchanging that debt for a 10 percent share in the New GM. It has been apparent for weeks that the bondholder problem could be addressed with some creative negotiations. By the end of last week, the government had found a way to be creative; having sweetened the pot, an accommodation with the bondholders was at hand.

But GM, under the aegis of the auto task force, filed for bankruptcy anyway, setting in motion a series of likely excessive factory shutdowns, needless dealership closings and anticipated cancellation of the rights of victims of defective GM cars.

Given the deal with the bondholders, the bankruptcy declaration was wholly discretionary and avoidable.

But the government had available a much better alternative to avoid bankruptcy than just cutting a deal with the bondholders. It could have simply taken complete control of the company.

Instead of declaring bankruptcy on Monday, the government could have announced the taking of GM through eminent domain.

The government could have paid shareholders the market price for their shares — worth less than $1 billion. It could have paid bondholders the market price for their bonds; trading at about 8 cents on the dollar, that would have totaled a little more than $2 billion. The UAW, which needs cash not equity to fund its healthcare benefit pool, could have been given preferred stock paying a substantial interest rate. (Assuming it could reach agreement on a shared vision for the restructured GM, the U.S. government could have decided to work in concert with the Canadian and Ontario governments — which will control 12 percent of the New GM.)

This would have been an aggressive approach — but less so than the administration’s maneuvers in bankruptcy.

With complete control of the company, the government could have explicitly set out to manage General Motors in the public interest. As Ralph Nader has said, this would not require micromanaging the company, but it would require managing it.

There are many different public management options. Consider the U.S. Postal Service as one example. It operates independently but under government supervision, and with some affirmative mandates and obligations. USPS is required to deliver on Saturdays, for example, even though it may be more profitable to cut Saturday service. It must deliver to the entire country, with a flat-rate first class stamp, even though it would likely make more money with limited service or differential rates.

A GM under public management would aim for a return to profitability — or at least breaking even. But it would take into account other public priorities. And it would focus on medium- and long-term objectives rather than short-term profitability.

A publicly managed GM would take pains to avoid excessive layoffs and would not needlessly close dealerships. A publicly managed GM would abandon GM management’s desire to move production for the U.S. market to low-wage countries. It would maintain decent wages, benefits and working conditions. It would not maneuver to deny victims of defective GM cars their day in court. It would prioritize safety in its new vehicle design.

Above all, a publicly owned and managed GM would invest heavily in new ecologically friendly technology. As part of a government plan to remake the nation’s transportation infrastructure, it would retool plants to meet growing demand for buses and trains.

Having decided not to pursue the full public ownership route, the Obama administration still finds itself about to own 60 percent of the New GM. This majority stake comes with some important limitations; with a significant portion of the company still trading publicly (10 percent immediately after bankruptcy, and more over time), the government will have legal duties to the minority shareholders.

Still, the government as majority shareholder will have ultimate control, and the long-term and socially appropriate investment practices can all be justified as in GM’s long-term interest.

The biggest problem is that the Obama administration explicitly disdains a desire to manage the company to advance the public interest. Even worse, the administration has stated its desire to begin selling off the government-held shares in GM in six to 18 months after the company emerges from bankruptcy; that posture puts a premium on measures to achieve short-term profitability … exactly the orientation that landed GM in its present predicament.

What in the world is the Obama administration thinking? The GM bankruptcy — entirely avoidable — seems designed to hurt every constituency it is supposed to assist.

First, as to the avoidability issue: There’s no doubt that chronic mismanagement and the deep recession have left GM in dire straits. But with the government pouring tens of billions of dollars into the company, it is clear that needed restructuring could have been done outside of bankruptcy. By last week, even the problem of bondholders who sought $27 billion from the company (the government and GM were offering a 10 percent stake in the new company) was moving to resolution. Yet the Obama administration’s auto task force has plunged GM into bankruptcy nonetheless. Why? There’s no obvious answer to that question.

Why does it matter? It matters because bankruptcy may further tarnish GM’s already very weakened brand, and make recovery for the company much more difficult. It matters because it creates some unique problems. And it matters because it forecloses — or, at least makes more difficult — other ways to reorganize the company.

The GM/auto task force plan for bankruptcy and restructuring — shaped by a secretive, unaccountable group of Wall Street expats without expertise in the industry — seems designed above all to perpetuate GM as a corporate entity. Preserving corporate GM should be not an end, but a means to protecting workers and their communities, preserving the U.S. manufacturing base, forcing the industry onto an innovative and ecologically sustainable path, and advancing consumer interests. It fails to meet any of these objectives, in entirely avoidable ways.

GM probably needs to be downsized, but there are questions about the extent to which it should be downsized and the method. There are very significant questions about decisions being made to eliminate brands, close factories and terminate dealer relationships. The auto task force may well be needlessly costing tens or hundreds of thousands of jobs at auto plants and suppliers. It has authorized the closing of many hundreds of GM and Chrysler dealerships, even though these dealerships do not impose meaningful costs on the manufacturers. Dealership closings alone will result in more than 100,000 lost jobs.

While there is probably a need to reduce GM’s capacity, there is no need to cut worker wages and benefits. Auto worker wages contribute less than 10 percent of the cost of a car, so even the most draconian cuts will do little to increase profits. Yet the Obama administration’s auto task force helped push the United Auto Workers into further acceptance of a two-tier wage structure that will make new auto jobs paid just a notch above Home Depot jobs. This will drag down pay across the auto industry, with ripple effects throughout the entire manufacturing sector. Stunningly, the Obama administration brags that “the concessions that the UAW agreed to are more aggressive than what the Bush Administration originally demanded in its loan agreement with GM.”

The ultimate evidence of the task force’s disconnect from its public mission is its approval of GM plans to increase outsourcing production of cars for sale in the United States. GM has now disclosed its intent to begin production in China for sale in the United States. What is the possible rationale of permitting a company propped up with U.S. taxpayer funds to increase production overseas for sale in the U.S. market? The point of the bailout is not to make GM profitable at any cost, but to protect the communities that rely on the automaker, as well as U.S. manufacturing capacity.

Finally, if the Chrysler bankruptcy is a harbinger, the bankruptcy is likely to wipe out the legal claims of people injured by defective and dangerous GM cars.

None of this need be so. The government could have averted bankruptcy. It could have sent its plans to Congress for more careful review. It could have demanded that worker wages and conditions be maintained or improved, rather than worsened. It could have been more surgical in the downsizing it is requiring, and more forward-looking at preserving manufacturing capacity. The government could (and still can) choose to accept sucessorship liability in the New GM for the injuries inflicted on real people by Old GM.

Some of these avoidable harms can still be averted, if the Obama administration chooses to exert the control that attaches to owning 60 percent of GM. Unfortunately, President Obama says, to the contrary, that “our goal is to get GM back on its feet, take a hands-off approach, and get out quickly.”

More on a different way to manage the GM restructuring in my next column.