Should we bail out the car companies?

GM, Ford, and Chrysler need bankruptcy, and their situation is exactly the reason why bankruptcy exists. They have a huge pension plan burdening them, a high cost structure and large inventory, and not much revenue. Their shareholders have all been wiped out and they can’t reissue equity and no bank in their right mind would loan them money even without the credit crisis. These are terribly run businesses that have long been an issue. The credit crisis was just the straw that broke the camel’s back.

Chapter 11 allows them to get their feet under them. One of the primary factors that is killing the automobile industry is over capacity. They need to shed staff and close plants. They would also be able to grab more concessions off of their workers and possibly offload their pensions onto the government.

Yes, that is terrible for us, but we’re going to be footing the bill no matter what. It’s a “loan”, but we aren’t getting this money back. If there was a fairly good chance of that, one of the lenders would’ve lent them the money. I know about the whole frozen credit markets storyline, but good businesses aren’t having any problems raising capital right now.

Next, the observant reader and auto advocate would tell me that the automotive industry is too big to fail because of its suppliers. Ok, that’s somewhat true, but the companies aren’t failing, they are declaring chapter 11 bankruptcy. The automotive companies won’t cease operations. They will simply restructure their contracts and totally wipe out the equity. They will emerge much stronger (and smaller) than they are now.

The easiest way to look at the situation is to look at the airline industry. In the 80’s, the large carriers were regulated, so they did not care about costs. They signed big union deals, lavished themselves with bonuses, and paid no attention to the customer. Once the government deregulated the airline industry, new carriers came into the market with much lower costs allowing the new carriers to charge much less than the older unregulated carriers and new paradigms focusing on customer experience. The older carriers had no choice but to match price, but their margins were squeezed so tight that they couldn’t really turn a solid profit. They tried to renegotiate with their unions, but union leaders wouldn’t budge. The result for the airlines was bankruptcy.

If you followed the analogy at all, you see why the U.S. automakers need to reset the deck. In the beginning, they had no competition from foreign car makers and they set the price and the trend of cars. In the 80’s, Honda and Toyota successfully began to compete here and had pricing power due to non-union plants. The US automakers now have a higher cost structure and will never be able to compete on price without having very, very small margins. Throw into this that they don’t really make mass market cars since they don’t tend to consult the customer at all, and it’s a recipe for bankruptcy.

Well, what if they enter chapter 11 and they can’t get out, you ask? In that event, we have a good old fashioned inventory sale. The Big 3 still sell a lot of cars and the foreign automakers can’t fill the gap at their current levels. Either a wealthy investor or one of the foreign automakers will step in and buy the equipment and begin to produce cars. So what happens?

Will they likely use the existing facilities?

Yes

Will they deal with the UAW?

Probably not

Will the suppliers be hurt?

Probably, but they are going to be hurt anyway. We simply need less capacity. The suppliers who are going to fail would’ve failed anyway.

Will there be pain to us who are in the stock market and massive job losses?

Yes, but I’m already numbed to losses at this point. Those who lose their jobs will find others. That’s the way it works. We could utilize the laid off workers to help get off foreign oil and improve our infrastructure.

In my opinion, we may as well get it right since we have the opportunity.