Should U.S. taxpayers’ dollars be used to bailout General Motors, Ford and Chrysler (80.1 percent owned by Cerberus Capital Management, a private equity firm)? My answer is NO. The bankruptcy system (Chapter 11) administered by the courts is designed to preside over financial situations like those being experienced by these auto makers. Let the bankruptcy courts handle the reorganization, not the politicians.
Clearly, the three automakers are in serious trouble. They suffer from 1) years of mismanagement by overpaid executives, 2) a strong UAW union that does not want to renegotiate its extraordinarily high wages and benefits until its current contract expires, 3) legacy costs that drain billions each year and 4) inefficient dealer networks controlled largely by state franchise laws. This represents the status quo.
A government bailout will only perpetuate the auto mess; it is unlikely to solve any of the industry’s problems – only postpone them until the taxpayers’ bailout money is exhausted. Then what? Another bailout?
A bailout would ultimately be overseen by politicians – politicians who cannot afford to deal with a union and union retirees (think 3 million plus voters). Rather, you and I as taxpayers will support a failed business model and a recalcitrant union. In addition, we will have to help foot the bill for hundreds of thousands of pensioners and continue to accept a highly inefficient dealer network system. How much would a real bailout cost? No one knows for sure, but my guess is that it could top $100 billion!
By contrast, filing for Chapter 11 bankruptcy protection will result in real changes – major changes that will result in positive outcomes. Chapter 11 will provide an opportunity for the automakers to reorganize themselves as well as renegotiate union contracts. And, the outcome will not be controlled by politicians. Rather, it will be controlled by the bankruptcy courts that will follow the bankruptcy laws and will not be subject to the whims of politicians seeking reelection in less than two short years.
I foresee the possibility of bankruptcy proceedings leading to a much leaner auto industry, perhaps a single company rather than three. This single company would have a much narrower product line. The surviving brands would likely include only Chevrolet, Buick and Cadillac (from General Motors); Ford, and especially the F series truck line, (from Ford); and Jeep (from Chrysler). Redundancies would be eliminated, resulting in significant gains in productivity and a leaner and profitable industry.
Under the protection of Chapter 11, union contracts will be renegotiated immediately with significant reductions in wages and fringe benefits, legacy costs will be reduced, the number of dealers probably cut in half, and executive salaries and benefits cut. Again, the auto industry would become an efficient and profitable industry.
Those who want to avoid the bankruptcy route have attempted to scare Congress and the population. They have suggested that once the auto manufacturers declare bankruptcy they will void vehicle warrantees and no one will purchase a vehicle manufactured by GM, Ford or Chrysler. Other scaremongers have suggested that the auto manufacturers might actually be liquidated! These “calls to panic” are designed to promote anxiety and are not based in reality. Unfortunately, when “calls to panic” are repeated frequently by the news media, people start to believe they are true.
According to bankruptcy lawyer Richard M. Schlaifer, Esq., of Earp Cohn, P.C., of Cherry Hill, N.J., “It is unlikely that Chapter 11 will result in the complete liquidation of the auto manufacturers.” Furthermore, he indicates “that it is also highly unlikely that the vehicle warranties will not be honored as a part of a negotiated Chapter 11 reorganization.” In the context of a Chapter 11, he opines that "the various parties most affected by the bankruptcy will have a financial interest in preserving the warranties to help prop up the companies and the value of the various brands. To that end, whether the companies are simply reorganized or sold off to the highest bidder, everyone will have a financial incentive to keep the warranties intact.” So much for the scaremongers!
If GM, Ford and Chrysler declare bankruptcy, there will be job losses. If the government bails them out, there will still be job losses. Either way, these auto makers must cut costs; they must become competitive in the world marketplace. There is going to be pain. The real issue: should taxpayers foot the bill. My answer is NO.
Note: Dr. Robert E. Pritchard is the senior member of the Rohrer College of Business faculty. He completed both his undergraduate degree in physics and an MBA at Drexel University, his MA in applied economics at the Wharton School of Business at the University of Pennsylvania and his doctorate in education administration at the University of Pennsylvania. Pritchard has authored/co-authored nine books in the fields of finance, small business management and marketing and has written more than 250 trade journal articles. He has consulted and provided financial training for many businesses and trade associations throughout the United States. Pritchard's research interests include real estate, personal financial management, retirement planning and Social Security. He specializes in applied financial research and pedagogical research principally pertaining to the teaching/learning processes in business and finance.
