By on October 29, 2008

After the initial media support for a potential GM – Chrysler hookup (e.g. Jalopnik.com’s Ray Wert), the bandwagon began to roll like a snowball down the proverbial mixed metaphor hill, and everybody soured on the deal. We even charted how individual commentators changed their positions and eventually “threw Chrysler to the Wolves.” In Monday’s New York Times, Andrew Ross Sorkin said that GM CEO Rick Wagoner’s continued employment is a “minor miracle.” But the commentatorati are still behind the curve re: the government’s rumored $10b “intervention” in the GM – Chrysler merger. In the main, they have’t even acknowledged that the bailout is happening. That, and the critical fact that it’s structurally designed to fail.

Let’s start with the likely government strings. This is after all, common sense. If the merged GM/Chrysler is going to enjoy the benefits of our largess, they should be held accountable for what happens next. He who owns the gold makes the rules. At least in theory. In theory, you and I might demand that the entire executive floor of the Renaissance Center be fired. But the U.S. government doesn’t see it that way. All indications are that the men who’ve gutted GM will keep their jobs and eviscerate what’s left of the American automaker(s).

But it gets worse. One of the politically-fueled requirements of this politically-fueled bailout: Chrysler-GM must keep as many jobs intact for as long as possible. That’s 97k union jobs that someone’s duly elected officials want to protect. But any analyst with a high school diploma or better knows that both GM and Chrysler are currently too big to survive; too many managers, brands, factories, dealers and workers. Unless the new entity makes job cuts, merging the two automakers makes no sense whatsoever. How do you achieve any benefits if you can’t replace two jobs with one?

At this point, the bailout request from GM and Chrysler is a $10b package (in addition to the $25b previously allocated for plant retooling for more fuel-efficient cars). The combined debt of GM and Chrysler is $52b. GM alone is burning through $1b per month, just to keep the lights on. Even if their collective debt vanished or could be put on hold (a process we once referred to as bankruptcy), bailout number two only provides enough cash to keep GM-Chrysler (a.k.a. American Leyland) rolling for another two years– at best.

The automotive business runs on a five-year cycle. From a product perspective (remember products?), General Motors and Chrysler can’t do anything significant during those two federally-subsidized years. We know exactly what will be on the showroom floor in two years’ time. GM’s “great hopes” were the Chevy Cruze and Volt. While the Volt’s feasibility is debatable, the Cruze (a much easier to build conventional car) is slated to go on sale as a 2011 model some time in 2010. That’s it. Time’s up for GM. Giving them money without restructuring is like heading into the bottom of the ninth, losing, and insisting the other team takes its turn at bat.

So why will the government attempt the bailout anyway? Because “something must be done.” GM and Cerberus (Chrysler’s owner) have powerful friends in Washington. The United Auto Workers may be a shadow of its former self, but it still knows how to deliver votes. And American government officials have always loved dumping cash into the economy right before an election (see Edward Tufte’s 1978 book Political Control of the Economy). Second, class warfare. This bailout makes up for the first “thief in the the night” raid on the public purse for Wall Street fat cats. This one’s about protecting “real jobs” for “middle class working stiffs” who “build stuff,” thus protecting our “industrial base.”

If GM filed for bankruptcy and the government sat back and watched, people would be angry at the “failure to respond.” So they will take a futile action instead, with $10b or more, lots more, to make the problem a little less grave (or at least look that way). It’s a cover-your-ass play on an epic, tragic scale.

As a result, it’s unlikely anyone in Congress or the lame-duck White House will oppose a bailout. Nobody wants to be the first to oppose the bailout when their election opponents are in favor of it. Nor does anyone have a strong desire to go toe-to-toe with the UAW weeks before a local, state and presidential election.

From any rational perspective, it makes far more sense for the government to do something else with the money headed for Detroit. The feds could simple hand every blue collar at GM and Chrysler worker a $100k tax-free check. They put it into schools; provide health care for a pile of people. Or give the American people a tax break. Or simply not spend money they don’t have.

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19 Comments on “Editorial: American Leyland: The GM – Chrysler Bailout That’s Guaranteed To Fail...”


  • avatar
    knowhereman

    Great Article. Within GM there are still a majority of people who just dont believe anything is wrong and that its the economy and the petroleum industry making things tough, not piss poor management. Fire fighting instead of having a long term vision. Promoting yes men (and women) into management positions and bullying people who stand up to point out how bad the score on the scoreboard is.

    GM’s future is decided, you have to spend it to make it in this game, and when you cant pay to keep employee voice mail working then you cant invest in products people want to pay full price for.

  • avatar
    nudave

    If the government can’t or won’t terminate the upper management, how about a cap on GM executive salaries in line with their government counterparts? Let’s say no more than a senator or congressman’s yearly salary. In January 2009, that’s scheduled to be $174,000.00.

    Sound about right?

    Better yet, if this truly is a national emergency why not recruit executives who – as in WWII – would be willing to serve their country for $1.00 dollar a year?

  • avatar
    menno

    Spending money they don’t have. But can print.

    http://www.dailyreckoning.us/blog/?p=924

    The end result will be Zimbabwe lite for America.

    Once we get through the temporary deflationary period we’re in (gas prices – which will start going up, oh, on about December 5th) and house prices (which will continue down another 20-30% then gradually move up with inflation again).

    Since I (being an American citizen and taxpayer) will be sending tons of “my” (har har) money to GM (not that I want to…) to borg-afy Chrysler, does that mean I get a dividend check if American Leyland ever makes any money?

    OK you can stop laughing hysterically now…

  • avatar
    BuzzDog

    Let ’em fail. This bailout “solution” has all the markings of an expensive boondoggle.

    But the author is correct in his statement that bankruptcy would trigger a public outcry against the government’s “failure to respond.”

    Perhaps a possible solution is a compromise that is somewhere in the middle, although – despite my extreme love for my country – “compromise” and “middle of the road” seem to be absent from U.S. politics these days. While NOT a perfect solution, one wonders why the government doesn’t consider a solution similar to what the FDIC/RTC did 20 years ago with failed banks and S&Ls.

    It would require a coordinated effort of Federal law, a quasi-public oversight corporation and the automakers themselves, but here’s the basics:

    – Open up the new vehicle market by passing a Federal law that invalidates ALL state laws and regulations protecting vehicle dealers; this will allow a more efficient and competitive method of distributing products. Think electronics: Apple sells online, in their company-owned stores and through other retailers such as Best Buy, but subsidizes and facilitates all warranty work.

    – Allow GM and Chrysler to enter bankruptcy, allowing negotiation room or release from most union, dealer and legacy obligations; keep warranty obligations in place to protect consumers (much like the FDIC does with deposit insurance).

    – Let the UAW strike. Either the union will see that concessions need to be made on the worker’s part, or eventually someone will be willing to work for what Toyota, Honda and Nissan and others pay their workers in the U.S. Better to have a well-paying secure job than no job at all.

    – Finally, allow a merger or reorganization of the remaining three automakers into a structure that allows synergies between the remaining pieces. Perhaps we will end up with two companies with pieces of GM, Ford and Chrysler in both.

    Problem is, it will probably never happen since the parties involved will all be interested in “What’s in it for me?” in the short-term, while ignoring what’s in the best long-term interest of all. But almost anything is better than the way things are currently headed.

  • avatar
    1996MEdition

    This is getting so crazy that I am starting to agree with menno…..I might even write in Ron Paul on my ballot

  • avatar
    Theodore

    Memo to the government: Don’t just do something, stand there!

  • avatar
    GS650G

    Once that money hits the bank account the government is in no position to dictate how it is used. Don’t kid yourself. We are ALL going to end up owning 2 bankrupt automakers and paying for their healthcare and pension obligations for years to come. Maybe we should get jobs on the assembly lines and wait for the Obamagrants to come in the mail.

  • avatar
    Redbarchetta

    This sickens me, talk about making me irritated. It’s not enough that I had to put up with them steeling from me with their piss poor product now I don’t even get a lump of steel in return.

    The solution to this is to boycott their products and never buy from them. Tell friends family and people on the street how they are steeling from all of us and not to support this failed organization. The sooner their sales totally collapse the sooner the companies totally collapse and the sooner they stop sucking our tax dollars into their wasteland.

    I’ll put it plain and simply Wagoner, Lutz and Fritz will continue to collect million dollar pay checks on OUR dime until we stop the madness once and for all. I would like to have them drug out back and shot but I know that’s not going to happen since they are throwing a cash party for them.

  • avatar
    no_slushbox

    This is not about class warfare. The working class people I know are disgusted that failed, mismanaged automakers would be bailed out.

    UAW may try to spin this as their version of the Wallstreet bailout, but only UAW workers are going to go for that. Most Americans want to end the bailouts, not play tit-for-tat with them.

    Anyway, this is really just an extension of the Wallstreet bailout, not a counter to it. The last time I checked the UAW does not hold much sway with the Bush Administration, which will be giving out any money that GM/Chrysler/Cerberus gets before January 20th.

    Unfortunately Cerberus, GM management, and a number of well connected suppliers and lenders do.

  • avatar
    NickR

    Quick GM story. I may have written this before, so excuse me if I am repeating myself.

    About 4 years ago, I worked for a company that provided marketing services. I was involved only peripherally in this project. Some of my colleagues came up with a novel, intriguing way of marketing cars. They had a contact in GM, a middle manager, and made a presentation. The guy loved the idea, he’d been dying to see something novel out of marketing. So, he pushed the idea upstairs. And got squashed. His superiors simply couldn’t get their heads around this new approach. I remember seeing the email he sent, where he tore a strip of his own superiors for their complete lack of imagination and vision. Had anyone inside the company seen the email, I am sure he would have been fired.

    That’s was the closest glimpse I’ve had of the ossified management of GM.

  • avatar
    Redbarchetta

    NickR What was the marketing idea, you can’t tease us like that. Let us have this ingenius plan that GM Marketing/Management shot down.

  • avatar
    guyincognito

    Justin:

    You made a great case for why the government will bail out GM and Chrysler but I still fail to see why an ill advised merger is needed to get them to do this. How does the merger change anything about the situation other than making both automakers worse off and assuring the failure the bailout?

    I simply cannot believe the government or the general populace are stupid enough to bail out Cerberus at the expense of GM and Chrysler.

    Also, what sources do we have to confirm that this is really happening? I have not heard one named source on any of this information. I believe that GM and Chrysler and the government are in talks but I have seen nothing to convince me they are discussing a merger between GM and Chrysler.

  • avatar
    Martin B

    How does the merger change anything about the situation other than making both automakers worse off and assuring the failure the bailout?

    No, no, no, no, no. You’ve got it wrong.

    If you take 1,000 dud mortgages and bundle them together, you get a AAA-rated security. That’s what the Masters of the Universe have been telling us.

    By the same logic, two bad companies make one good company. </sarcasm>

  • avatar
    hltguy

    John Galt is dying.
    What does one call a three headed bloated pig?

  • avatar
    AG

    guyincognito, I believe the idea behind the merger is to make it more politically acceptable to bailout GM and Chrysler. In its current form, Chrysler can’t be bailed out becuase it would be the equivalent of bailing out a private equity firm. Cerberus benefits from getting rid of Chrysler while ending up with all of GMAC and part ownership of GM. GM benefits from getting a larger bailout than Ford. Then Cerberus can ask the government for TARP money for GMAC.

    A while back someone once told me that GM was a mortgage bank that just so happened to make cars. Now it seems like they’re a professional government money embezzler that just so happens to make cars.

  • avatar
    picard234

    Another reason it’ll be tough to swallow this pill: isn’t Cerberus already sitting on a pile of cash? Anyone know how much they’re worth? Why would we pay already rich people to unload Chrysler?

    Also, the election is only 6 days away…is that enough time to rush this through the Congress? Let’s pray for gridlock!

  • avatar
    zerofoo

    Or simply not spend money they don’t have.

    Stop it! Just stop it with your logic and reasoning and stuff…

    Is there anyone left in Washington with a brain and a conscience?

    As much as I hate to see all the people that will be hurt by GM and Chrysler going TU – giving these bozos $10 billion makes me want to puke.

    -ted

  • avatar
    TaxedAndConfused

    Interesting read.

    I made the comparison between British Leyland and GM a few months ago in a comment in the Death Watch series. What struck me at the time was the pinning of GM badges onto everything from Chevvy to Cadillac – something BL managed to do with everything from Austin to Jaguar in the early 1970s.

    This attempt to create a core marketing, er, thing which didn’t exist before BL (Leyland made Trucks and money before they were pursuaded to merge with car companies) was doomed to failure as will/has the GM one. BL had neither the money or the cash generating capability to create the new models they needed, and the ones they did create relied heavily on the unreliable (read expensive in warranty claims) engineering of previous models.

    The BMC/BMH/BL mergers ended up costing the UK taxpayer millions of pounds – and that was when millions where millions. In the end the shrivelled remains, after all the good bits had been sold to BMW and Ford for peanuts, finally died a few years ago with uk.gov adding £6m as a quick bailout before withdrawing any aid and finally letting it die. Even though it was a labour government (Socialist, allegedly) they preferred to see market forces take effect and to pour money into a hole.

    To see a country arguing over the S word in the election so vehemently and then pouring money into the “dead hourse flagellation society” is pretty amusing in an ironic kind of way.

  • avatar
    viewfromtheuk

    OK, so looking at this idea from Britain, where we once comtemplated the smoking ruin of British Leyland, the parallel for GM/Chrysler is slightly chilling… try these simple tests from our experience 1966-2005:

    Sprawling, outdated brands and product range/s? Check
    High manufacturing costs due to above? Check
    Tendency to ignore customer perceptions of poor quality? Check
    Long-standing labour issues arising from history of poor management? Check
    Weak, strategically illiterate management later quoted as saying something along the lines of “it was a can of worms and we didn’t have enough can openers”? Check
    Tendency to merge with other weak, unprofitable etc (see above) companies as a panacea for improvement? Check
    Alarming tendency to run out of cash and seek public support claiming “next time it will be different, really”? Check.

    Mmmm. A full set.

    It’s not looking good…. if GM and Chrysler do cling together as they drift down to oblivion, and new management isn’t found, history suggests that you’ll be wasting tax revenue on an even bigger disaster. And I hope I’m wrong…

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