GM, Chrysler Seek Billions for Dumb Business Plan

Having already wasted billions of our tax dollars, GM and Chrysler are back. But don’t worry, they’ve got a plan:

General Motors and Chrysler, two flagships of traditional American manufacturing, reported yesterday that the decline of the U.S. economy has outpaced their bleakest expectations of just two months ago, forcing them to significantly boost their request for billions of dollars in government aid.

The companies said they plan to cut an additional 50,000 jobs worldwide, drop as many as six brands and shutter 14 plants in an attempt to survive one of the deepest recessions in decades.

Once-popular lines such as GM’s Hummer and Saturn will be spun off or, failing that, eliminated. Saab is up for sale. Chrysler will stop production of the PT Cruiser, Aspen and Durango by the end of the year.

“Today’s plan is significantly more aggressive because it has to be,” GM chief executive G. Richard Wagoner Jr. said. “We have taken stronger actions; we needed to.”

The automakers yesterday said they may need as much as $21.6 billion in additional loans — $5 billion for Chrysler and the rest for GM. The requests announced yesterday come on top of $17.4 billion the companies received in recent months.

Now . . . let me get this straight.

The only reason to bail out these failing companies is to save the jobs of its workers during dire economic times when it would be even more difficult than normal for them to find new work.   Yet, they’re going to cut at least 50,000 jobs anyway.

And their plan for saving the company is to announce ahead of time that cars they’re trying to sell now will soon go out of production, which means the companies won’t be making spare parts for them, which means no one who isn’t an idiot will buy one of them.

Further, if the idea is to cut costs and they’ve figured out that the Aspen, Durango, and PT Cruiser are unprofitable why not stop making them now?

Explain again why we didn’t just let the companies declare bankrupcy and do this restructuring without taxpayer money?  Which, by the way, might happen anyway:

GM said it might need as much as $100 billion in financing from the government if it were to go through the traditional bankruptcy process. Rick Wagoner, GM’s chairman and chief executive, said the bankruptcy scenarios are “risky” and “costly” and would only be pursued as a last resort.

Chrysler’s plan said the company would likely have to file for Chapter 11 protection if it doesn’t get additional loans from the government and concessions from unions, creditors and dealers. It said it would need $24 billion in financing if the company were to file for bankruptcy. But company officials said in a conference call that they believe a Chapter 11 filing is “not necessary” for Chrysler’s survival.

You’ll forgive me if I’m less than confident in their prognostication skills.

UPDATEDave Schuler adds,

As of this morning GM’s total stock valuation is $1.33 billion. The estimated value of GM’s assets is something like $30 billion. GM is literally worth more dead than alive.

If the objective is saving the jobs of GM’s workforce, here are two alternatives. GM’s 181,000 U. S. employees could buy the company. That’s something like $7,500 per employee. Or maybe some sort of debt for equity swap could be arranged. Heck, I think the U. S. government should lend GM’s employees the money to buy the company, perhaps on a need basis. Then if GM’s workforce think they can do a better job than GM’s current management they could do anything they cared to.

That certainly makes more sense than simply throwing good money after bad.

Update (Steve Verdon): It should also be pointed out that bankruptcy does not automatically mean that the company ceases to exist or that jobs are terminated immediately (i.e. not all 181,000 will be out of work). If the problem with GM, for example, is bad management and a bad business plan that bankruptcy can clear out the rot and possible save the company. Granted it might be in a leaner form (i.e. we might still lose those 47,000 jobs), but at least the American tax payers isn’t going to be at risk for tens of billions of loans to a company where the management has made a series so bad decisions.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Rick Almeida says:

    I’ve come around to your way of thinking on this, James. I reluctantly supported the first bailout as the better of a bad set of alternatives, but it seems clear to me now that the leadership of these companies is unwilling to or incapable of leading them out of this crisis.

    Of course, as always, it is thousands of workers and their families that suffer.

  2. Dave Schuler says:

    $100 billion to save something like 100,000 jobs comes to $1 million per job. This is insanity.

  3. Drew says:

    Unfortunately this is following the all too familiar workout life cycle. An initial, insufficient round of capital is injected, and a business plan that doesn’t go far enough is adopted, all on too optimistic a set of assumptions.

    And then round two.

    I made that rookie mistake during the first workout I was involved in. I understand how it happens; its all that the parties can stomach in the initial go round. Unfortunately, as we are seeing, its good money after bad, and a waste of valuable time.

    On wonders what our intrepid government officials will do now. I’m not optimistic it will be the right thing.

  4. Drew says:

    “$100 billion to save something like 100,000 jobs comes to $1 million per job. This is insanity.”

    Have you ever done a variant of this wrt the Great Society programs?? With the money poured into them you could set up a trust fund that would yield an income to recipients in perpetuity. I’d call our current approach insane, except I understand its about power, and creating voting constituencies.

  5. Anderson says:

    That surprises me about the PT Cruiser — the damn things seem to be everywhere.

    Bankruptcy really seems to be the best hope for the U.S. car industry — auction off the brands, and let someone with a clue try to make money from ’em.

    As it is, GM/Chrysler/Ford leadership is comparable to that in Soviet factories circa 1965.

  6. Bithead says:

    What you guys are missing is that this was never about saving the big three.

    This is about saving the UAW.

  7. ptfe says:

    Dave, do the math honestly at least. I know and you know that the economy isn’t driven by this kind of simplistic formulation. These companies are also supporting pensions and promised benefits for retired workers. This might give you an idea of the magnitude of GM’s debts:

    http://www.globalaging.org/pension/us/private/2005/gm.htm

    “The General Motors pension fund is by far the biggest in American industry, promising benefits to more than 600,000 workers, retirees and surviving spouses…G.M.’s pension fund is actually made up of two big plans, one for salaried employees and one for hourly workers. At the end of 2004, G.M. reported that the two plans had total assets of $91 billion, and total benefits owed of $89 billion, for a surplus of $2 billion.”

    Note that, under Chapter 11, taxpayers would be obligated to pay for any underfunding of the GM pension fund, up to slightly over $50k/year/person. If we assume they only have 100,000 active employees, that means their pension obligations for retirees are for 500k employees as $50k/year/person = $25b/year. That adds up fast, and it completely ignores medical benefits shortfalls that GM clearly has no solution for.

    Here’s another interesting discussion of their debt obligations, which warns of the consequences of going through Chapter 11 (though it ultimately supports the option):

    http://www.voxeu.org/index.php?q=node/2574

    I think it’s dangerous to prop up the company as well, but it’s also worth noting that, barring additional work showing up in the near future, it wouldn’t just be the loss of 125,000 jobs that would affect the economy — there are much broader implications here, especially to the elderly, who are already likely to become a collective financial burden as their retirement funds rapidly disappear.

    Companies like GM have been run into the ground by short-sighted leadership, but it’s perfectly valid to wonder whether we should starve the employees just to make a point to Rick Wagoner — who, I’m sure, is in no danger of actually going bankrupt anytime soon.

  8. odograph says:

    As of this morning GM’s total stock valuation is $1.33 billion.

    We’re used to looking at market cap as total worth, or valuation, but in crony capitalism it’s no longer true. Government “owns” a good part of GM now, and the stock market knows it.

  9. Rick DeMent says:

    Living in Michigan I’m not at all sanguine that more dollars will make GM and Chrysler more solvent. But here’s a few things to think about.

    * Suppliers, contractors, and job shops who are all anywhere from 120 to a yard out on their accounts receivables will immediately go under.

    * all of the business that serve that group and their formerly employed workers will be hit hard and many will close as well.

    * all the salaried retirees will be forced on to the Medicare rolls.

    * The State of Michigan will go belly up.

    * a huge base of our strategic manufacturing base will be sold off piecemeal.

    * Any overstating of the economic situation that the Obama administration has been accused of in the past will now seem prescient.

    While the car companies clearly need some legal wiggle room to contract, it’s seems like bankruptcy would effect everyone in the US in a very negative way. It also might just be what we need to finally push the economy from the “worst since the depression” to the next depression.

    As GM goes, so goes the country. That’s not just a slogan.

  10. markm says:

    $100 billion to save something like 100,000 jobs comes to $1 million per job. This is insanity.

    100,000 isn’t even close to the number that will be unemployed should one or both go under. People not from this area don’t get how far out the reach is. It goes well beyond GM and their suppliers.

  11. sam says:

    100,000 isn’t even close to the number that will be unemployed should one or both go under. People not from this area don’t get how far out the reach is. It goes well beyond GM and their suppliers.

    But it’s all and only about the UAW ™Bithead

  12. Bithead says:

    The UAW makes the big three unprofitable.
    And let’s remember that many if not most of the suppliers are also union dominated… one of the last indiustries to be so.

    Do you really consider that the Big three going belly-up, and kocking the unions out of the box means that we won’t be making cars here anymore?

    I say that sans the Unions, there will be a large number of dollars flowing into starting companies that are not union dominated, and using the tools facilities and talent pools being spoken of here.

    The Union model is unsustainable. That the car makers have to keep coming back to the well shows us that clearly… as if we need the added clues after the last 30 years. The only way out is to dump the unions and whatever gets in the way of that goal, including the Big Three. Funny thing; when Liberals talk about economics, their devotion to ‘sustainability’ goes out the window… why is that, do you suppose?

  13. Rick DeMent says:

    The UAW makes the big three unprofitable.
    And let’s remember that many if not most of the suppliers are also union dominated… one of the last industries to be so.

    What you actually know about it you could stick in a thimble. Non-union salaried workers, guys being paid 150k pulse to shovel stacks of paper form one pile to the next also contribute to the problem in ways you can scarcely imagine.

    The Union model is unsustainable.

    Capitalism is unsustainable, funny, when right wingers talk about economics basic math goes out the window. The problem with the car companies goes way way way beyond the fact that for a relatively short time in labor history the people that actually made the product got something close to a fair share of what the product they made fetched on the open market.

    Seems to me your opposition to the bailout begins and ends with the unions. Almost everyone in the US can thank unions for setting the benchmark for wages in this country which are all artificially inflated due to immigration laws. But hey you go ahead and complain, your job is next I reckon.

  14. Rick DeMent says:

    oh and one other thing … if the unions are to blame I guess that must meant that Toyota and BMW must be making money hand over fist?

    no?

    Damn there goes that theory …

  15. Bithead says:

    What you actually know about it you could stick in a thimble.

    So defensive of unions you need to start with insults? Yeah, there’s a strong position, huh?

    Non-union salaried workers, guys being paid 150k pulse to shovel stacks of paper form one pile to the next also contribute to the problem in ways you can scarcely imagine

    But that happens in every industry to at least some degree, and they survive. What’s different here? Unions. And government, of course.

    Seems to me your opposition to the bailout begins and ends with the unions

    Not at all. But it does seem to me that in the case of the automakers, we’re ignoring the elephant in the room.

    Almost everyone in the US can thank unions for setting the benchmark for wages in this country which are all artificially inflated due to immigration laws.

    Funny how the Unions seem to be working against immigration… and peopel coming from outsdie the country to work. Need links for this?

    oh and one other thing … if the unions are to blame I guess that must meant that Toyota and BMW must be making money hand over fist?

    Funny you should be mentioning that. Their problems are exactly proportional to the amount of involvement with unions, relative to the big three…(And of course the degree of relulation by the federal and state governments) and given their lower depenecy on unionized labor, they’re far more sustainable, having far cash more in reserve, and a far lower debt load.

  16. anjin-san says:

    I am coming to think it would be better to let GM go bankrupt. Looks like we are giving a transfusion to a corpse.

    Interesting that Bit blames the unions for everything. How many union workers were responsible for Merril & Bear Stearns going over a cliff?

  17. Brett A. says:

    If I recall correctly, the original argument for not letting the Big Three go into conventional Chapter 11 bankruptcy was that it would basically be a Death Wish for them. It would be saying, “We’re bankrupt – you can’t count of us to potentially be there with viable warranties and supplies of replacement parts”, and would scare off potential purchasers of cars from the Big Three.

    The problem, of course, would be that investors would also realize this might happen, and would refuse to provide the funding that would enable the Big Three to restructure under Chapter 11, driving them to Chapter 7, where we get all those lovely consequences of a now largely defunct domestic auto industry.

    That’s the argument, at least.

  18. Bithead says:

    Interesting, Anjin, that you use the word ‘everything’ and then try to redefine the word to include things not under discussion.

    Sraw man?

  19. anjin-san says:

    things not under discussion.

    I added them to the discussion. Sorry Skippy, you don’t make the rules.

    Non union companies are crashing just as spectacularly as ones with a large union component. I know that does not fit into your ideology, but thats the way it is. Try and wrap you brain around it.

  20. Bithead says:

    So, you change the subject to your straw man, then accuse me of changing the rules? You have a future in standup comedy, Anjin.

    No sale, though.