Bankruptcy and Bailouts

One of the first major economic tests that may face the next President is whether to use taxpayer funds to keep GM and Chrysler out of bankruptcy.

As talks between General MotorsCorp. and long-time rival Chrysler LLC continued over the weekend, a harsh reality has emerged: Without a merger and possibly an assist from the federal government, two of Detroit’s Big Three auto makers could run out of cash within a year.

At the same time that GM and Chrysler are hemorrhaging, Toyota, Honda and Nissan are manufacturing cars at a profit, paying American workers $22 an hour. There is a reason the bankruptcy statutes are set up the way they are. As we have seen with the Airline industry, they allow a company to renegotiate on good terms obligations that no longer are needed. Leases on unwanted real estate can be shed, union contracts renegotiated, vendor obligations settled. The U.S. government should let GM and Chrysler go into the bankruptcy process and clean up their balance sheets and their obligations before a single dime of taxpayer loans are extended to these companies. As both airlines and department stores have found, getting DIP (debtor in possession) financing after a bankruptcy is still very viable.

GM and Chrysler are in this pickle because their managements were blind to the reality of a changing oil landscape. Even if gas falls back to $2.25/gallon in this long recession, the days of the Chevy Suburban getting 14 MPG are over. When these two companies go through the creative destruction and prove to America that they can make cars for the next century, they may be deserving of some government loans.

This entry was posted in Advertising, Barack Obama, Business, Economics, Energy Policy, Innovation, Politics, Recession, Wall Street and tagged , , , . Bookmark the permalink.

0 Responses to Bankruptcy and Bailouts

  1. whenelvisdied says:

    I’m not a bankruptcy expert, but I would only support bankruptcy proceedings for GM and Chrystler if worker protections were built into the bankruptcy process. The first thing that GM would insist on cutting and trimming is their workers pensions, health-care, job training, etc… Someone will need to stand over their shoulder as they wield the scalpel and make sure they don’t cut into workers life-support.

  2. pond says:

    I don’t think GM, Ford were ‘blind’ to a changing world. I’d prefer to put it that they didn’t cover all their bases, and were ‘imprudent’ in laying out their vehicle lineups.

    I took a course with Art Murphy at USC-Cinema a few years back. One of his theses was that a film studio does best financially when it puts out films on all levels of the market: the big-budget A pix for Oscar contention, actioners, oaters, low-budget comedies, and so on.

    In the same vein, GM should have stayed in the small econo-car market here. They have the designs all ready: cars they make for Europe and Asia. Making a token number of those cars in North America would have preserved these badges as ‘brands’ with public awareness, and positioned GM to be able to expand the market, y’know … in case of another mid-east war, or oil embargo, or other cause of oil price shooting up.

    (Ford on the other hand was just about to close down the factory making their only North American small econocar, when the price of gas shot up, and the plant quickly went into overdrive. This might have been the fate of a GM-Opel North American subcompact.)

    For the rest, GM had dug its own grave in other fronts: they did waste the money President Clinton gave them and the other US automakers to invent a supercar back in the mid-90s. And they talked up the Autonomy – an electric car powered by fuel cell – at the same time they were doing their best to kill their EV1 electric car powered by batteries. But common sense tells you that all experience with electric cars helps you design and manufacture all other electric cars. Continuing EV1 while awaiting a practical fuel cell for Autonomy would have put GM way ahead of its competitors.

    Manufacturing tanks was not, however, a mistake. GM not only made money on those monster SUVs, they made 10-20 grand on each and every one of them! Impossible to fault them for digging into that gold mine.

    But they should have used that gold to position themselves to be able to take on the future in any form it took.

  3. <>

    The fuel cell car thing started really rolling under W. Coincidentally a Houston-based university was doing a ton of fuel-cell research at the time.

    And when it comes to electric cars with batteries, common sense is, if not flat out wrong, at least not as simple as it would seem. The trade-offs between power (oomph), mileage, safety, and cost are numerous and complex. Additionally, the engineering and design differences between hybrids like the Prius, ‘plug-in’ hybrids, and pure electric plug-in cars complicate matters further.

    Europe kicked our butts on this by deciding early on to focus on clean, quiet, high MPG diesel technology. The American auto industry, even this late in the game, is still gambling to pick a winner (they did this with SUVs and it worked) instead of training a winning horse (picking a good technology and working their butts off to design and market great cars).

    Japan is kicking our butt on hybrids because they’ve been investing in advanced battery research (and other important aspects of EV design) for a long, long time (longer than this issue has been on most of America’s radar). It’s called “long-term thinking” and Detroit, like Wall Street, sucks at it.

  4. Webb Traverse says:

    If GM went into bankruptcy and was able to relinquish its pension obligatons, it would then be attractive for a buyout by one of the companies that can manufacture cars in American plants with American workers for a profit – Honda, Toyota, BMW, Mercedes, Kia, Hyundai, etc. It’s unfortunate but true – until the pension is gone, GM would not be worth having even for free.

  5. museincognito says:

    Somewhat related…

    Just after the start of the Iraq war, my father, business owner, was looking into a new vehicle. I remember finding it rather “odd” that there was some sort tax incentive for businesses to purchase any from a certain list. Every single one of them was a behemoth gas guzzler.

  6. Those good old “free” markets at work again…not.

  7. Rick Turner says:

    The problem with fuel cells and the so-called Hydrogen Economy is that it requires a massive infrastructure that we don’t have and it is an infrastructure too easily monopolized and gamed just like oil/gasoline is now. I think that plug-in hybrids are the answer, at least for the near future, with the plug-in capability being totally compatible with solar, wind, hydro, or whatever alternative you like, and the cars being compatible with the electric grid.

    I haven’t seen the figures on average daily miles driven in the US, but I’d bet it’s less than the 60 or so that current plug-in hybrid systems allow for.

  8. Rick, I’m with you and DOE is, as we speak, putting some ‘energy’ into investigating the effects widespread adoption of plug-in hybrids would have on the grid (both positive and negative).

    I hope that Americans can make the mental shift from the kind of car that meets their actual driving needs and what they want, which is culture and marketing driven. At least two parents at my kids’ school use Hummers as their grocery getters.

  9. Rick Turner says:

    My ex-bookkeeper drove a Hummer to work and back…a whole 20 mile round trip at what, 12 mpg of basically city driving? Her husband had one, too, and they had an Internet biz selling gee-gaws and accessories for Hummers… I didn’t get it.

  10. I’ll never get it. We have the RMT (redneck monster truck), but it goes off road and pulls an RV when my husband goes hunting…it also tows my car if it breaks down (not lately) and has been known to rescue other stranded vehicles (on or off road) and hauls crap we need for the house. I still hate that it’s the husband’s commuter (and he doesn’t love it either). But I’m a total beeyatch about having two drivers and three vehicles.

  11. Zhirem says:

    Folks, the Hydrogen economy is a myth. At least right now.

    Hydrogen is an energy carrier, like petroleum.

    Here is the thing to keep in mind:

    Only *one* country on Earth has the wherewithal to set up and make a go of a hydrogen economy: Iceland. For the sole reason that they sit astride the greatest density of geo-thermal energy of anywhere on the planet. They can go hydrogen, because they have thermal energy in spades, for loooooong into the future.

    The rest of us: Hydrogen requires (again, at this point) more energy required in the ‘creation’ of hydrogen, than we can get out of it. It is a net negative energy carrier.

    It is possible, with some of the research I have been reading about, that carbon nanotubes may be a good means of storing it, making it a possible battery-like solution. But then again, the creation process needs to be energy efficient enough to be viable.

    Right now, it is not.

    – Zhirem

  12. Rick Turner says:

    It’s another scam to gain a monopoly on an energy delivery system.

  13. It’s also a red herring to keep people thinking there’s going to be something “way cooler” than boring old electric or diesel cars while they keep driving Detroit-made behemoths.

  14. Jesse C says:

    Hydrogen = water + energy. It is that simple. Storage is another issue. But any nation in the world could go hydrogen without any real problems as long as storage is solved. Obviously burning fossil fuels to make hydrogen is a losing proposition from an automobile perspective. But using solar/wind/nuclear/geothermal/hydro to make hydrogen is not a losing proposition as long as there is way to power cars with it.

    If the US wants to be serious about a hydrogen economy, we need to start building nukes and solar farms right now to power it. We should also be building fueling stations that will run off the grid NOW, so that the infrastructure is already in place when the clean fuel sources come online. For now, fueling stations will mostly run off NG and Coal (since that is our energy infrastucture), which sucks but really isn’t any worse than burning petroleum in cars.

    But the obvious and immediate problem is that we need to change our primary sources of energy away from fossil fuels. If the end result is conventional batteries or hydrogen doesn’t matter all that much.

  15. Dan says:

    I know I sound like a broken record on this subject, but building nuclear plants to solve our energy problems is like mainlining heroin to break an Oreo addiction. If there is one thing for which the future will curse us, it is the nuclear cesspool we’ve been creating for the past 50 years.

  16. Patrick says:

    Automotive technology is bound by the laws of physics, like so much other stuff in our lives. This is often inconvenient, but not likely to change. For a coherent and readable discussion of the likelihood of hydrogen-powered cars, or electric cars, or other technologies, I recommend Richard A. Muller’s book Physics for future presidents : the science behind the headlines.

    Muller’s (a physicist) bottom line is basically that the best bet for the near- and mid-term is modern, clean diesel technology, just like the Old Europeans have already. Electric vehicles are severely limited by battery technology, and physics, for anything other than short-distance commuting. Buyers of hybrid cars are in for a $$ shock when they have to replace their batteries at some point. At the very least, that will make hybrids unappealing as used cars after a certain age. There may be other technologies on the horizon that make hydrogen fuel cells useful for generalized earthbound applications, but they are not here yet, and may not arrive anytime soon.

  17. Rick Turner says:

    Agreed that battery technology is the major issue, but if you look at the average mileage per day, then hybrids (and they can be clean diesel hybrids) make sense for a lot of people. I only drive over 40 miles at a time a few times a month, for instance, so a plug-in hybrid would probably only kick into internal combustion at those times. I’ll bet that would be true for a lot of folks.

    At this point, I’m looking seriously at one of the “hybrid” electric bicycles. The hybrid part is leg power. Range about 20 miles on electric alone, and more if you pedal more. That would cover me for much of the time, and now that it doesn’t rain anymore in California it would be good year round…

  18. Tom Wilmot says:

    I’m guessing most of the folks participating in this thread live in the west – land of sprawl.

    This is a LARGE part of the problem no one is really talking about – suburbs on suburbs on suburbs with no logical intermix of business/residential in them. Since the end of WWII America became a car culture and we’re having a very hard time letting go of the concept.

    Prior to the post-war boom, most cities, east or west, had numerous forms of public transit – trolleys, bus lines, etc. Additionally, folks actually WALKED quite a bit. Urban planners prior to the end of the war usually looked at logical mixes of residential/business zoning as to reduce the public’s need on transport systems.

    That’s starting to come back into play in some areas, but it’s a critical component of reducing energy dependence.

    I hope that part of the next administration’s energy plan includes the revival of passenger trains, diesel bus lines for rural areas and incentives for urban mix planning/zoning.

    The best way to reduce energy consumption and environmental impact of vehicles it to reduce one’s dependence on them.

    Instead of worrying about the trees, maybe we should focus on the forest.

  19. Alex Bowles says:

    GM’s real problem is that it has 145,000 workers on the payroll, and 600,000 pensions to cover.

    Which means they’re not really car company at all – they’re a retirement plan that makes cars to fund their generous pension obligations.

    And that’s why they’ve focused so much energy on SUVs – for better or worse, these are the only vehicles they can sell at a high enough margin to satisfy their constituency of retirees.

    It would be an uncomfortably exposed position for any management group to find itself in. But when you’re as bad as the group running GM, it’s potentially fatal.

  20. Jon Taplin says:

    I didn’t even get into the stupidity of GM trying to merge with Chrysler. They claim it’s because Chrysler has $11 billion of cash. They are private, so I don’t have the number but I guarantee you their debt is probably $20 billion.

  21. Rick Turner says:

    Well, now…Come the GM bankruptcy and you’ll see a real bail-out attempt. That private retirement fund idea so beloved by the Repukelicans will turn into a triple scale Social Security bailout as quick as you can say Jumpin’ Jack Flash. Wanna bet if it gets covered or not by the tax payers? Oh…that’s us…

    So is the Detroit bailout really a retirement bailout? In which case it’s a piss-poor investment into the future…

    But I’m writing as someone who has known for years that I don’t get no stinkin’ retirement plan because I chose to live the artist/craftsman life. I get to work ’til I die, and that’s just fine. But to quote Pete Townsend, “Hope I die before I get old…talkin’ ’bout my generation…”

  22. Zhirem says:

    Jesse: You are not *hearing* me. Right now, the hydrogen creation process is an extremely inefficient means of providing energy.

    It is a *net* negative. So, the energy required to create the hydrogen, is significantly greater than the energy it is possible to get *out* of the hydrogen via a fuel cell.

    Why take the electricity, generated from renewable sources (solar, wind), and expend tremendous amounts of it to create hydrogen, which will (even if we have fantastic, lossless storage), provide much less energy output than the energy input required to create it?

    Why would societies not utilize the electricity derived from the first renewable source as electricity to power whatever?

    You are right, that either battery or fuel cell will be great to have, but reason would dictate that we pursue battery technology before fuel cells, because even if we had the best fuel cells possible, the creation of hydrogen would *still* be the problem…

    – Zhirem

  23. JR says:

    I don’t mean to be oblivious to the plight of the Chrysler workers, but why do we want to bail out Cerberus?

  24. Rick Turner says:

    Hydrogen fuel cells are just a means of storing energy that is generated some other way. All energy storage systems have losses, and so it’s becomes a matter of figuring out what storage systems have the least loss and are compatible with a world in which we want to live. With hydrogen, you not only have to extract it, generally from water, but you then have to compress it and store it under considerable pressure. There are a lot of serious safety considerations; the stuff is explosively flammable in the presence of oxygen, and I’m not sure I want to be driving around on streets full of potential bombs.

  25. Jesse C says:

    @Zhirem. Charging a battery is net negative. Sending electricity over shitty wiring into communities is net negative. Anytime you convert energy from one form to another, you lose energy. Is hydrogen more inefficient than charging a battery? I actually have no idea. I’ll take your word for it (if you have a suggestion on something to read about the topic, I’d love to hear it).

    But I think there are real limitations to battery technology. Recharge times, weight, and the use of scarce/toxic metals all come immediately to mind. There was a really interesting article in Wired about a plan in Israel to make batteries a commodity that you essentially lease the rights to, so you if you need an immediate recharge (no time to actually recharge) , you can just pull into a garage and get a 5 minute battery swap. Something like that might work, since it is removing the cost of dealing with battery technology from the user.

    Obviously hydrogen has a bunch of problems as well. But every safety test I’ve seen on fuel-cell cars has shown them to be safer than gasoline engines (considering you now drive around on a street full of potential bombs).

    But as I said, the end product is the least of the concerns, the initial generation method is the most important.

    @Dan. Nuclear waste issues are overblown, IMO, when compared to global warming issues. Nuclear waste can be reprocessed and reused as fuel. Our abilities to do that is only going to get better as the science improves. In the end, we will have to deal with a large amount of highly radioactive material. That is not a small challenge, but it is much smaller challenge than having to deal with massive sea-level change and a destruction of the earth’s food producing capabilities, not to mention a loss of a substantial portion of the habitable territory. There is no other non-fossil fuel alternative that can produce enough energy right now. We should be full-steam ahead on solar (since wind is never going to be enough), tidal, and geothermal right now. But baring some awesome breakthrough (and solar looks like it might be near), those aren’t going to be enough right now. I don’t like nuclear energy. But I do think it needs to be part of the cluster of solutions we use to eliminate (completely) fossil fuel.

Leave a Reply