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.