Sunday, November 16, 2008

Saving the U. S. Auto Industry

One of the biggest and most controversial issues to be discussed and negotiated next week in Washington, D. C. is whether and how the U. S. taxpayers should help our three major auto industry manufacturers, General Motors, Ford and Chrysler, with a large financial bailout in order to give them a better chance to survive and thereby to save hundreds of thousands of jobs.

GM seems to be leading the very weak industry in lobbying aggressively with federal officials for urgent help, suggesting bluntly in recent weeks that without government aid the company will probably have to file for bankruptcy some time next year, and that this would cause a massive chain reaction causing irreparable harm to the entire industry and consequent further damage to the U. S. economy as a whole. It's quite obvious that the Democratic leadership in Congress plans to move forward with bailout legislation already this week. Senate Majority Leader Harry Reid has indicated he will move forward with a bill which would give the auto industry access to the $700 billion Troubled Asset Relief Program (TARP) approved by the Congress last month to help ailing banks and other financial firms.

The Bush Administration and quite a few Republican senators reportedly will oppose this bill. President Bush instead has urged the Congress to speed up releasing $25 billion in already approved loans to the auto industry and dropping pending requirements that these loans be used specifically to help the industry retool their factories to meet higher fuel economy standards.

President-Elect Obama indicated in a "60 Minutes" interview played yesterday that, while he would not normally support a bailout to any private sector company, these are extraordinary times with our economy in crisis, and he would therefore support federal aid under certain conditions. These would include, as I recall, an agreement by the principal stakeholders (management, shareholders, bondholders, and the United Auto Workers) that would provide the government and taxpayers reasonable assurance that the company should have an ability to operate successfully in the longer term.

Personally I have very mixed feelings about any federal bailout, though I acknowledge that a bankruptcy by either GM or Ford would likely be such that the industry as we know it today would likely collapse. However, even in that case I'm confident that a new smaller and more focused auto industry would arise through initiatives of entrepreneurs and private equity funds. The main problems with a bailout, as I and many others see it, are that it's very difficult to be certain that a bailout will succeed, that much more money will not be needed later, and that it would make it much more difficult politically to say no to other important industries needing bailout assistance.

That said, I'd be reluctantly open to supporting a bailout along the lines proposed by Barack Obama, but with some more substantive stronger conditions. I'd want to have the bailout subject to a limited industry study and an associated compelling business plan written by neutral experts, agreed to in writing by senior representatives of all the stakeholders, and approved by the U. S. Senate and the President. It wouldn't be easy, but that work could be done in three months if put on a fast track by the key players. I'd also want the bailout to include a meaningful equity stake, say 25-40%, for the government on behalf of U. S. taxpayers. Whether it also would make sense to require some interest or dividend returns to the government I don't know, but would leave to the negotiators, and clearly that issue would depend on the specific structure of any deal arrived at.

Finally, while less important than the first two conditions, there should be specific limits to executive management compensation for existing personnel, but not necessarily if new management is brought in. Salary compensation should in either case be relatively modest, but meaningful financial incentives should be incorporated to provide adequate inducements for success.

3 comments:

varniklili said...

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Recommended!

Shel Bachus said...

Given the premise behind a market economy, Knut's position is really the only logical one possible. I agree with him completely, and suggest an additional alternative to the corporate welfare state. How about having the oil companies fund Chrysler and GM's bailout?

Viking Views said...

I would be OK with the U. S. oil companies volunteering to bailout our auto industry, but I greatly doubt they would volunteer. However, they certainly appear to have the cash and could possibly be induced through meaningful tax credits to make significant equity investments in the industry alongside a conditional federal loan bailout package. Realistically, though, it's too late for that to be even considered, at least for the first phase of the rescue initiatives.