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The Road to a Bailout They Don't Deserve

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By Steven Pearlstein
Wednesday, September 3, 2008

It's desperation time for the Big Three automakers. They are awash in gas-guzzling vehicles nobody wants to buy, bleeding red ink and running out of cash.

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So it should be no surprise that when Congress returns next week, the companies and their unions will put on a full-court press to win approval for $50 billion in federal loans to be used to re-engineer and retool their plants for a new generation of energy-efficient vehicles.

With the auto-dependent states of Michigan, Ohio and Indiana up for grabs in November, the Big Three hope to use the political calendar to their full advantage. They've already won the backing of both of the presidential candidates, along with House Speaker Nancy Pelosi, who promises quick action this fall. And while the White House has indicated its reluctance to involve the government in the rescue of yet another industry, it may have a hard time explaining why the automakers are any less deserving of a "bailout" than Wall Street investment banks or Fannie Mae and Freddie Mac.

The foundation for this effort was quietly laid last year in a little-noted provision tucked into the energy bill passed by Congress and signed by the president, providing for $25 billion in loans. Although any company producing autos in the United States could qualify for the loans, priority was given to those retooling plants that were more than 20 years old, which pretty much guarantees that most of the money will go the Ford, Chrysler, General Motors and their suppliers.

Since passage of the energy bill, things have only gone from bad to worse for the Big Three, due to the credit crunch, an economic downturn and $4-a-gallon gasoline. So the industry and its supporters will try to expand the program to $50 billion and provide the necessary funding in the omnibus spending bill that will be needed before the election to prevent a government shutdown.

Even before top industry executives arrive in Washington later this month to lobby for their program, General Motors' vice chairman, Robert Lutz, who never misses an opportunity to put his foot in his mouth, was telling reporters in Chicago last week that the industry "deserves" government loans because of all the challenges that have been inflicted upon it. In fact, it's hard to imagine an industry less deserving of government help.

Here are three companies that for decades failed to produce cars that were well designed, well produced and exciting to look at, that fought tooth and nail against efforts to require greater fuel efficiency and, until recently, did too little to bring wages, benefits and retiree costs in line with competitive realities. And while they whined for years that it was unfair trade that put them at a disadvantage, Toyota, Honda, BMW and other foreign transplants came along to prove that it is possible to produce quality cars at affordable prices in U.S. factories while offering decent wages and benefits.

Not only are the Big Three not deserving, but to help them out of their current predicament would also set a lousy precedent in a market-driven economy where the possibility of earning great wealth is supposed to be balanced against the possibility of failure. For the government to step in and put up $50 billion in loans to try to save the Big Three auto companies, after having done little or nothing to save the jobs of steelworkers and shoemakers and furniture craftsmen, would be patently unfair.

And yet it is probably the wise thing to do.

This is a uniquely inopportune time for these three giant companies, with their hundreds of thousands of employees and vast national network of suppliers and distributors, to be forced to go through the painful process of bankruptcy reorganization. The national economy is already looking at years of recession and stagnation due to the worst housing and financial crisis since the 1930s, while the economy in much of the industrialized Midwest is already in its own depression.

If one of these companies is forced into bankruptcy, the other two are almost certain to follow, resulting in massive layoffs and plant closures, a hit to the incomes of millions of retirees and another body blow to wounded banks and credit markets that have lent the Big Three hundreds of billions of dollars. It would also dump tens of billions of dollars in pension liabilities on the federal government's pension guarantee agency.

Is bankruptcy inevitable? It's hard to say. What is certain, however, is that if these companies are to have any chance of long-term survival, they will need to invest large sums over many years to develop new technology, redesign their cars, retool their plants and buy out even more workers and dealerships. And right now, it's not clear where the money would come from. Because of operating losses, they are burning through cash like a Hummer running on unleaded premium. And given the pickle that the hedge fund geniuses at Cerberus now find themselves in with their purchase of Chrysler, the chances of raising any additional equity capital are pretty close to zero. Borrowing money might still be a possibility, but the cost would be prohibitive: On credit markets yesterday, some Ford bonds were yielding close to 20 percent, some GM bonds more than 28.

That's why the best of a set of bad options might be for the government to step in and provide the Big Three with low-interest long-term loans, just as it did years ago with Lockheed and Chrysler. The government should insist that its loans get first priority and be used only for investment in new technology that can be shared with competitors, or in new plants and equipment that could be sold to other car companies in the event of a bankruptcy. The government might also insist on further cuts in shareholder dividends, executive salaries, blue-collar wages and retiree benefits, at least until the current crisis has passed.

Can we be assured that, after the Big Three, no other industry will step forward and demand that the government rescue it from its own misjudgments? Unfortunately not. This is what happens when asset bubbles develop, countries live beyond their means -- and then, inevitably, the bubble bursts and economic reality finally reasserts itself. Now the bill is coming due. The only thing left to be resolved is how it will be paid.


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