A Brighter Bailout?

Sunday, December 7, 2008

THE PROSPECT of a hanging for the U.S. auto industry has at last concentrated some minds on Capitol Hill. For weeks, House Speaker Nancy Pelosi (D-Calif.) has been insisting that a bailout come from the Treasury Department's Troubled Assets Relief Program, not a $25 billion fund earmarked for fuel-efficiency improvements as President Bush insisted. Now, though, she has relented, apparently recognizing that Detroit can't build a new generation of cars if it's out of business. As a result, congressional leaders and the White House have agreed in principle to use roughly $15 billion of the fuel-efficiency money to keep General Motors and Chrysler alive until March 31 -- by which time a new Congress and a new president can fashion a permanent solution.

Difficult as it was, breaking this political deadlock was easy compared to what the federal government has to do next: Cut a deal that gives the industry a chance at long-term survival without setting the taxpayer up for a soaking.

Last week's hearings on Capitol Hill have at least clarified the issues. Barring economic calamity, Ford seems to be salvageable without massive government aid. Chrysler is so far gone that it should be encouraged to merge with another company and government loans it receives now must be paid back as part of that consolidation. The heart of the problem is GM, which could have a future and whose collapse could do serious collateral damage to an economy that lost 533,000 jobs last month.

How to save it? There's no point in a rescue that does not unequivocally deal with GM's $62 billion debt, as well as its labor costs. In well-informed comments during the Senate Banking Committee's hearing Thursday, businessman-turned-senator Bob Corker (R-Tenn.) provided the basis for such a package. GM's bondholders must sell out for 30 cents on the dollar (roughly the current market value of the company's 2011 bonds). The United Auto Workers must not only suspend a program that requires the company to pay laid-off workers, and defer GM's contributions to a retiree health fund -- as the UAW has already reluctantly offered. The UAW must also convert half of GM's $23 billion debt to the UAW health fund into equity and agree to bring the wages and benefits of its active members into line with those of nonunion workers at foreign-owned plants, immediately. If GM, the union and the bondholders don't get it done by March 31, then the government would get its money back and the company would go bankrupt.

Mr. Corker's words were those of a problem solver, not a bailout basher: This is the attitude that should govern the deliberations to come. He is a Republican in what is soon to be a thoroughly Democratic town, but many Democrats share his skepticism toward an industry that has lost the public's affection and trust, however necessary auto making may be to the U.S. economy. And, of course, no solution can pass without bipartisan support. GM, the UAW and the company's stakeholders have no leverage. Their only alternative to a strictly conditioned loan is bankruptcy. If Congress and the White House deal with them accordingly, the result could be a much smaller but sustainable company. If not, nothing will be achieved but a tremendous waste of taxpayer money, the demise of the U.S. auto industry -- or both.

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