Editorial -- A Plausible Plan to Rescue the Automakers

Thursday, December 11, 2008

THE IMPENDING collapse of at least two of the Big Three U.S. automakers, General Motors and Chrysler, is not the sort of crisis that lends itself to a formulaic response. If this were a different, more prosperous time, the best option might be to let the companies file for Chapter 11 bankruptcy and work out a new business plan under a judge's supervision -- a bit of creative destruction.

But under current circumstances -- a historic credit crisis and rapidly accelerating economic downturn -- the destruction wrought by a sudden, simultaneous bankruptcy of GM and Chrysler might not be at all creative. Such an outcome is worth trying to avoid, even at some cost to taxpayers, as long as the aid is tightly conditioned on a credible reorganization plan. But Congress should not use this crisis to pile all sorts of new mandates on the car companies, such as overly specific fuel efficiency targets. Here's the needle that the government must thread: Fund a second chance for the companies, without either leaving them free to mismanage themselves into another bailout or putting federal officials in charge of microscopic business decisions.

Under a plan proposed by the Bush administration and congressional leaders, and approved by the House last night, GM and Chrysler would get a $15 billion loan to fund their operations until March 31, 2009. (Ford has said it has enough cash for the time being.) In return, the companies would submit to the supervision of a presidential appointee, informally known as the "car czar" or -- as we prefer -- the "autocrat." The autocrat would then make sure that the carmakers, the United Auto Workers, bondholders, parts suppliers and other stakeholders contribute the sacrifices needed to make the two companies viable now and competitive in the future. If March 31 arrives and there is no deal, the autocrat must call the loans and consign the companies to their fates.

The plan does draw a clear bottom line for the companies: They would have to chart a course to positive net present value, meaning that their reasonably foreseeable cash flows would exceed the government's investment. A weakness of the proposal, however, is that it does not spell out the actual concessions to be made. We don't see how the companies can ensure their viability unless creditors convert much of their debt to equity -- and the UAW both takes equity in lieu of payments to its retiree health fund and surrenders its current wage and benefit advantage over nonunion foreign-owned factories. This shortcoming should be addressed as the bill makes its way through a skeptical House and Senate.

What has emerged so far is hardly a risk-free framework. Once federal dollars start to flow, it will be that much harder to force GM, Chrysler and the UAW to keep any promises they made to secure the cash. But the fact that the March 31 deadline is firm and enforceable by a single official gives the various stakeholders relatively little wiggle room -- and makes this a fair substitute for actual bankruptcy. Appropriately modified, it might work.

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