Pearlstein: The Auto Bailout
Wednesday, December 3, 2008; 2:00 PM
Washington Post columnist Steven Pearlstein was online Wednesday, Dec. 3 at 2:00 p.m. ET to discuss the automotive bailout.
A transcript follows.
About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.
Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.
Read Pearlstein's latest columns.
Atlanta, Ga.: Well, I definitely respect your opinion and think you were mainly correct in the opinion of helping out financial institutions, etc. But I'm getting VERY TIRED of borrowing from my grandchildren (my kids are elementary school age) - and thinking that all is okay. It is ridiculous to think that we should keep bailing companies out. So of course companies will become riskier and riskier when they know that Uncle Sam is there waiting to bail them out. What are we teaching our children? That we don't want to forgo cell phones and cable so we'll just bail everyone out (and borrow more) when things get tough? NO we need to teach lessons, and those are not the ones I want to teach. I want everyone to live within their means and be responsible for their actions. Why are we in this mess? Because we have an irresponsible government who just borrows when times are tough - so everyone else thinks they can borrow too. We have a government who got us into this mess with their lax regulation in parts of the economy and overregulation in other parts - and typically making the mess worse at every step. Then we're supposed to believe that they can come in and 'fix' everything? Lousy job they've done so far. Of course, the voting public is no better. 98% of our reps get voted back into office. Cause everyone thinks 'their' guy is fine, it's the others that are terrible.
Steven Pearlstein: No doubt about it, this is a lousy precedent. These are not the most deserving companies in the world, given their past history of poor business performance and high costs. And the money we lend to them will be borrowed money. But remember, in this case if the loan is structured well and works to save the companies and is repaid, with interest along with a share of the companies, then, in fact, your grandchildren will be better off than if no loan is made. Think of it as an investment -- and then ask the question, is it a wise investment?
Cleveland, Ohio: Much is made of the term "US" auto makers. However, I think that the "foreign" makers such as Toyota ,Honda, BMW etc. employ large numbers of US workers and support a large infrastructure of suppliers, dealers and repair shops. How do their numbers compare to the Big 3 numbers? And if they are close to the same size, is not there a (legal) case that they need equivalent "help"? In a normal competitive situation, the stronger competitor would absorb the weaker. In this case it seems that one (relative) US company is in a position to absorb another and the bailout is thwarting competition.
Steven Pearlstein: Well, the bailout would certainly prevent, or at least delay, the kind of Darwinian process you describe, in which business would shift from one or more of the Detroit Three to other makers, including transplants. That would happen eventually, but the process would be extremely disruptive to workers, communities, suppliers, lenders, etc. Normally, we like that kind of thing to happen in the US, and we tolerate the disruption and provide some safety net for the most vulnerable of the losers. But in the current economic environment, a disruption and transition of this size would be just too much for the system to take, in the opinion of many people. So that is the dilemma.
Right now, the transplants don't need help because they don't have a large and inflexible set of fixed costs, like a large base of retirees, and because they can more easily scale their production to the lower level of demand. They also have built up years of retained earnings which they can draw on if they are losing money for a while, thanks to their more successful management. So they probably don't need help.
Golden, Colo.: Don't you think that a bailout of the three auto makers is just a way of delaying the inevitable? The billions they want, and considering the billions they are spending now to meet basic financial requirements, will not help them but the total will only serve as a bridge loan until they file for bankruptcy. This is especially true for GM. There is no oversight of the program and the money will be gone in about six months and the taxpayer will be holding the bag. Don't give them the money but let the chips fall where they may!!!
Steven Pearlstein: No, I don't think the failure of all three is inevitable. I think there is an open question as to the viability of an independent Chrysler -- the company all but said as much itself in its filing with the Congress. But Ford and GM have enough brand equity, have a good set of workers and suppliers and dealers and have finally begun to build some good cars, in addition to their popular trucks and SUVs. So don't write them off.
What I think both companies need to consider is whether they need to bring more fresh blood into the top management of the company. The industry is just so insular that it has a hard time conceiving of different ways of doing business. It needs a cultural overhaul. It needs more east coast and west coast. It needs more entrepreneurial instinct. It needs more people who say, "This is a crazy way to do this and we're just not going to do it any more, and I don't care what the union or the suppliers or the dealers think."
St. Paul, Minn.: Why doesn't congress require industry execs and members of the boards of directors to make substantial -- say 75% of net worth -- unsecured loans to their companies in exchange for taxpayer loans, guarantees, or whatever form a bailout will take?
Steven Pearlstein: That's really not possible and it won't amount to a hill of beans. It is important in this conversation not to get fixated on executive compensation. It has symbolic importance, and no financial importance at all. This is not an industry that has been one of the big abusers in this area. We need to move on to more important issues.
McLean, Va.: Thanks so much for taking questions. I appreciate your perspective. So--how to avoid more bailouts? I propose that "too big to fail"='too big to exist'. If a company is so large that its failure cannot be tolerated, it is a monopoly in restraint of trade. It can and will take risks that smaller companies, unprotected by the government cannot. This prevents fair competition from the smaller companies. I'm thinking of Citi and AIG in particular, though GM could fit the bill.
Thanks for your thoughts.
Steven Pearlstein: I wrote such a column myself last week, asking if Citigroup is too big to manage. But it is not true that because it is too big to be allowed to fail, it is a prima facia case of monopoly. Mostly these are too interconnected to fail, which is the problem of systemic risk. I don't think we need to go around and start breaking up all these giants that we've spent the last 30 years putting together. The investment bankers would love it, but I don't think that would accomplish much. Better to regulate them and give the investors the power to make sure they are run well.
Bend, Ore.: If auto sales are down worldwide, how do the United States auto makers propose to repay their bridge loans? Could the U.S. government use a foreclosed upon Ford plant in Brazil?
I would much rather see 25 billion dollars used to support and retrain a workforce of the future. It seems to me that the financial crisis could be a catalyst for development of new cleaner, and less expensive auto technology. Also, newer auto plants like the Ford robotic plant in Brazil will not benefit the U.S. worker.
Is not the handwriting on the wall? Other economies are passing the U.S. economy. To be competitive, the U.S. must lead the way to a cleaner less expensive product produced within its own borders. That revolution will not occur without the foresight of a new "Henry Ford."
Steven Pearlstein: Again, I don't think there is any handwriting on the wall.
Beijing, China: From US LOVING CITIZEN BASED IN CHINA
Cheap gas in the US has created huge demand for relatively larger and relatively less fuel efficient vehicles than those found in Europe & Japan where gas prices are, by tax policy HIGH... US Congress bears responsibility for maintaining a "cheap gas" environment and needs to immediately address this huge competitive DISadvantage if the US is to have a sustainable auto industry while at the same time providing stable incentives for alternative forms of energy, including automotive.
A second MAJOR cost disadvantage for ALL US industry is the lack of a national health program. European nations and Japan have this and US companies are excessively burdened by the lack of a comparable US policy... AGAIN, US CONGRESS bears responsibility for getting this done.
DOES CONGRESS GET IT???
Steven Pearlstein: Interesting perspectives. Thanks.
London, England: Ford has some very able senior executives one level down from the entrenched Detroit people - for example Lewis Booth who turned around Ford of Europe with great leadership and people skills. I'd feel more comfortable giving bailout money to the Detroit Automakers if they got rid of the current entrenched "Detroit old guys" and let some of the next level run the show. What is being proposed about updating the leadership teams in return for the capital injection? Why should Detroit require more sacrifices from it's union workers when the real need is bold and decisive leadership at the top to make the decisions now they should have made 20 years ago when Toyota was showing the world how auto companies could be run?
Steven Pearlstein: There's a lot of wisdom there. Thanks.
Riyadh, Saudi Arabia: Dear MR. Pearlstein, I am an admirer of your great articles, I wish you write an extended one on the state of the stock market in inflationary environment. I know it is not related to this subject matter, but I saw recently on CNBC, and I liked your approach to things. Warm Regards
Steven Pearlstein: Thanks. You never know where you're gonna pick up a fan.
New York, N.Y.: Steve, I have a low opinion of Bob Nardelli, even compared to the other Big-3 execs. His C-level history is shabby at best, and severely damaged Home Depot and now Chrysler. And we all know that if their investment had panned out profitably, Cerberus would do everything in its power to avoid paying taxes, abandon its workers, and hand out massive bonuses to its executive team.
Bethany McLean said -- and I'm sure plenty of others have, too -- that in today's version of US capitalism, profit is private, but losses are pawned off on the public. I think Ford and GM have made massive mistakes and will pay the price for that. But Cerberus made deliberate decisions, took deliberate risks, took Chrysler private, hired a not-good executive, and hoped to simply sell off the company for parts at their first opportunity. It didn't work. Why is that my problem? Or yours? Cerberus sure won't bail out one of its own companies with its own capital. None of this is 'fair', but this idea of bailing out Cerberus just stinks on ice. Why doesn't someone tell these guys, a la Gerald Ford, to 'drop dead'?
Steven Pearlstein: I sort of tried to suggest that this morning, although unlike you, I pulled my punches (uncharacteristically). If we can make a loan, however, that would repaid upon the sale of the company and/or its assets, then it might be a smart thing to do, as long as none of the benefits go to Cerberus.
Fort Worth, Tex.: Hi Steven, thanks for these chats. While everyone seems to agree that all these loans/bailouts/free money handouts are necessary, at what point will the world realize that we have no intention of ever paying back this debt? In good times we spend and in bad times we spend even more. I'm young and worried, especially as one of the few monetarists left. Even Keynes knew that you have to pay the piper at some point.
Steven Pearlstein: We need eventually to worry about paying down the debt. But you need to remember this is a big, rich country. It was only a few years ago that the chairman of the Federal Reserve was worrying about the "problem" of having paid off the debt and having no Treasury bills and bonds outstanding with which to conduct monetary policy. So if we set out, once this crisis has passed, to pay down that debt, we can do it within a decade if we want to sacrifice just a small amount of current consumption and pay the necessary taxes. This isn't a mathematic puzzle. It's a political one.
Pinckney, Mich.: First thing...It's not a bailout, it's a loan. Second....a few questions for the honorable members of Congress. Do you understand how low your approval rating is? Where were you while the economy was falling apart? Based on your lack of successful performance over the last 8 years, are you willing to work for $1 in 2009? How did you travel from and return to Washington D.C. over the Thanksgiving holiday? Have you ever traveled in a private jet? Who paid for it? Do you research issues thoroughly before you speak on them, be honest, at least on this one. These are a few things you worthy legislators should consider before you rejoin your inquisition of the Detroit auto makers. They are not seeking the free ride you gave Wall Street, insurance and banking (I should mention banking twice as Citigroup came back for seconds). If I seem irritated it's because I am. Disclosure...I'm a retired Ford Motor Company salaried management employee. Thomas, Pinta
Steven Pearlstein: Thanks, Tom.
McLean, Va.: I supported the financial bailout almost whole-heartedly. My thinking on that was that the interwoven nature of the derivatives markets, particularly the opaque CDS markets, really made for a house of cards if any one of the financial giants were to fail. It's unfortunate that we reached that point and we should do everything possible not to get there again, but we were where we were.
I can't see any parallel to the automakers (or for that matter, the states, municipalities, colleges, etc.). Sure, there would be significant collateral damage if one of the automakers filed for bankruptcy, including putting a lot of people out of work. Sure, it would further damage a region. But those factors are the same for almost any large company. The arguments I'm hearing for bailing out the carmakers could have applied to Enron or WorldCom too, but I think it was a proud moment for our system when the government (notwithstanding the administration's ties) let Enron fail. That's how things should work, absent extraordinary circumstances like we saw in the financial system.
Steven Pearlstein: Actually, I don't think that is factually accurate. Nobody even thought of saying it for Enron and WorldCom. This is the heart of our industrial base and while the industry has overstated its significance by peddling the one job in ten line, the collateral damage, in the current environment, might well push the economy over the edge.
Great Falls, Va.: I wonder if you could explain two (related?) references in your column this morning.
First, you say the consequences of doing nothing would be too great with respect to government revenue. If we're talking only about a successful reorganization under chapter 11, is that necessarily true?
Second, you close by noting Chrysler's inference that its requested $7B is less than the government would put up in a reorg. I can't begin to imagine where this comes from. What would be the government's obligations to fund a Chrysler bankruptcy case?
Steven Pearlstein: Good questions, bad column.
As you know, I've been pushing for some expedited, pre-packaged bankruptcy like process for GM and I think, in the end, that is exactly what will happen. But an ordinary Ch. 11 reorganization would take too long -- the companies would have a very hard time emerging from that. It needs to be quick, dirty and rear, the consumers will get too concerned about viability.
As to the second, Chrysler was arguing that if it were forced to file for Ch. 11 bankruptcy, the only way it could be reorganized is if somebody provided debtor in possession financing, and no private party would do that now, which is correct. So the government would have to do that, or face the prospect of a quick and disorderly liquidation of Chrysler, which it might want to avoid.
Bethesda, Md.: This morning's news story on the big 3 plans said the 4th element (after cutting costs, restructuring, selling brands) would be to "speed the introduction of fuel-efficient vehicles widely considered crucial to their future." Your column today didn't refer to this long-term essential. What are the big three really planning to do about cutting U.S. dependence on foreign oil? Or is the "fuel-efficient" phrase just empty PR to them?
Steven Pearlstein: They are all promising to speed the introduction of new fuel efficient cars. I just don't know enough to be able to evaluate or comment on these. They all sound great, but to a lug head like me they all sound the same. I know a lot of members of Congress are focused on this, but my view is that if there is a market for these products, the companies will respond, and we ought to be careful about forcing them to make things nobody is willing to pay for or adopt a particular technology that may not be the best. Government's have a bad batting average on those kinds of things.
Ann Arbor, Mich.: I'm a Michigan resident, not in the auto industry (but affected by it like everyone here) - it seems like the rest of the country is in denial about how much a total collapse here would affect the rest of the country (auto workers do actually buy CPG's, go on vacations, have mortgages). Is this just blissful ignorance? Also, a lot of my friends in the industry or related (like advertising) have pointed out that one of the big issues with US automakers is that they're out of touch. There aren't a whole lot of women and minorities even in the upper middle echelon of marketing/advertising/product. So you have entire meetings of middle-aged white suburban men (no offense) talking about the brilliant marketing they'll aim at women. And it comes off just looking stupid and misguided. The auto industry seems at times trapped in an episode of Mad Men, except it's not the early 60's. Any acknowledgment of this - or even understanding of this on their part?
Steven Pearlstein: Well put.
Baltimore, Md.: Steve - Thanks for putting out the "details" of the automakers plans. I haven't seen them anyplace else. My problem is that if the UAW (Gettelfinger) has a seat on the automakers board, shouldn't he have to propose a plan of concessions (in front of Congress) as well? I know it is not easy for the union chief to publicly negotiate contract terms, but the fact that the UAW appears to be conciliatory (at least in public) might go a long way to restore public confidence in this bailout.
Steven Pearlstein: I think everyone understands the union has offered its helping hand here and is willing to do what is necessary to make labor costs competitive and hold off on requiring the full amount of VEBA payments in the short and medium term. the UAW is not the big problem in working this out at the moment, and people in Washington understand that.
Eugene, Ore.: I agree the big 3 companies are vital to our country, yet we really had no say in who ran them and the decisions they made. It all comes down to management, management limits a company the level of highest production/profitability. In my small company, I return my "bonuses" when I make mistakes to help finance the way out the mistakes. If the teams that run these companies want to stay in charge, they need to return all personal bonuses earned since each company was last profitable. Why are these bad managers still in charge? If we invest billions in these companies, who would really be in charge of the big 3 and what management changes could be expected, besides taking a cut in salary? How can we expect change with the same team in place that drove profitable companies to bankruptcy? I've got a lot more to say, but will hold it here.
Steven Pearlstein: It's hard to say the bad managers of the past are still in charge. The new owners of Chrysler have changed top management. Ford has brought in a chief executive from Boeing and made lots of changes at the top. GM is a different story, however.
Arlington, Va.: What if, rather than dole out loans to the Big 3, the federal government just bought cars? The govt could use the bailout money to replace its entire fleet, buying existing already-tooled-up-for models, give its old fleet to states, which can trickle-down vehicles to individual localities. At the same time, as a condition of doing all this business with the Big 3, the government adds conditions -- must devote X, Y or Z to technology, fuel efficiency, etc. Wouldn't this sort of bailout keep the Big 3 afloat, and keep their suppliers and subcontractors (the reason the automakers are "too big to fail") going. I'm sure this is too simple an idea to work. Please tell me why. Thanks.
Steven Pearlstein: I like the idea of a big order for fuel efficient cars, as part of a package of assistance. That seems to me like a good investment, and one that could reduce the pain of production cuts in the short run.
Washington, D.C.: So how shocked were you that it was GM who came to the table with the best, most well thought out proposal?
Steven Pearlstein: Not shocked. I've dealt with the company over the years and found there to be people who get it, as well as those who don't. To be frank with you, it was the Chrysler proposal that shocked me by its amateur tone and "we've got this under control" attitude and stunning lack of important detail. If that is the way private equity guys operate, then it is amazing they have done so well up to now.
Staten Island, NY: Your columns and chats are one of the few bright spots in these economic times.
Are we witnessing the swift unraveling of the American Consumer/Debt Culture, which was built over generations, with all this entails for retail, autos, housing, etc?
And if this is anything near 1930s redux, how does the economy snap out, considering it took a World War and the accompanying mobilization the last time (the New Deal helped but was not sufficient alone)?
Steven Pearlstein: We are seeing the air being let out of a Bubble Economy built on cheap debt and asset bubbles fueled by cheap debt, no doubt about that. But it doesn't have to turn out like the Great Depression.
Beaumont, Calif.: Thanks for having this dialogue the day before the hearings get started on the hill. Your article today expresses many of my sentiments in that you recognize the detail and viability of the GM workout plan. This isn't just coincidence since Rick Wagoner (Chairman and CEO) has been putting enormous efforts over the past few years to get GM headed in the right direction. Comments from lawmakers and pundits seem to have totally overlooked these facts. He had negotiations with the UAW a year or two ago that established a new two tier compensation system that was to go into effect in 2010 I believe. He has been a vocal national figure working with labor, government and special interest groups to bring more sensibility to solving the broken health care system and bankrupt pension plans throughout the USA. He negotiated with the UAW to give them multi billions to take over responsibility for these benefit exposures next year I think. He has been an active participant in designing and moving toward more energy efficient cars. In all honesty he was doing really concrete things to fix GM's future; the collapse of the credit markets and the overnight loss of 80-90% of his companies car sale revenues over the past few months totally blindsided him and put all of his plans and efforts underwater. I hope your "preplanned bankruptcy" approach will be offered to GM - it is the proper solution that should be extended to this valiant warrior! On a personal note, our investment portfolio which has lost at least 35% of its value in the last three months includes a $20,000. GM smart note- estimated worth yesterday was $2300. I would willingly welcome a settlement at 50% of original value. Keep up your realistic recommendations of the types of solutions needed in this monster financial collapse we are wading through!
Steven Pearlstein: Thank you. And too bad about that note, huh?
New York, N.Y.: In an extreme situation, do you think there is any place for a direct government takeover of the Big Three, on the basis of a Conrail-type solution, which ultimately ended successfully for all concerned?
Steven Pearlstein: No.
Alexandria, Va.: As a taxpayer, I think I'm being played for a fool. I haven't seen the answer to any of the following questions, questions anyone lending money would prudently ask. In fact, I haven't seen anywhere in the media where the questions have even been asked:
1) What will be the terms of the loan?
2) What will be the repayment schedule?
3) What interest rate will the borrowers pay?
4) What collateral will the borrowers put up?
I'm not at all comforted by the fact that Nancy Pelosi is saying Detroit won't get the money unless she approves of their business plan. I wasn't aware that the Speaker had earned an MBA, or that she had managed a venture capital firm in a previous life. Where does she - or any of the other 534 members of Congress - get the expertise to decide whether a business plan is sound enough to risk $34 billion on?
There's one question that could be asked, but everyone knows the answer to that one: Why doesn't Detroit try to borrow the money from lending institutions? The answer is, banks don't think the Big 3 are a good credit risk. It seems the banks have learned something from making all those subprime loans. Congress, on the other hand...
Steven Pearlstein: Nancy Pelosi isn't that dumb. The decision over the viability of the business plan will be left to a board of administration officials, who will be authorized to dole out the loans if certain general conditions are met.
Bailo, UT:: Why is it considered so essential to bail out the auto industry when nothing much was done to save, say, the textile industry? And how about a bailout for the newspaper industry?
Steven Pearlstein: We wouldn't even be thinking about a bailout for the auto industry if it hadn't come at this delicate moment for the economy, I suspect. And the ripple on effects through the economy were nowhere near as great in the case of textiles. Newspapers is actually not an industry -- its news organizations. And while we're in a heap of hurt right now, we've got a lot of restructuring to do on our part before we need to talk about any bailout. But thanks for thinking of us, man.
New York, N.Y.: I'm exasperated. When is "bailout nation" going to end? First the banks, now the auto makers. My question, Steve, is who's in the on deck circle? My guess is that cities & states are going to come to Washington with a tin cup looking for a handout (because the cities & states have been horribly irresponsible in granting free healthcare and generous pensions to municipal workers, and now don't have the money to pay those promises).
Steven Pearlstein: Cities and state are certainly next in line, and they need big-time help, so get ready.
Seattle, Wash.: The bailout proposals remind of what Winston Churchill said about democracy. "It's the worst system of government in human history, except for all the other ones." The bailout is a truly horrific thing, except for all the alternatives.
Steven Pearlstein: Precisely.
Washington DC: Steven,
Do you think that Congress will just decide to go the pre-packaged bankruptcy route by agreeing to debtor in possession financing? If so - doesn't it make sense to pursue a gas tax that provides a price floor for gasoline. This does two things - it generates a steady revenue stream for transportation infrastructure (roads and rail) and it helps ensure that high mileage vehicles (regardless of technology) are good investments.
Steven Pearlstein: I like both ideas, but never thought of linking them.
Richmond, Va.: For several weeks, I have read your responses to questions indicating a disagreement with government bailouts which always seem to state something along the lines of "these bailouts will provide a return on investment" in the future and will turn out to be good for the taxpayer.
What qualifications do you feel our elected representatives have to make this kind of investment decision on our behalf? How can they possibly make a long term decision that is in our best interests? I think this is a dangerous political precedent.
Steven Pearlstein: You wouldn't want them doing it as a matter of course. But extraordinary challenges call for extraordinary measures.
McLean, Va.: Steven, Without revealing sources (other than yourself), where do your ideas for correcting the economy originate? For example, I'm thinking of the "pre-packaged bankruptcy" approach you advocated for Detroit a couple of weeks ago. I sent the link to that article to several of my associates, who thought you had a great idea. Did you come up with "pre-packaged bankruptcy" yourself or are such ideas the result of consultation with government and industry sources.
Steven Pearlstein: Mostly I think them up myself, as in that case.
Atlanta, Ga.: If this is 'only' a LOAN, then why can't these guys raise the capital somewhere else? If the loan is such a good deal, why isn't someone taking it? Because it STINKS. Because we KNOW no one of those big three are going to spend ONE SECOND worrying about paying it back...and why should they? They'll take the money and come back for more. It's not like we don't know that...
Steven Pearlstein: Nobody can raise capital these days, for anything. The windows are all closed.
What's not talked about enough is how much the government will be on the hook for if one (or more) of the big three go under. I'm talking largely in terms of pensions that already guaranteed by PBGC, not to mention what we'll be shelling out in unemployment when the lines swell. Do you have any numbers to attach here?
People may be concerned we're saddling our kids and future generations with mountains of debt by bailing out auto companies and banks and the like, but it really seems to be that the alternative - the potential hundreds of billions transferred for pensions and like - would be far worse.
Steven Pearlstein: Both Ford and Chrysler say their pension funds are now almost fully funded, so the hit to the PBGC may not be that bad.
Colorado Springs: I really do like and respect your work, by the way. Read it all the time.
Steven Pearlstein: Maybe that's a good place, then, to say thank you, we're out of time, and I'll "see" some of you next week, perhaps at the usual time of 11 a.m.
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