Can government be trusted to steer a GM bankruptcy?
The Obama team is helping to push the automaker's debt holders, unions, and executives toward tough choices, but the risks of intervention are many.
The economic news of the week isn't just that giant automaker General Motors is about to enter bankruptcy. It's also that the US government is the one who will be guiding the firm through the process.
In a country that prides itself on free-market capitalism, this will be an unusual politically orchestrated bankruptcy.
The government intervention could have good results. It may prevent a prominent industry from collapsing at a time when the nation is already reeling from recession. It appears to be helping to expedite the needed restructuring of GM and another struggling Detroit carmaker, Chrysler. An Obama task force has helped push various stakeholders toward tough choices – a pattern highlighted Friday as the autoworkers union announced that its GM labor force had voted 3 to 1 for a pay-cut plan.
At the same time, President Obama and his automotive task force are entering politically difficult terrain by trying to save the industry.
For one, the rescue will be costly to taxpayers – an estimated $50 billion and counting. For another, critics say the federal government, in its effort to resolve the companies' problems swiftly, is upending tried-and-true legal traditions that have underpinned the economy since America's founding. And at the end of the day, thousands of industry jobs will still be lost.
"They’ve opened themselves up to a lose-lose situation," says Don Grimes, an economist at a University of Michigan in Ann Arbor. Voters could end up being angry that their money is being used to prop up private corporations that failed, and also angry about job losses at dealerships or factories where they live.
Meddling vs. hands off
Still, Mr. Obama’s decision to buttress the industry – and to draw limits around that support – is appropriate, he says. For all the political risks and the dangers of government meddling in private industry, the damage to the US economy without government support could be large.
"I have to give him some credit, maybe a lot of credit," Mr. Grimes says. "He did realize that the economy in its fragile state really couldn’t go with [an automaker] liquidation phase right now."
Detroit's troubles stem from both decades-old competitive challenges and the very recent sharp downturn in the US economy.
With auto sales plunging in recent months, private investors were unwilling to pump in the money that would be needed – even to finance a radical downsizing of the firms. So President Bush stepped in late last year with bridge loans to the two carmakers, and Obama has grappled with how to put together a government-financed restructuring.
Obama's 'pragmatic business people'
The goal is now for a quick bankruptcy for GM, probably starting on Monday and ending in two or three months. Chrysler is now partway through its own Treasury-financed bankruptcy process.
So far, the political "meddling" appears designed to achieve the same aims that any private-sector investor would have in the same role: restoring the firms to competitive viability.
"They all seem to be very pragmatic business people," says auto analyst Aaron Bragman, referring to members of Obama's auto-restructuring task force.
In his view, what's happening is "quite the opposite" of a politicized rescue. Yes, a lot of taxpayer money is being committed with the goal of saving jobs. But task force members have approached their job in a hard-nosed way, trying to ensure that public money will be spent only if it has a realistic hope of making the carmakers viable.
All parties have been asked to sacrifice or recalibrate their goals. Executives have been told that their restructuring plan didn't cut deeply enough to create a viable new firm. The CEO has been replaced. Despite Obama's ties to organized labor, the United Auto Workers have been asked to take new hits. On Friday, UAW President Ron Gettelfinger announced that GM workers had approved a plan that would freeze wages, simplify work rules, and pledge no strike before 2015.
Government ownership ahead
By providing the money to help GM restructure, the government intends to end up owning most of the firm – with the Canadian government possibly taking a small stake alongside the US. The government will also have a stake at Chrysler, but a smaller one.
Investors who currently own the firms' debt (bonds), however, complain that the government is riding roughshod over their legal rights. If the government succeeds in winning rapid court approval for a restructuring that wipes out most GM and Chrysler debt, it would sideline creditors who might otherwise be in the driver's seat of any bankruptcy process.
The bondholders' anger is justified, says Mr. Bragman, a Detroit-based auto analyst at the consulting firm IHS Global Insight. The Obama administration counters that its quick-bankruptcy plan – and its money – offers the firms the best hope of surviving. With a 10 percent stake in the new GM, those bondholders won’t be left high and dry.
New uncertainty among private investors
Although the task force seems focused on profitability, that doesn't mean questions about government ownership will end. Some economists and business leaders worry that federal interventions during the recession may do unintended damage. At the very least, private investors feel uncertain about where rescue efforts and regulations are headed.
The Obama administration could face pressure from various interest groups – representing labor, consumers, or localities with assembly plants – to use its ownership stake to influence how GM and Chrysler are managed.
"You’ll hear a lot of squalking" Monday, Grimes says, when GM announces the locations of more than a dozen factories it plans to close.
GM said Friday that one of those plants will be retooled to produce the company's smallest-ever US-made car. GM has not determined which plant will get the new cars, a person briefed on the plans told the Associated Press.
For his part, Obama has expressed the goal that US carmakers will lead the world in green-car technology. But he has also said he doesn't want to micromanage the companies and hopes the government will exit its ownership stake as soon as possible.
The railroad precedent
This won’t be the first time a giant industrial firm has restructured under the wing of the federal government. In the 1970s and '80s, railroad operations for much of the northeastern US operated under government control, before the firm Conrail was finally sold back into private ownership with a stock offering.
In that case, Grimes says, Congress laid out specifics of the restructuring and appropriated funds to keep Conrail going. President Richard Nixon signed the legislation.
With the Detroit carmakers today, the Obama administration is calling key shots on its own (using the pool of congressionally authorized rescue money known as the TARP), and Grimes says the government's role is "more ad hoc."