BANKRUPTCY BEST REMEDY FOR BIG THREE
By Brad O'Leary
According to a just-released ATI-News/Zogby poll, 62 percent of American voters are opposed to a bailout for the automakers, compared to only 26 percent who approve of a bailout (the rest are unsure). And most surprisingly, the poll found that 58 percent of self-declared union members think Congress ought to deny the automakers a bailout, while only 30 percent approve (the rest are unsure). American union members oppose a bailout by a nearly two to one margin.
In addition, 69 percent of independent voters oppose a bailout, as do 43 percent of those who voted for Obama (41 percent of Obama voters favor a bailout, and 16 percent are undecided).
This poll can be compared to a bank asking their stockholders to act as a loan committee to determine if a company should receive a loan. Americans know that the companies they would be loaning the money to could very easily declare bankruptcy, and if they did, under bankruptcy rules, the loan money would never be returned.
Of course, the poll question wasn’t framed in this way, but had it been, the scant 26 percent who approve of the bailout may very well have second thoughts. Especially if they knew that current bond holders who had loaned these companies money in the past sold their bonds for a measly 30 cents on the dollar. The current bailout “loan” under consideration is worth even less and is certainly more risky.
The ATI-News/Zogby poll also found that 63 percent of Americans who pay federal income taxes (as opposed to those who are not required to pay) are against the bailout, and only 25 percent are in favor of it. This means that, if Congress decides to bailout the Big Three, it will be a direct contradiction to the wishes of the clear majority of those Americans who would be forced to foot the bill. Even 60 percent of Americans who are exempt from paying federal income taxes oppose the bailout, while only 28 percent are in favor.
In addition, Republicans oppose the bailout 81 percent to 9 percent, while the poll found Democrats are roughly split on the issue, as 41 percent oppose and 43 percent are in favor. Self-described “Liberals” are also split, as 40 percent oppose the bailout and 42 percent favor it. Moderates oppose the bailout by a 55 percent to 32 percent margin, and Conservatives resoundingly oppose it 85 percent to 7 percent.
Despite this overwhelming opposition, Democratic congressional leaders and Republican administration backers got together over the weekend and, in an about-face, decided to buck the views of American union members, Republicans, and Conservatives by giving a cash loan of $14 billion to General Motors – a company on the verge of bankruptcy. They also decided to give an additional $4 billion to Chrysler. Left out is Ford, which appears not to be in such dire straits. The goal here seems to be to keep GM alive just long enough to dump the problem into the lap of the incoming Obama administration.
Apparently, Congress and the Bush administration had a change of heart because of a series of fantasy plans submitted to them by GM. The plans read as follows:
GM Fantasy Plan #1: GM arbitrarily changed its projection of achieving a 20.6 percent automobile market share for 2009, to 22.5 percent. This, of course, is predicated on Congress giving them more money to lose, and ignores the fact that most GM vehicles are among the worst in resale value and Americans won’t increase their purchase of them until they drastically improve.
GM Fantasy Plan #2: GM says it will cut their fixed costs, which, over the last five years, have fluctuated between 30 to 35 percent, to 25 percent. This would be quite a feat, especially considering GM submitted no details about how they will accomplish this.
GM Fantasy Plan #3: GM says it will reduce its number of brands from eight to five by 2010. This means GM would still be carrying two more brands than most experts think it should, if it wants to achieve profitability. It is also doubtful that GM could get past certain state laws that prohibit this cutback.
GM Fantasy Plan #4: GM says it will reduce its number of dealers to 4,700 – down from 7,500. This would still leave them with 3,000 more dealers than Toyota needs to sell the same number of vehicles.
GM Fantasy Plan #5: GM says its new “Volt” car, which would run exclusively on electricity, will go into production in 2010 and be a game changer, replacing its previous game changer, the hydrogen-powered “Sequel,” which was introduced as a concept car in 2006. (After reading this report, there is no doubt that, somewhere in the bowels of GM, there is a team of researchers working on a new game changer – a car called “The Fantasy,” which will run on pure rhetoric.) Of course, GM’s Japanese competitors have traditionally cornered the market on game changers, and considering Toyota is also planning to produce an all-electric car in 2010, this trend is likely to continue.
GM Fantasy Plan #6: GM says it will magically reduce its debt from $62 billion to $30 billion by 2009 without expending money or assets, and without an actual plan for doing so. If GM can pull this off, perhaps they can also help reduce the $750 billion Wall Street bailout to $300 billion.
Apparently, congressional leaders wanted GM to submit a plan, but they had no intention of actually reading it. Were they to actually read GM’s fantasy plan, they would realize that a bailout is not the answer.
Bankruptcy, on the other hand, offers the best remedy for American taxpayers and the automakers. Filing for Chapter 11 protection would allow the automakers to restructure their companies, usher in new leadership, and begin to climb out of the very deep hole they have dug for themselves over the years.
How do they dig out of that hole? First and foremost, the Big Three must at least renegotiate a more affordable labor contract, and this can only happen in bankruptcy.
GM must also address its unsustainable pension program. Its current pension obligation is $85 billion. The automaker has three times as many retirees as it does active workers and will be paying its retirees roughly $7 billion per year for the next 10 years.
Furthermore, questionable perks for senior executives and retirees need to be scaled back considerably. For example, executives at GM receive a new vehicle every four years, which is taxed as income by the IRS – but not to worry, GM reimburses them for the amount taxed. GM also covers the cost of their residential security systems, golf club memberships, chauffeured vehicles, and private aircraft. All of this, plus bonuses and stock benefits, as a reward for losing $39 billion a year.
Why not suspend all raises, bonuses, and perks for senior, mid-level, and lower-level management until the company actually turns a profit? If labor can reduce their perks, so can management.
American taxpayers object to the bailout for good reason, as history has taught them an important lesson. In the 1970s, Leland Motors, a British car company, was going through bad management, a bad economy, and a bad labor deal and was on the cusp of bankruptcy.
The British government decided to bailout Leland to the tune of $16.5 billion, making the same arguments we’re hearing from our government today: Leland is too big to fail; too many people will lose their jobs; and the economy will be devastated. Guess what happened? Leland went bankrupt, despite the bailout, and British taxpayers took a bath on their “investment.”
Though many Americans may not remember the Leland lesson, they do seem to understand a bad investment when they see one. The aforementioned ATI-News/Zogby poll also found that a majority of Americans (54 percent) favor bankruptcy for General Motors (GM alone, not Ford or Chrysler), with the caveat that $1 billion of the previously approved bailout money go toward guaranteeing pensions for auto workers affected by the bankruptcy.
To his credit, President-Elect Obama has shown leadership in refusing to be swayed by the panicky rhetoric coming from Big Labor leaders. Obama’s stance is a reflection of the stance that a majority of all Americans hold.
Nor was Obama swayed by GM CEO Richard Wagoner’s "yelling fire in a crowded theatre" act before Congress and a national televised audience. Someone needs to tell Wagoner that, if GM, which has 20 percent of the automobile market share, can’t compete without billions of dollars in government welfare, then Ford and Chrysler (which have 25 percent of the market), and their foreign competitors (which have 55 percent of the market) would be happy to make automobiles that Americans like to buy.
Remember, if Congress approves this bailout, it will be paid for by the 63 percent of American taxpayers who disapprove of it. And, considering the U.S. government doesn’t have any cash, this means we’ll have to either print more money or borrow from our Arab friends.
Brad O’Leary serves as President of ATI-News (www.ati-news.com) and is Chairman of the Board of American Radio Free
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