Sanity Injection

Injecting a dose of sanity into your day’s news and current events.

Automakers bailout details starting to take shape

Posted by sanityinjection on December 8, 2008

It sounds like the White House and Democratic leaders in Congress are getting close to agreement on the outlines of a compromise measure to bailout the Detroit automakers. Some of the details reflect concerns that have been raised on this blog as well as by legislators during the recent hearings.

The first step would be an emergency diversion from the earlier $25 billion loan package that was granted to the automakers months ago. That money was supposed to be invested in converting factories to make fuel-efficient vehicles. Under the new plan, up to half of this money would be used instead as emergency loans to the automakers available for more broad usage. This was the White House’s preferred approach all along, and it reflects the essential nature of the compromise: Democrats gave in on this in exchange for the White House’s agreement to the rest of the plan.

The second part of the package would be additional loans available to the carmakers on December 15 (no figure attached to this yet.) The Bush White House would then appoint a person or board which would write guidelines that the automakers must follow in restructuring their businesses to become viable in the long-term. The automakers would have from January 1 (when the guidelines are published) to February 15 to show sufficient progress in implementing the guidelines. If they failed to do so, in the judgment of the overseeing person (either the same person who wrote the guidelines, or whoever President Obama might appoint in their place), then the loans would be revoked and the automakers would have no choice but to file for bankruptcy.

The agreement would also require the automakers to limit executive pay, cease paying dividends, share a percentage of future profits with the government, and most importantly, guarantee that the government would be reimbursed before any other shareholders. It’s not clear yet whether the automakers would be required to replace their CEOs, though at least one Senator is calling for the head of GM to resign as a condition of any deal.

I am still not convinced that this bailout is really necessary. However, it does sound like the Administration and the Democrats are cooperating to find compromises, and including the necessary protections for the taxpayers’ money. If everything I’ve described above ends up in the bill, I can live with it. (The issue of the CEOs I think is a red herring – if they stay, they’re the ones that will have to implement the changes, or they’ll be cashiered anyway in a couple of months.) The question is whether the automakers will agree to it, though they may have little choice.

I have to ask myself though: why is it that the foreign car companies that build cars here, such as Toyota and Nissan, which operate under the same legal environment and regulations as Detroit, have performed so much better? It seems like bad management, rather than a bad economy, is what we are really bailing out here.

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4 Responses to “Automakers bailout details starting to take shape”

  1. sanityinjection said

    Update: It looks like parts 1 and 2 of the bailout plan have been combined. My understanding is that the total amount of the bailout will be $15 billion, all coming from the $25 billion previously authorized by the legislature. The automakers will still have to submit their restructuring plans to the federal overseer, but will now have until the end of March to do so.

    Democrats should have the votes in the House to pass a bill, and the Bush Administration has been a key player in the negotiations so a veto is not expected. The fate of the bill will most likely be decided in the Senate, where some Republican votes will be necessary for it to pass.

    Again, I find my view being influenced by the process of how this legislation is being crafted. The bipartisan compromise and gradual refinement of the bill’s language is exactly how the legislative process is supposed to work. I wish all the bills that were filed in Congress were subject to this much scrutiny and revision before being voted on. One of the lessons I have learned in my own professional life is that good processes tend to produce good results. I am weighing my philosophical opposition to government interference in industry against the possible distorting effects on the economy of the failure of Chrysler and GM.

    If one is going to take the position that any bailout, no matter how well designed, is fundamentally wrong in principle, then a “No” vote obviously is warranted here. But I am not such an absolutist. While I have no sympathy for GM and Chrysler, as my previous posts indicate, a properly designed rescue plan with adequate protections for the taxpayers’ money might be the best solution overall in terms of the short-term and long-term health of our economy. My biggest reservation is the creeping fear that we will be back to this same place again with these firms in another 20 years.

  2. sanityinjection said

    WashPost says the auto bailout is flawed but not fatally so:

    http://www.washingtonpost.com/wp-dyn/content/article/2008/12/10/AR2008121003030.html

  3. sanityinjection said

    Update: I guess it should come as no surprise that the United Auto Workers’ unwillingness to budge on wages and benefits killed the bailout deal. The Union has a fund full of money to pay benefits to laid-off workers. Their actions belie the widespread notion that a GM-Chrysler bankruptcy will destroy the auto industry – clearly, the union feels they can ride it out or they would have cut a deal. So if the autoworkers feel they can survive bankruptcy, why should the rest of us be worried?

  4. sanityinjection said

    Analysis: Larry Kudlow explains why the UAW killed the bailout deal:

    http://www.realclearpolitics.com/articles/2008/12/whos_losing_the_us_car_busines.html

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