The Missed Issue in GM Bailout Versus Bankruptcy Debate

Too many hot button financial news stories tonight, generally not a good sign for the short-term market outlook.

GM is twisting in the breeze, saying it won’t make it through year end without help, but the Bush administration, which has been liberal with aid to anyone who can pretend to be remotely connected to the financial system, has been consistently tightfisted about helping anyone who probably didn’t vote Republican, such as auto-workers and people who lost their homes (recall various Republican initiatives to scrub people who had lost their homes from voter rolls).

Despite the fact that most voters would find GM workers more deserving than investment bankers (at a minimum, they could not be deemed to have created the mess they are in, or have brought down the entire economy along with them), there is an important issue not getting enough attention: the problems with bankruptcy laws.

I don’t pretend to have an answer, but the lack of attention to this issue assures that we won’t get one. For GM, bankruptcy may be a better solution than a bailout. The New York Times explains:

Momentum is building in Washington for a rescue package for the auto industry to head off a possible bankruptcy filing by General Motors, which is rapidly running low on cash.

But not everyone agrees that a Chapter 11 filing by G.M. would be the disaster that many fear. Some experts note that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay, at considerable cost, the wrenching but necessary steps G.M. needs to take to become a stronger, leaner company….

“Just let market forces play out,” said Matthew J. Slaughter, associate dean at the Tuck School of Business at Dartmouth. “And if G.M. or one of the other companies files for bankruptcy, support the workers and the communities that would affected by a bankruptcy filing.”

William Ackman, a prominent activist investor who runs Pershing Square Capital, said Tuesday that G.M. should consider bankruptcy. “The way to solve that problem is not to lend more money to G.M.,”…

Instead, G.M. should submit a prepackaged bankruptcy, laying out steps it plans to enact once in Chapter 11 protection, said Mr. Ackman, who is not a major holder of G.M. shares.

“I’d rather the government’s money be used to train people for other jobs,” Mr. Ackman said. “The bankruptcy word scares people. It’s simply a system.”

Now why can’t we do that for financial firms? In some cases, you get the run on the institution syndrome, which is what happened to Bear Stearns. But that fwas triggered in large part by fear of getting snarled in a Bear bankruptcy.

A Fortune Legal Pad post at the time of the Lehman bankruptcy provided a partial explanation:

In essence,[Ed] Morrison [a professor and bankruptcy expert at Columbia Law School.] explains, bankruptcy laws have evolved since 1978 in ways that actually leave investment banks like Lehman Brothers less protected than most debtors would be from hordes of creditors “descending on [it] and tearing it apart,” as Morrison puts it.

But those laws have been written specifically for the purpose of limiting systemic harm from a collapse like Lehman’s, and averting financial meltdown….

An ordinary bankruptcy petitioner, like an airline or a steel mill, gets immediate protection from its biggest creditors by the operation of law: as soon as it files for bankruptcy, an “automatic stay” takes effect which prevents those creditors from going forward with lawsuits and seizing the debtor’s assets. Metaphorical runs on the bank are prevented, and management gets time to organize its affairs in a way that will, theoretically, maximize value for all creditors, and maybe even allow the company to reemerge in sound health.

With a financial institution, however, the automatic stay offers no protection against many of its most important creditors. In a trend that began in 1978 and was greatly expanded in amendments passed in 2005, most financial contracts — including securities contracts, swaps, repurchase agreements, commodities contracts, and forward trades — are unaffected by automatic stays.

Worse still, as soon as Lehman’s parent corporation goes into bankruptcy, that event (under the contractual language governing most of these) triggers default, allowing the counterparty — the bank or other institution that entered into the deal with Lehman — to immediately accelerate or cancel the contract and seize whatever collateral may cover it.

Why? The thinking, Morrison explains, was that if an investment bank like Lehman ever failed, all its counterparties (like, say, a Bank of America) could extricate themselves immediately from Lehman’s troubles rather than getting mired in a bankruptcy proceeding….

Now comes the downside potential. The risk is that lots of these commercial counterparties will choose to terminate their financial contracts with Lehman — say, for instance, credit default swaps — all at once, and then try to rehedge themselves all at once, causing the market to seize up.

Now the Lehman bankruptcy did reveal a far more fundamental problem: most observers thought the firm was perhaps $10 billion in the hole, but likely to incur even more losses if it attempted to soldier on, when in fact the true negative net worth appears to be an order of magnitude higher.

However, an opportunity was missed: to what extent was the run on Bear and later Lehman the result of bankruptcy law procedures that increased the odds of a run, or otherwise made the process more perilous to creditors? I am wondering whether some changes in rules might have made it possible for financial firm bailouts to be more contained, for instance, for one entity to be bailed out and other carved off and liquidated (ie, could you figure out a way to do a prepack “good bank-bad bank” deal?). It was obvious at the time of the Bear failure that other investment banks were at risk. yet this avenue of investigation appears to have been overlooked.

Ignoring the fact that bankruptcy laws are not as good a vehicle for financial firms as for industrial companies has also skewed the focus of other rescue operations. The reason I liked the AIG bailout version 1.0 was that it put taxpayer interests first but also allowed for an orderly liquidation of the company. If (as many people contended) the firm really did have a lot of valuable businesses, management had time to sell them and if they fetched good enough prices, there would be a rump AIG left for them to operate. But as we have discussed at length, the revisions to that deal have clearly been to benefit AIG incumbents to the detriment of the public at large.

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  1. bg

    It is not really a close call that the the american auto industry will be better in the short, medium and long term with a crisp packaged chapter 11, than any government bailout.

    What amazes me is that there is a combination is panic, mendacity and cynicism that has made the unthinkable commonplace in government recently.

    this is a very bad omen for the future, as it was government that precipitated the worst parts of the great depression.

  2. Tom Joad

    Democrats view the Great Depression with such nostalgia. It was a time when giant Democrats roamed the Earth.

    It was a time when the arts were supported by the government. Marvel at the murals that rivalled the best of the heroic art of Mussolini, Stalin, and Hitler.

    And the music! Comsymp, wobblie, happy peasant worker music that is still celebrated on NPR.

    Those glory days may be coming back. You know the Democrats want them back.

  3. Anonymous

    I just want our dear leaders to make sure that there is a stipulation that any government loans are to be used for direct investment in capital and equipment in the U.S. and not to expand their joint venture for building cars in China.

    Avg John

  4. wintermute

    The irony is that GM and Ford are world-beating companies which could survive and thrive. But like a champion swimmer with an anvil tied round his neck – people are wondering why he is drowning. Just cut off the anvil!

    a) GM and Ford need (somehow) to stop paying out all the pension and sick-pay benefits they are liable for.

    b) GM and Ford need to halve all wages. $73 per hour on the assembly line is madness.

    Suddenly, miraculously, those two companies would be healthy again contributing to US GDP with zero taxpayer assistance.

  5. Richard Kline

    The main ‘positive’ for bankruptcy for GM would be an ‘opportunity’ to repudiate tens of billions in _unfunded_ pension obligations to workers, and to summarily layoff tens of thousands of unionized workers. Wall Streeters and libertanrias, near as I can follow, both LOVE these outcomes. Without them, there is no upside for bankruptcy, really. True, bondholders could be shaved for multiple appendages. But GM isn’t going to stay in business without continuing to sell corporate bonds, and that will prove harder and more expensive if the current lot are decimated.

    There is no easy path for GM. There product is not in demand, and they have more staff than the economy of the next 5+ years is going to remunerate. What would I propose? Full nationalization. Management summarily dismissed. Equity wiped: they ate profits for years rather than fund those pensions, and they _DO NOT_ deserve an iota of sympathy. Bond holders crammed down, and offered discounted equity. Pensions folded into whatever the government backed pension alternative is to become: a new model is going to be on the way. This will pay less, probably, then current pensions, which is more than zero if GM goes el foldo. Existing workers offered a combination of (modest) buyouts, equity shares in the salvaged firms, and re-education benefits down to a set, new payroll, with the mix differing depending upon the age of those who apply. If not enough apply, a lottery might be the best way to go (I’m serious). GM broken into 3-4 smaller companies, and these are floated back to market as soon as practicable, having been told that now they are small enough to fail so they had better succeed.

    You know, democratic socialism. This problem is too big, too stale, and too product-poor to attempt this halfway.

  6. Anonymous

    A huge part is political…. the Democrats just won an election BIG and need to throw a bone to their supporters. Another $25 billion to the automakers might give them enough time to come up with something better.

    After the $700 billion for finance related companies in order to allow for an orderly winding down — or somewhat more orderly then without it, maybe the auto companies should get a “taste” of bailout money.

    Some of their problems were caused by the financial speculation in commodities — particularly oil.

    Unlike the banks, GM will spend the cash quickly rather than hoard it.

    Longer term, forget about it. The Koreans built up their auto industry in the last decade and are building better cars then the Japanese were a 8 years ago. What’s going to happen when Tata reintroduces its new Jaguar brand into the US? Or maybe the Koreans will buy up Volvo and some of the soon to be orphaned brands.

  7. patrick neid

    Despite your BDS thank god Bush and crew seem to be holding out. Obama and his economic morons will be quick to give GM etc all the money they need further perpetuating a corporate mentality that should have been put down years ago. With Bush dragging his feet GM may end up in bankruptcy still. One can only hope.

    I stated on day one where all these stupid plans would lead. Now at plan E or F is anyone starting to believe? Forget Obama’s feared socialism we have skipped right to a new aged Stalism embracing central planning 101. All this before the messiah even got elected.

    This is what happens when you let the academics run the equipment. The best part–they claim to have read history!

  8. Anonymous

    Both GM and Ford are world brands with production facilities around the world under different names, just like VW who operate as skoda, audi, seat etc. Mazda and Volvo are considered reasonably profitable ford brands. Opel and Vauxhall are GM brands.
    The problem is that US auto production has been considerably out of step with the rest of the world and is probably a mill stone around the neck of these companies now. Chapter 11 may well benefit GM outside of the US at the expense of US production.
    Equally if GM is bailed then why not VW or nissan with production in the US. If a bail out is targetted at weak domestic participants rather than an industry then you open the door to national protectionism. Even if Europe, Japan and India just leveled the playing field tax wise then GM will not be able to compete. This is part of the reason why the TARP has been altered.
    Ford is just plain too strong outside of the US for it to fail, however at teh other end of the scale Chrysler which is largely domestic would appear to have nowhere to go in a world of overcapacity.

  9. Independent Accountant

    I saw the Ackman interview and agree with him. I’ve followed the Delphi bankruptcy. It didn’t end the world. Now if we only could get Goldman, Morgan and the rest of the Wall Street crew to file bankruptcy. That would be something.

  10. CKMichaelson

    wintermute is headed in the right direction and kline tags both of the necessary ideas.

    No to the bailout, yes to nationalizing the social costs we now put on employers and impose a national sales tax that would level the playing field for similar products regardless of place of manufacture. This would adress the race to serfdom problem in globalization.

    And yes to nationalizing the auto industry (not just the big three or tottering two) and using the bailout money to start making world class economical and environmentally sound cars behind a tarrif barrier – just like the Japan, Korea, and China have done to build their industries.

  11. Anonymous

    I don’t understand how anyone can say if GM should go bankrupt why couldn’t more large financial institutions have gone bankrupt. There is a huge difference between GM and big banks. If more big banks had gone down, the entire financial system would have come to a screeching halt. It came too close when Lehman by itself went down. The Federal Reserve can’t function without its primary dealers. The problems with the auto industry have been a long time coming and are clear to most of us. Chapter 11 exists for situations like this.

  12. Anonymous

    GM should be preparing a prepackaged bankruptcy. In essence it should seek to substantially extinguish all legacy liabilities (Pension and Debt), handing over all equity to these entities.

    There could be a role in the government providing a DIP or similar facility to the bankrupt company…If the company actually stopped making payments on debt and other items, it would greatly help cash flow and probably not even need the DIP. This assures that GM can get through the bankruptcy and avoid as much damage in the marketplace ie it will survive and be out in a very short period of time.

    A GM stripped of its legacy costs and debt will have fewer claims on its cash flows upon emergence and should be able to obtain some reasonable financing to fund operations post bankruptcy. The holders of the legacy claims (Debt/Pension) will have all the equity in the company and they can sell/hold as they see fit.
    Plus if we want to give subsidies for fuel efficient vehicles, less CO2 etc etc a restructured GM will be more likely to avail itself of these opportunities.

  13. Stephen

    Someone idicated that GM had no demand, not true, by a long shot.

    In a tie with Toyota worldwide. However they have shrunk mightily and continue to do so. But the point is you cannot say there are no assets, there is no business.

    Now I havent looked in detail at their financials but the question is do they generate cash from their core operations, which exclude health and pension. For the life of me I still dont get why companies still take on these defined benefit plans versus sticking solely with defined contribution plans.

    I am no fan of bailouts, but I dont think you toss industries like this, and all the assets they entail…distitbution systems, manufacturing capacity and knowhow etc. As some point out the Koreans have spent billions trying to build up the industry and the North America already has it?

    Ackerman likely has it right, there is a business there but it is held back by stupid financing and liability decisions. It needs to take a bath, equity is gone, bondholders take major haircuts and get equity in Newco, this includes pensions, or the government takes the equity and tops up the pension fund to say 90%of bennies…its tough but thats what happens.

    GM then does what it shoudl be doing free from complaints from the UAW and others with claims. That means shutting down a number of divisions, rationalizing their car line and production capacity.

    The goal is to enable the key capabilities to be preseved and prosper, if they fail after this then too bad, they likely be sold in better times and in a more orderly fashion.

    I hav eno love for these guys, never owned a GM car or stock but lots of people do own the cars. These arent normal times, if this was 2 years ago I would have said let nature take its course. People seem to feel that GM could have done something else if the markets were in a more normalized condition, a DIP financier could be found, seems to not be the case.

    Summary, fund what is required to get a transition done, not a bailout to preserve status quo. The dems may owe the UAW but I think even they realize that this just cannot continue.

    As someone else here said, cut the anvil away, there is no reason finanicers making bad decisions should be preserved either, i.e lenders.

  14. Anonymous

    Kline and pals are on drugs. Ritalin, I think. Looking only at the small picture and imposing a misguided and frankly ignorant view of Chapter 11 and its advantages.

    GM should file a pre-pack and soon. The problem really is that they cannot apparently put a DIP facility in place. By all appearances, thats where they are probably being screwed by Hank and pals — along the lines of banks being warned ” if you finance the admin of this case you’ll be barred from further spoils of our looting spree”.

    The banks should be FORCED to put up a DIP. Hell, if Treasury participates they can turn a nice profit for the taxpayers. DIPs are the most profitable loans out there — plus they generally have the advantage of being REPAID by actual money!

    How the case proceeds is almost irrelevant — just that they get the time and space to reorganize.

    Any of you remember International Harvester? Manville? Dow? Now those were the glory days.

  15. lineup32

    The core issue is falling demand which has been proped up for years with slick advertising and most importantly cheap credit and the ability to roll over prior debt.
    As a society we have yet to fully face the impact of our high productivity manufacturing capability and only view these issues within the marketing sphere such as branding or advertising channels but our society is overstocked with auto's, small and large trucks and everything in between. Garage space probably outstrips living space in our society!
    The so called credit crisis is also about overproduction and the ability of the advertising & credit industry to somehow someway cram more products onto the American debt pile.

  16. Anonymous

    Every crises is an opportunity and GM is no exception. Everyone is screaming for energy independence especially cutting the cord to foreign oil. Natural gas is cleaner, cheaper and abundant in the US. If GM were to start building autos that run on it, Everyone would win. However, there is no infrastructure to easily provide natural gas to car owners. Here is an opportunity to create green jobs by building said infrastructure. This a tall order but at least it is an order. Building infrastructure to accommodate the products that will use them leads to economic success. I realize that Congress and their masters, the oil companies, will try to gut such a program. But we at least owe it a try.

  17. tompain

    Airlines have gone through lots of banrkuptcies in which the planes never stopped flying. There is no reason banrkuptcy at GM would have to mean it stops making cars. Some jobs would surely be lost. But the idea that millions of people are instantly out of work is not right.

    To my astonishment, I find myself in agreement with Ackman on this. But I have question for anyone who cares to respond. Ackman says, and I agree, that government money would be better spent on retraining auto workers for something else. My question is, what is the something else? What new place in the economy will be found for those people, and the retail employees who are no longer needed, and the housing construction workers that are no longer needed. We seem to have a need to go through a massive reallocation of labor resources. What is it going to look like when the reallocation is done?

  18. lineup32

    tompain: A good post by Tim Duy is worth a read a short bit regarding your question about what new economy can be found.

    “In the medium term, if consumption is falling, and private investment is unable to compensate, then the federal authority should fill the gap. There is no shortage of sectors of the economy that offer opportunities for investment. In so many ways, we are running on the fumes of the infrastructure investment made by the last generation. Roads, bridges, channels, etc. – you name it, there is an opportunity. Or human capital, via education? Should the federal government finally step up and fund unfunded mandates? And by all means, continue efforts to reform health care, including the development of nationwide, portable medical records tracking. Reasonable policymakers free from ideological constraints can develop a host of potential projects without relying on bridges to nowhere. You can even extend the argument to supporting Detroit – if current management and boards are swept clean.

  19. tompain

    Lineup, thank you for the suggestion. I don’t find Duy’s answer all that satisfying. Ok, we need infrastructure. Let’s say we do a multi-year binge on that. Then it’s done, and activity there goes back to more normal levels. What do the excess workers do after that?

    Also, how are we going to pay for this infrastructure spending? We will be borrowing to do it at first, but eventually taxes have to pay for it. Who’s going to pay those taxes?

    I love the concept of directing more resources to education, but let’s be serious – we don’t think there are a whole lot of autoworkers who are going to retrain as special ed teachers, do we?

    I can see health care services as a potential future source of employment growth, but only if home care etc becomes a job where you can earn a living wage. I suppose that might point toward unionization of those sorts of workers in the future.

    Again I pose the questio to anyone who is interested: when labor resources are ultimately reallocated in an economy that is not as obsessed with debt-financed consumption as ours has been, what will the new economy look like? What are all those people who were producing the goods for consumption going to do to make a living?

  20. Anonymous

    I’m not in favor of state control of any industry like the auto industry, but I’m wondering if the same people who want to slash the $73/hour salary of line workers are the same people who want to reduce progressivity of the income tax system. Do you understand why we have no real wage growth in the country? It’s because we’re told not to have ‘wealth envy’ when discussing estate taxes (which are applicable to a very, very small portion of the population), but we are told it’s perfectly fine to guffaw at ‘outrageous’ salaries for middle class laborers. As a lawyer, my nominal take home after expenses is over $300/hour (billable and nonbillable hours counted), and I make barely a fraction of what really successful lawyers do. I certainly don’t feel ‘rich.’ I can’t believe anyone like a line worker making less than a quarter of what I do thinks he is dramatically overcompensated. My point is not as much absolute salaries, but the idea that reducing everyone’s wages to the an unskilled wage rate of $20/hour is a disaster for this country in the long run. Regarding the labor as a fungible input and valuing only the management and the capital in the system is exactly what leads to revolution.

  21. Anonymous

    Are there really line workers making $73 an hour? That can’t be true. $150,000 a year?? If that is true, no wonder GM is about to go under.

  22. Anonymous

    President Bush and the Republicans are playing Russian-roulette politics with the US economy, right up until the bitter end. $2.25 trillion dollars for their cronies on Wall Street to bailout their atrocious misdeeds, but let the average working man ask for a chance and the Republicans just don’t care. Hopefully the republic can survive until the Republicans no longer have any power in Washington.

  23. tompain

    11:39, very interesting point.

    But if you take home $600k ($300/hr x 2000 hrs), even though you don’t “feel” rich, you recognize that you are rich, don’t you?

    Henry Ford supposedly used to say that he had to pay his workers a good wage or else they wouldn’t have money to buy his cars. Isn’t that true for the nation as a whole? Can we have a functioning economy and civil society while simultaneously allowing unfettered free market forces to bid down unskilled labor to $7/hr?

  24. lineup32


    I think Tim’s point was that we have to look beyond the 50’s expansion of roads and bridges and focus on different parts of our economic life to develop. The possible list is as wide as your vision for the future but it would require a fundamental change in our current political makeup as both parties are entrenched in the economic status quo.

  25. Anonymous

    While they didn’t bring down the economy like the financial industry did. I would say the autoworkers and there unions are directly responsible for the downfall of this company. They demand way to much for a jobs that are not worth the cost, which makes the companies uncompetitive with foreign firms.

    Unions started for a good reason but have since abused there power to the point of bankrupting the company. I am for a bailout with the stipulation that the unions are banned.

  26. Anonymous

    Good post and good comments. However, I am tired of continuously hearing this mantra about investment bankers backing Republicans. The facts do not measure up. Take a few minutes and please visit to see which political party enjoys the financial support of the investment banks. Also, please note that Paulson’s closest advisors are Rubin and Corzine. Goldman Sachs is a Democratic firm through and through.

    Bush deserves alot of criticism, and he has been poorly served by his chosen subordinates. He chose them. So, he must take responsibiltiy and be held accountable for their decisions. But the idea that Republicans demolished our financial system is hooey. Republicans did not care because their core constituency is small businesses not Wall Street, Greenwich-based hedge funds and the big law firms feeding off the debt explosion.

  27. Anonymous

    Wintermute said:

    “GM and Ford need (somehow) to stop paying out all the pension and sick-pay benefits they are liable for.”

    A voice from the ethics-lite generation, perhaps?

    It’s striking that the same sort of folks who resist any relief to bankrupt homeowners with outraged morality are pretty cavalier about the obligations of the corporate elite and the promises and obligations they made to the workers.

  28. apachecadillac

    A GM bankruptcy would be the biggest impetus imaginable to some form of universal health coverage in this country. That would be a good thing.

    On the other hand, Waggoner says that bankrutpcy can’t even be contemplated because all their polling indicates no one would buy a vehicle from a bankrupt manufacturer. Of course, no one is buying much anyway.

    If I were a claimant to retiree and medical benefits from GM, I would be hoping for some form of federal assumption of those liabilities. If I were a stockholder of GM, I’d feel like the markets have already given me such a haircut on the value of my holdings that I my future losses are probably smaller than my past ones.

    Can’t bleed a turnip.

  29. mft

    Some “home truths”:
    (1) The Big 3 are in such trouble now because the October collapse came on top of two years of declining orders due to a completely wrong-headed model mix (SUVs etc). Auto makers elsewhere are gasping too, but unlike the Big 3 they will survive.
    (2) Legacy costs (pensions etc) are a problem, but if auto makers can make money in Germany with that country’s system of employers’ payments for health and social security, then I don’t see why the US companies can’t too.
    (3) Unionised auto workers in Detroit may earn a lot, but that’s only in contrast to non-unionised workers for foreign car firms in Alabama etc. Perhaps the solution to this problem is to force unionisation in Alabama, not to outlaw it in Detroit.

    What to do? Nationalize or Chapter 11? The aim should be to make investors pay for wrong investment decisions while minimising social costs. That would speak for nationalisation, but the European experience is that nationalizing car companies leaves the basic institutional structure intact, thus perpetuating the mistakes that led to the problem. The resulting nationalized behemoths just die longer. Thus bankruptcy would be better, and following wipe-out of existing equity, would allow other lenders to be converted to equity holders in new, smaller, leaner companies making the right vehicles. The social costs (pensions, redundancies, retraining, etc) will have to be covered by the government, and this is a better use of taxpayer money than bailing out defunct corporations.

    Incidentally, this is quite different from the question of the banks – they need to be nationalized because they are systemically vital. We can easily get by for a year or two with no cars being made, but not even two weeks with no loans!

  30. Anonymous

    “What would I propose? Full nationalization.”

    That is absurd. GM does not provide a public good or an essential public service. Let them file BK, stand by with safety nets for those impacted, graded on a highly progressive basis (i.e., unemployment benefits and job training for line workers and white collars, zilch for management and corporate officers).

    End of story.

  31. tompain

    1:55, there is a kernel of truth in what you say, but you oversimplify. Those employees were “demanding” too much for jobs that are not “worth” the cost? Who determiness what the “worth” is? Consumers. What it boils down to is that consumers want autos cheap and they don’t really give a crap what the standard of living is for the people who make them.

    As a society, we have decided there is little we can do to get consumers to pay more on behalf of the employees who produce their goods. But we also recognize that we cannot have a functioning and civil society in which auto workers get paid only what unfettered market forces will deliver to them. So we let them unionize, which is their way of extracting a bigger share of the economic pie than they would otherwise be able to extract.

    You can be offended by this notion, but unions are hardly the only devices by which workforce participants battle for bigger slices of pie than they would reap in a perfectly efficient labor market. CEOs achieve the same thing by way of the disgraceful corporate governance practices we use. Hedge fund managers basically sucker people into paying them on an absurd compensation scheme. These people also demanded way too much for jobs that are not worth the cost. Yet we are told we are not supposed to begrudge them their wealth because they earned it in the free market. We are supposed to ignore the fact that that market was not really free. Meanwhile you would have us be enraged at the union workers who are basically doing just the same thing, but coming out of it with far less wealth, and whereas the CEO deserves his deal with the golden parachute, the union worker is screwing us all over?

    You say unions started for a good reason. What was that reason? Was it not that labor was unable to achieve acceptable living standards when it was every man for himself? Is that not true today? Looks to me like it is.

    And look at what the result of that has been over decades: households went from one earner to two earners to two earners plus borrowing on their credit cards and taking out subprime mortgages in order to maintain a reasonable standard of living. Our society let them borrow because we wanted them to spend so that someone else somewhere else in the economy could make money. We know that the net result of that was an increasing share of that money ended up in the hands of the very wealthy. Now the debtors are saying, guess what, you won’t let us extract enough wages out of the economy to make a living, so f- you, we are not going to pay our mortgage and our credit card bills.

    Banning the unions won’t solve the underlying problem, which is basically income inequality has gotten out of hand and it can no longer be masked by letting people borrow to sustain their standard of living.

    I don’t know what the answer is. There are too many auto workers and their wages are indeed too high to be competitive. But those people have to be allowed to extract a living out of our economy, do they not? If someone follows the rules and works hard, shouldn’t they be able to have a reasonable standard of living in the richest country that has every existed on the planet?

    Let me tell you, I have been spending a lot of time in recent weeks thinking about this stuff. I work on Wall Street and I have an MBA from a big name school and I have always been a believer in free market and the invisible hand and low taxes and all the rest. But now I look at what is happening in the economy, and I contemplate the reallocation of resources that is going to have to take place in the coming recession, and I see some problems that look very intractable for the free market to solve on its own, unless we as a society are willing to just allow the least skilled among us to live in poverty and squalor as they compete with one another for the crumbs we are willing to throw to them to make our cars and other stuff for us, and I just don’t think that’s the kind of country we want to be, nor is it sustainable in a free nation.

  32. mft

    tompain, I liked your comment very much. Thoughtful, but also from the heart. What above all is needed in the USofA is that thinking people distance themselves from the blinkered ideologies and dogmatism of the post-Reagan era. It will be hard for Americans to find a new, ethically based set of principles for economic activity without falling over into a new dogmatism. It’s hard to stay standing on a ship in heavy seas, and American cultural traditions tend towards a Manichaean discourse.

    But how the mighty have fallen. The Wall street “Lords of the Universe” turned out to have feet of clay. Perhaps a virtue that some in America should pay more attention to is humility.

    In the hope that all this will turn out for the better, as a European I can only suggest that the coming time may be an opportunity for America and Europe to get together and learn a little from each other. We both have our weaknesses and our strengths, and if we approach both with humor and respect we may still be able to help make the world a better place.

  33. wintermute

    tompain, I like your post very much too.

    I have now spent 20 years working in investment banks and have seen a lot of what is wrong in the financial community before this crisis started.

    Total greed of the upper echelons is/was rampant. People worth $50 million who can only be kept in their IB jobs for promises of more millions every single year. Also 25 year-olds working 14 hour stress-filled days – hoping to get to the top. They are management, fixed salary, small bonuses, as no-one in an IB is blue-collar which means their hourly rate winds up below that of most auto-workers. (Unless you are upper-echelon).

    I also despair at how capitalism itself is under fire and yet this is the system which has created the living standards we enjoy today, or we would all be like Albanians. I realise that the rot has been setting in for years – as mentioned earlier – it used to be one wage-earner sufficient for a family, then two, and then two with debt. Something has gone wrong – fractional lending?, no gold standard? Shadow-blanking system? Perhaps.

    Someone mentioned ethics-lite and that is not my instinct. The hardline for current and ex-employees of the auto-makers is shock therapy only. A chart of GMs share price shows it heading to zero as surely as Titanic ripped into the ocean-bottom. People are forgetting that $25bn was made available to the auto companies only a few short weeks ago! It is not like they are being hung out to dry. This government money comes from one of two sources: taxes or savings (via printing). This is hard-earned money from everyone else – just vanishing. When infusions like this fail – there is nothing left but shock therapy.

    The IBs and auto-makers have a lot in common. The IB business model is broken. No IPOs, leveraged buyouts, securitization, corporate financing. I can see a whole empty floor from my desk. The auto-makers face their own crisis – the internal combustion engine itself has had its day – this is a huge event and just as IBs are ill-equiped to cope with their business model collapse – the auto-makers have their Waterloo moment as well.

  34. charlie

    the $25 DOE loans aren’t coming until 2010. They have major string attached (govt takes possession of the new/renewed car plants) and are open to everyone. Also, most importantly, GM and Ford don’t qualify for the loans based on their financial books. So a large part of this debate is moving the DOE loan requirements around.

  35. amazed

    After reading most of these idiotic statements you have posted. I have come to a conclusion.
    As a auto worker for over 20 years I hope the industry does fail.
    To stop all you whining and jealous people who hate auto workers because they actually have do something to earn there wages. And please stop posting about wages you know nothing about.
    Only then will your eyes open to what really is going on. Killing the middle class in this country so we only have the rich and the poor.
    I wonder if a country can file for bankruptcy. Probably not but it will be fun to watch all you squirm when you lose your jobs. Then have to work 2 or 3 jobs to make a living at McD’s or Arbies.If your lucky. It’s coming. You don’t think so? With no manufacturing base anymore in this country what is left? Wallstreet. Oh yes it’s fine to bail them out they really have a product that all Americans want. They are the ones that should fail. Greed, humungous bonuses, business trip parties. I could go on and on. That’s what my money is being used for at the moment. So it’s fine to give money to the crooks but a staple in this country asks for help LOL and you want to crusify them.
    Go figure.

  36. AXXel


    Without the THREE U.S. automakers combining into one there is no rationality to bailing out GM. GM’s cash burn is triple the street estimate and has lost all control over its sales, its product development and its future. The executives and the unions have the company hostage to government capital infusion. Bankruptcy is a viable answer that can push off creditors and force unions and management to make concessions that are impossible unless a loaded gun is at their head. There is too much capacity, too many models, too many plants, too many employees producing products that are more easily produced by others. The VW bug was the first indication that the Big Three did not have a clue to the needs and long-term preferences of the U.S. consumer. And today we have a glut of SUV’s that will ultimately have to be sold at a first-ever half-price sale. GM has already built them, they have already paid for them and no one wants them. You need cash, blow them out the door ½ price or less and they are out of inventory and cash hits the balance sheet.

    But to infuse GM with cash to keep it afloat without bankruptcy is no answer because next in line will be Ford and Chrysler. These three should be forced to combine and re-form to use their talents and capacity to building something we all need and that is energy independence.

    There is one industry that has a payback that cannot be overlooked as a place to re-train and invest and that is in renewable energy. Train those people, insist that the manufacturing capacity of GM be converted to energy and produce, once and for all, a source of energy that once in place CAN NEVER GO UP IN PRICE. In World War II Ford built a massive number of B-24’s in their new Willow Run plant in Ypsilanti. That change in production and product proved that it can be done and Ford did a spectacular job producing that airplane to the considerable consternation to the Nazi war machine. Fast forward to 2008 and our enemy is our own waste and inefficiency; energy independence is crucial to our national safety and we can actually budget part of our national defense budget to this end.

    I am not against giving money to GM…but I am against giving them money to build products that have no measurable or important upside to our economy long-term. I am against giving money to GM with Ford looking like that doggie in the window. Force them into solar, wind, wave and nuclear. Support them in their endeavor to re-tool and you got my money. Absent that, you will not get me to suggest giving them, their workers or their bloated retirees belly-aching about their co-pay when millions have no health care a single dime.

    The side benefits are obvious: our defense structure is enhanced because we no longer have to depend on a cartel of Bedouins in the Middle-East to determine for us how much oil we are going to use and our environment actually can become healthy in L.A. vs. choking to death sitting in traffic on the five. We put a pin in our energy costs once in for all and bankrupt our dear friends in the middle east forcing them to drive Chevy Cobalts and trade in their Bentleys.

    Here is what we said about the Chrysler/GM merger talk=
    “Two drunks walking down the street
    holding each other up…
    until they hit the curb,
    then they both fall down”

  37. William J. Leitold

    The UAW destroyed the Detroit Big 3 in two ways. Fist the wages and benefit obligations today exceed their nearest US competitors by $60+K per year, rendering their employer uncompetitve. Second, more subtly the UAW created a culture between the union work rules and the wage scales in the Big 3 that made it virtually imposible to hire new intelegent well educated workers. Ever wonder why Big 3 amagment is so simlar and so “dumb”? The answer is to be found in their comon demoninator; UAW. Yves, I’m shocked at your taking the UAW’s side. Even now their arogance is so large that their Presidnet is unwilling to incite the delusinal membership by even offering nominal concesions.

  38. thegeniusfiles

    Lots of good comments! One issue I have really not heard discussed much in the media is the strengthening of the dollar as the Treasury funds its giga-bailouts by flooding the bond market. Is it just me, or does this seem like a disaster for whatever is left of American manufacturing? Not just automotive: all manufacturing. American products become less globally competitive as a result of monetary policy, just as credit also dries up. How will Detroit make good on promises not to outsource, and yet still be competitive in a market where it already can’t compete? This does not bode well for unions or pension holders. So does Detroit blythely shed both, as some have suggested? Is that really a ‘solution?’ Think about the implications of that. How will workers remain productive under those circumstances? Will workers really stand for a 50% pay cut? Will such drastic measures even counter the disastrous effects of the current monetary policy?

  39. Andrew Gross

    The White House claims its "working round the clock" on GM/Auto Industry
    per today.

    See at:

    My suggestion: Stop working on this and all other related Multi-BILLION DOLLAR Bailouts!

    They're mortgaging everyone's future when the MARKETPLACE will ultimately decide winners and loosers!!

    Best to all,

    Andrew Gross
    Chairman & CEO
    Automotive Consulting Services, LLC

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