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FRONT PAGE CONTRIBUTOR

The Week That Was For General Motors

Not Much Road Ahead

So this week we witnessed the jarring spectacle of three wealthy, well-dressed CEOs flying from Detroit to Washington, DC, each in his individual private jet, to ask for anywhere from 25 to 50 billion dollars of your money.

Instead, Congress turned them away. Democrats (if you take them at their word) said they wanted to give Detroit a big slug of money from the Treasury’s bank-bailout fund.

Republicans, understandably wary of the public reaction to allocating new money for yet another bailout, proposed instead to redirect $25 billion that has already been allocated for fuel-economy research, and allow the automakers to use it for operating capital instead.

In the end, Senate Majority Leader Harry Reid decided that it was his way or the highway, and he refused even to bring the Republican proposal (offered by Senators Dodd and Voinovich) up for a vote.

The news reporting naturally spins all of this as a desire on the part of Republicans to stand in the way of a solution.

So Reid let everyone get out of Dodge for the Thanksgiving holiday, and they’ll (presumably) come back in early December to give it another shot.

Why the urgency? Because as I explained here, General Motors will be out of cash by sometime in the vicinity of the end of this year, unless their sales turn sharply higher this month and next.

So now we’re going to go through a couple of weeks of frantically weighing the pros and cons of a range of possibilities for dealing with GM.

The obvious option is to do nothing, and allow GM to hit the wall. There’s no way for them to continue operating without capital, and they would have to shut down operations. This could conceivably go as far as a liquidation of the company under Chapter 7 of the bankruptcy law.

That’s a total worst-case scenario. Thousands of smaller companies from parts manufacturers to dealers would be affected, and they in turn would cause distress for Ford Motor, Chrysler LLC, and other automakers. It would be an ugly mess, and some people have estimated that the cost to the taxpayer (for such things as unemployment compensation) could hit $200 billion.

(What a year it’s been! We’ve gotten accustomed to throwing around astronomical sums of money as if they were just fluff on the breeze.)

Besides, it doesn’t make sense for GM to die completely. North America certainly needs less vehicle-producing capacity than it has now. But I don’t accept that the difference between what we have and what should have is as large as General Motors.

Additionally, GM has some very strong and profitable operations overseas, notably in Europe and China. There’s no reason for those businesses to go away.

What about a Chapter 11 bankruptcy filing for GM? Again, they’re out of cash, so it doesn’t really help them. They will still need to line up short-term financing before the end of this year. And the only available source is the Federal government.

So it’s a foregone conclusion that taxpayer money will be fed into GM, whether or not this takes place in the context of a formal bankruptcy filing.

Here then is the state of play. We have a huge automaker which is wounded badly, and perhaps fatally. Some significant part of GM’s workers and operations will survive, and some won’t.

And it’s not yet known whether the parts of GM that survive will do so inside of a business entity named “General Motors,” or inside other entities, or a combination of both.

Fundamentally, what we’re doing is pouring in a huge wad of public money (I believe it will total $100 billion or more), simply to wind down General Motors in an orderly fashion over time.

And we have to spend this money to wind down GM slowly because if we let them crash and burn quickly, the mess will be a lot bigger. We’re between the proverbial rock and a hard place.

GM’s existing pension and healthcare commitments to retirees will be assumed by the taxpayers. Get ready for that, folks, it’s going to happen and there’s no way out of it.

But as regards continuing operations, the United Auto Workers are absolutely critical to the process. Their compensation and benefits are much of the reason why GM’s cost structure is so poorly matched to current market realities.

The UAW absolutely must accept major, painful concessions on wages, benefits and work rules. If they’re not willing to swallow some very big changes, the die will be cast not only for GM, but also for Ford Motor and Chrysler LLC.

And if that happens, it’s only a matter of time before the Big Three die. The union is ultimately the key to the whole situation.

What could be wrong with my analysis? Well, look at what might be the best-case scenario from the point of view of both GM’s senior management and the leadership of the UAW.

Their sweetest dream would be an open-ended commitment from the Federal government to fund their operations indefinitely with public money, so that neither the union nor the company will need to swallow a painful restructuring.

What’s the likelihood that a new, more-Democratic Congress and a new Democratic Administration will be tempted to follow this path to state-capitalism and industrial policy?

Probably not large. But definitely not zero.

-Francis Cianfrocca

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