The three automakers are too big to fail (some say), but is a federal bailout the way to go? Lyle Gramley, former Federal Reserve Board governor and senior economic advisor at the Stanford Group, said, “As a general principle, I don’t think that bailing out individual companies is a good idea. Under present circumstances, you’re looking at an economy in a steep fall already. You have to contemplate the possibility of 1 million employees losing their jobs and the entire industry at risk” if an automaker were to fail.”
However, Michael Cusumano, professor at MIT’s Sloan School of Management, said, “Like the airlines, I think they should go into Chapter 11 bankruptcy … and start with a clean slate.” Layoffs would occur in “an orderly way… it would be tens of thousands over a period of time” and not millions of workers.
Bankruptcy does not mean a company disappears. “Maybe three become two, and the two are both leaner and meaner,” Chris Varvares, Macroeconomic Advisors President said.
Chapter 11 was created during the financial panics of 1800s. In 1938 bankruptcy laws became stricter, but in 1978 Chapter 11 came back, and since that time it was been used to reorganize airlines, steelmakers and other companies.
There is one problem with automakers filing for Chapter 11 style bankruptcy. Research shows that the majority of consumers will not buy cars from companies that filed for bankruptcy.
Bailout with strings attached?
If the federal government bails out the automakers industry it “needs some serious stipulations,” said Marcus Amick, an automotive industry analyst.
President-elect Barack Obama appeared on 60 Minutes November 16 and said that any money given to the Big Three must come with conditions. Any assistance to the automotive industry must be “conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan” to create a sustainable industry.”
“It’s time for new management and stringent conditions,” said Rep. Jim Cooper (D-Tenn.). “It’s Uncle Sam. It’s not Uncle Sucker.”
“I think there have to be some conditions attached to it,” Sen. Charles E. Schumer (D-N.Y.) said. “One is so that we have an assurance they’re not going to come back and ask for more money six months from now, that it will actually improve their conditions in the long run.”
Huffington Post writer Laurie David pointed out that Congress forced automakers in the past to improve cars by adding seat belts and air bags, “all of which Detroit refused to do voluntarily.” David suggests that automakers immediately drop their lawsuits against states that passed clean cars legislation which requires “more efficient, less polluting vehicles.”
David also suggests that Congress “set strict guidelines” that ensure automakers get “clean cars into American driveways where they can help power a new smart grid.” She goes even further by stating that federal funds should be given to “smaller entrepreneurial car makers for large-scale production of their innovative all-electric and plug-in hybrid prototypes.”
Perhaps one condition for a federal bailout should be ending lobbying by automakers. Paul Soglin, who runs the consulting company Soglin Consulting LLC, believes a provision needs to be made to stop automakers from “lobbying and influencing elections and public policy.”
One thing is for certain: automakers must convince the Congress that a bailout will be the last one. The Big Three will have one more chance this year. Otherwise they have to wait until Obama and the new Congress take office. In the meantime one of more of them will probably file for bankruptcy. Will the automotive industry then survive at all? We will have to wait and see.