It’s now clear that the next step forward for GM (“Federal Motors,”although they’ll probably keep their existing ticker symbol) will be very similar to bankruptcy. It’s also clear that, in a move of breathtaking audacity (not to mention hubris), the President of the United States has chosen to become the de facto CEO of the largest (by revenue) American corporation.
GM’s future is much like a bankruptcy because of two things: contract renegotiation, and financing. Its future is unlike bankruptcy in that there will be no enforced performance metrics. And the whole exercise is a radical shift in direction for governmental involvement in private affairs.
Everyone has their pet theory about why GM is failing. People who hate unions blame antiquated, high-cost labor contracts. People who want nationalized health care blame the fact that GM is obliged to buy gold-plated coverage for over a million retirees and their families. And people who hate GM blame its marketing.
All true to some extent. But the proximate reason GM went over the edge, is a collapse in the North American vehicle market. As recently as November, GM executives were saying that they expected the market to return to 16 or 17 million units a year by 2010 or shortly thereafter.
Horsefeathers. Reality will be in the neighborhood of 9 or 10 million units for the foreseeable future, and perhaps beyond. This is the kind of structural transformation in a market that flushes away the older and less-efficient production capacity. We don’t need GM to stay in business.
As long as GM had the cash flow from operations to stay current on its payments to vendors, dealers and long-term debtholders, it was insulated from ever having to seriously restructure. So it never did.
Now, it’s hemorrhaging about $5 billion a month, by my own count, and restructuring is inevitable.
But no one will provide the financing for GM to operate in a standard Chapter 11 bankruptcy. And no one is willing to see the company go to a Chapter 7 liquidation, which would take hundreds, maybe thousands of other companies along with it.
Because the market is shrinking and changing, a certain amount of the existing capital stock and jobs must go. Free markets make these adjustments quickly, but brutally. Since we live in the Age of Bailouts, however, the liquidation of excess labor and capital will be slow, expensive, and partial at best.
The government (read, the taxpayer) is the only plausible source of debtor-in-possession financing for GM. That much was inevitable, and for months now I’ve been writing that we need to prepare to put at least $50 billion of public money into this company. Maybe $100 billion.
But this company simply has no pathway to return to profitability at anything like its current size, so the process of Chapter 11 bankruptcy would have been a very substantial liquidation — probably a near-total exit from the North American market. (GM’s overseas businesses are actually rather healthy.)
That means the public money that will continue to pour into GM will be wasted. There was no private source of bankruptcy financing for GM because bankers aren’t stupid.
But there’s a really big problem here. Normally when a company goes into emergency mode with nontraditional funding sources like bankruptcy lenders, it has to meet some very strict covenants and performance metrics. Otherwise, its lenders quickly seize the assets and wind up the business. But government doesn’t work that way. If there’s one thing that bureaucratic managers never tolerate, it’s overt failure. That goes double for Congress, who regularly does shockingly expensive and silly things just to prevent bad headlines.
Recognizing failure is something free markets do very well, because the only metric that matters is the bottom line, and when you’re out of money, that’s the end of the game. Government doesn’t work that way.
There’s always more good money to throw after bad.
It didn’t have to be this way. The government should have said: This is disgusting, and we regret it, but in order to save as many jobs as possible, we’re going to enable this company to partially liquidate over18 months without a fire sale, and then we’re going to step back and let some new owners run the business.
Our new President didn’t do that. Instead, he looked at the situation and said: “Hey, if I can run the Free World, an automaker is a slam dunk! How hard can this be?”
This is radical, unprecedented in peacetime, and exceedingly dangerous.
Unique among nations, Americans have always had the happy privilege of understanding that government should have strict limits. The experienced people that for hundreds of years have emerged into our national leadership have always been deeply respectful of those limits.
True leadership respects the lessons of history.
But today, the fools are rushing in where the angels have long feared to tread.
