When Government Comes to the Aid of Big Business

I’ve been keeping an eye (and my ears) on the Senate hearings regarding the auto industry, trying to follow the latest developments while also attempting to wrap my mind around the unfolding drama. Yes, it is dramatic when leaders of three huge American corporations appear before lawmakers with their hands held out asking the federal government for tens of billions of dollars of low interest rate loan money to help prop up their businesses.

My opposition to helping General Motors, Ford and Chrysler is fairly well known – you can’t miss it as I’ve been discussing the plight of the auto industry over the past several years on my The Auto Writer blog and elsewhere. Lately, like so many others whose work is related to this industry, I’ve stepped up my coverage and comments.

Two Wrongly Held Beliefs About The Car Industry

Before I continue, let me first refute some of the commonly held, but erroneous beliefs about the American automotive industry. I probably should say North American because what applies to the US portion also applies to Canada – the two countries have a vested stake in this industry thanks to labor and trade agreements ironed out in the early decades of the twentieth century.

Firstly, statements from some quarters that neither General Motors, Ford nor Chrysler are building cars that people want are misleading. More than half of the cars produced in this country are from the Big Three automakers and, in the cases of Ford and GM, both companies build and sell far more cars overseas than they do in the US and Canada combined. True, some models are less desirable than others, but a blanket statement such as this one is inaccurate, perhaps even irresponsible.

Secondly, if the automakers were to go bankrupt, that doesn’t mean that either company would quit building cars. Unless, of course, they chose to go through Chapter 7 of the Bankruptcy Code which would be dissolution of the business. GM CEO Rick Wagoner is making it sound as if his company will cease operations in the next few weeks – I doubt that includes completely shutting down everything.

Explain this to me: GM may be struggling at home, but in China they built more than one million vehicles there last year. Are they willing to shut down their fastest growing market too? I think not! Chapter 11, on the other hand, allows GM to reorganize which is exactly what they need to do. This move would allow GM to abrogate certain contracts including labor agreements, dealer agreements, abolish excess brands, etc. I’m not saying it wouldn’t be painful for them or those directly involved – it most certainly will be – but it is an option that keeps the automaker afloat and allows them to eventually emerge from bankruptcy stronger and ready to move forward. Chapter 11 would apply to the company’s American operations only, not Canada and certainly not elsewhere.

A current example of an industry that knows Chapter 11 bankruptcy well is the airline industry. Delta Airlines lost billions, filed for bankruptcy protection, worked their way out of it, and has emerged successfully. Recently, Delta bought out Northwest Airlines, so there is life after bankruptcy. I’m not saying that companies won’t have a tough road ahead of them, but at least by taking the steps as outlined in Chapter 11 of the federal bankruptcy code, they can emerge and fight on.

Digging Deeper: Looking Beyond The Senate Hearings

There are a few other things taking place along with the Senate hearings, certain events that may have escaped you:

Chrysler LLC is a privately held company owned by Cerberus Capital Management, L.P. – a private equity company. Cerberus also owns a 51% stake in GMAC (what was once called the General Motors Acceptance Corporation) with the remaining 49% held by GM. GM and Chrysler were negotiating as recently as a month ago for GM to buy Chrysler in exchange for selling all or a portion of their remaining interest in GMAC. GMAC not only finances cars, but they are a big mortgage holder. Cerberus has expressed interest in making the company into a bank holding company, one that could qualify for a slice of the $700 billion bail out pie. In order to qualify as a bank holding company, Cerberus would need to increase their share in GMAC to at least 75%. By the way, 90% of Chrysler’s vehicles are sold in the United States and Canada – their presence overseas is comparatively tiny.

Ford says that they have enough cash to last them through 2009. Clearly, their financial predicament isn’t as bad as what GM and Chrysler assert, but they are (rightfully so) concerned that if either GM or Chrysler goes under, that they’ll be dragged down into the financial vortex as well. All three automakers (plus a number of foreign automakers who produce domestically) would be impacted if an automaker fails and auto suppliers end up sinking with them. Thus, Ford basically wants assurance that they’ll not be whacked in the process. By the way, I believe Ford has the best product mix of all three companies while Chrysler has the worst. GM falls somewhere between the two.

General Motors is a curious company, one that until early last year was the world’s largest automaker. Their reach beyond the US is strong and the company is the largest automobile producer in China. In fact, they sell twice as many Buicks in China as they do in the United States. Moreover, the company has or is seeing success in emerging markets such as eastern Europe, Latin America and in Asia. The Chevrolet Volt is their electric car model of the future which could play a significant role in where the industry is heading. Unfortunately, it isn’t scheduled to appear in showrooms before November 2010.

What The Automakers Want

So, why are the three automakers appearing before Congress? That’s easy: they want in. After the federal government panicked everyone this past fall into approving a disastrous $700 billion bail out program and after it became apparent that government oversight of the distribution of these funds was lax or non-existent, I believe the automakers saw a cash cow ready for the killing. These funds would be on top of the $25 billion loan package the federal government approved of several months back, monies which the automakers can use to retool plants and bring modern, much more economical cars to the market.

The reasoning for additional help is easy to understand. After all, if tens of billions of dollars can be thrown AIG’s way and no one bats an eye and the federal government takes a financial stake in the nine largest commercial banks, why not ask Congress for money? It seems lawmakers are in the giving mood – surely, the beleaguered auto industry should get help too, right?

Well, no.

In fact, I’m sorry that the bail out was passed in the first place. Where on earth is it government’s business to shore up the failing operations of big business? Namely, private business?

Unfortunately, some politicians who seem to be only concerned with protecting their personal interests have decided that certain portions of big business should be effectively nationalized. Sure, the commercial banks, AIG, Goldman Sachs, et al., are still privately managed, but they are now partially owned by the federal government. In exchange for financial assistance these companies have exchanged their debt for federal loans or grant money.

So what we’ve created over the past few months are a number of federal government backed businesses. Fannie Mae and Freddie Mac have long operated as quasi government controlled entities, but now we can include all of the top banks, several investment brokerages, and whoever else has gone to the Treasury Secretary and received funding.

To date, we know that about half of the $700 billion bail out has been dispensed, with hundreds of billions more set aside for mortgage refinancing, treasury purchase of mortgage backed securities, to guarantee money market mutual funds, etc.

Small Businesses: Tough Luck

I run my own business as I am the sole proprietor of my marketing/writing operation which I founded in November 2002. I’m not on the radar as far as being someone who creates jobs, choosing to avoid the headaches of managing other people and following my passions which include writing and marketing. Still, every single one of my customers is a small business and I understand what they are going through during these tough times (e.g., tight credit, slow repayment from vendors, a decline in business, etc.)

Lately, it seems that we Americans have grown soft when it comes to holding people accountable for their actions. If someone hurts or kills someone, we don’t blame them – we blame their parents for raising them wrong. If a person has a drinking problem or drug habit, we call it “addictive behavior” when an underlying reason – a matter of the heart – is what is really going on. The word “ethics” seems to have been removed from our vocabulary, perhaps to protect those who are making wrong choices.

Today, when big businesses fail, we may assign some sort of generalized blame but we rarely dig deep enough to find out what is really going on. Instead, the focus is on job loss, impact on the housing market, related crime, etc. Yes, these are valid concerns but few people go to the heart of the matter: what is it that got the company in the position that they’re in? Was it poor management choices? The economy? Government over regulation? Or a combination of all three?

For small business owners getting help from the government is not what most managers want. Instead, if given much more latitude, owners would run their businesses pretty much without interference.

Treat Your People Right

I’m certainly all for companies treating their employees right, but I believe that employees have a responsibility too. In fact, wherever and whenever people have a vested interest in the success of an operation, they work harder, smarter, and better than those who don’t. What’s more, the vast majority of new jobs created in this country are from small businesses, a segment of the economy that is actually the biggest engine, not big business.

Examples of companies who generously award their employees are legion including most internet entities (Google, Red Hat, eBay, Sun Microsystems, Microsoft, etc.); the pharmaceutical industry; many franchisers who give their managers a stake in single store profits; mom and pop operations; and more. True, a number of the businesses I mentioned no longer qualify as small businesses (as per the Small Business Administration’s guidelines of 500 or fewer employees), but they started out small. Indeed, each of the companies who are currently failing also started out small which leads to this question: are some businesses too big to succeed? I wonder.

A Band Aid Approach

As far as what Congress plans to do for the auto industry I think that answer is obvious: they’ll loan the companies some money. How much, for how long and with what conditions attached hasn’t been ironed out as of this writing. It’ll mount to tens of billions of dollars which will save jobs, keep plants running, the industry humming, etc. But it won’t cut to the heart of the matter – why these automakers continue to lose money while foreign automakers can build cars stateside and make money.

Instead, what the money will do is delay the inevitable restructuring that is required.

Chrysler cannot continue operating in their current set up with few new products to compete in a global market, while General Motors is saddled with more brands than necessary. Ford is in the best shape of all, but like its two American competitors owes tens of billions to creditors as all of their property is leveraged. Owing more money to creditors than what the company is worth is Ford’s lot, as is General Motor’s. With Chrysler we don’t know for certain because that company is privately held.

Long after the funds are dispensed, America will likely forget what it was that brought the Big Three to its knees. But, because the automakers did not take the painful, but necessary, step to reorganized their businesses, they’ll return to the government till with their hands held out. That, my friend, will set up a whole fresh round of addictive behavior one that will be borne out through poorly made cars that cost more than Toyota, Honda, Volkswagen, and Hyundai, vehicles that are always a step behind what the industry leaders are building.

Buyers Choose What They Want To Drive

Worse, you can’t make consumers buy your products. If car shoppers perceive that your vehicles lack quality, are too expensive, or not what they want, they’ll vote with their wallets and go to the competition. No amount of government help can resolve the problems of the auto industry unless the industry wants to help itself first.

We may be able to delay for a season or two the inevitable when it comes to the restructuring of General Motors, Ford and Chrysler. However, as long as we coddle shrinking big businesses at the expense of small businesses and taxpayers, we’ll have a government dependent industry on our hands, one that will be a money pit and a continual drain on the American economy.

Further Reading

Government & Big Business

Chapter 11? Not the End of the Road!

When talk surfaced earlier this fall that the federal government was considering putting a huge bail out package together to aid several failing companies, I immediately began to question the wisdom of this approach. After all, if private enterprise fails what role does government have in propping up a business?

Early on, I contacted one of my US Senators, Elizabeth Dole, and told her office that I was opposed to the bail out plan that was originally under consideration. Unlike our other US Senator, Richard Burr, Senator Dole later voted against the revised bail out plan which had widespread bipartisan support. Some $700 billion later, we don’t know where all of the money has gone or in what way that it has been used. We have heard stories about lavish taxpayer funded junkets for executives which took place after the bail out money was dispensed (thank you, AIG).

Today, a lot more companies have lined up with their hands out including American Express, General Motors, Chrysler, and Ford. I’ve also heard that about half of the bail out monies — $350 billion – may not be dispensed by Treasury Secretary Henry M. Paulson, Jr., as the Bush Administration prefers that the remaining funds be used per the Obama Administration’s discretion come January 20, 2009 when The One ascends to the presidency of the United States of America.

So, my question is this: if it was a matter of life and death back in September that $700 billion be given immediately to prop up failing companies, why is it that the remaining funds can be sat on for at least two more months before the next administration decides what to do with it? I can only conclude that there wasn’t an emergency in the first place.

I’ll tell you what this is all about: fear. Yes, a group of politicians tried to scare us into forking over a wad of our money a few months ago and it is that same tactic the US automakers are now using (plus select other companies). My response to their demand for taxpayer money: file for Chapter 11 bankruptcy if things are as bad as you assert. After all, you are a private enterprise – why should America be forced to fund your poorly managed companies?

Chapter 11 of the US Bankruptcy Code allows businesses to reorganize their operations while remaining open for business. On the other hand, Chapter 7 is essentially a fire sale bankruptcy, one where the assets are liquidated and the business is shut down.

Now I must tell you that the automakers are suggesting that if they file for bankruptcy, millions of jobs will be lost. Really? Are they planning to file bankruptcy under Chapter 7, not Chapter 11? If so, why?

My thinking is that the automakers are taking a page from the fear play book, painting a worst case scenario where none exists. If the automakers file for Chapter 11 bankruptcy, that’ll open up a world of possibilities for them: union contracts can be negotiated, dealership relationships terminated, contracts with suppliers reviewed, and much more. True, GM and others would escape some of their financial responsibilities but it is these same poorly negotiated contracts which has all three automakers in their current bind.

Why wouldn’t the automakers choose Chapter 11? Political pressure. Politicians whose voting base is heavily unionized want the bail out. They know that some employees will be laid off, plants closed, and tax revenue lost. Meanwhile, a bail out doesn’t cut to the heart of the issue: all three automakers desperately need to be restructured. Inject some taxpayer money into all three companies today and I guarantee it that they’ll hold their hands out again in the near future.

To my fellow Americans: fear can be a great motivator, but it can also be used to act irrationally and protect your self interests even at the expense of other people. Government solutions to any problem –whether real or trumped up – means centralized control and the gradual erosion of our freedoms and the death of free enterprise.

I don’t like how any of this is playing out and I think that most Americans, if they had all of the right information before them, would agree and let their elected officials know that propping up the free enterprise system is bad for taxpayers and businesses alike.