Let G.M. go bankrupt

http://blogs.law.harvard.edu/philg/2008/11/08/let-gm-go-bankrupt/

by soundsop • 18 years ago

95 71 18 years ago

blogs.law.harvard.edu

mdasen• 18 years ago

I doubt this would happen. Of all the players involved, it's probably the UAW that has the most to loose in a Chapter 11 situation. What's killing GM (and the other American auto manufacturers) is the unreasonably high labor obligations they have accumulated back when the industry was an oligopoly.

The question is, will a president who ran as union-friendly allow UAW workers to loose a ton? GM has a lot of people on payroll earning more than many computer programmers who are simply idle - they don't do anything, don't show up to work, etc. The average labor cost per hour for GM's manufacturing is over $70/hour.

While GM has made significant mis-steps in their management, the fact is that no management no matter how brilliant they were could compete when they have labor costs like that.

Dilpil2• 18 years ago

Not that I don't believe you, but some sources for that would be nice. I've suspected this was true, but I've never seen a real in depth analysis and explanation of it.

jeroen• 18 years ago

From 1996: http://query.nytimes.com/gst/fullpage.html?res=9507E1DE1239F...

"The company estimates its hourly cost of labor at $43"

2005: http://www.npr.org/news/specials/gmvstoyota/

"Average Labor Cost per U.S. Hourly Worker $73.73"

I can't find anything more recent.

peakok• 18 years ago

This is an analysis you won't find outside of the U.S. Typically, the car industry is known for having strong union labors in a lot of other countries (especially in Europe), and while auto makers are always in trouble during recessions, no European one is nowhere near the critical condition of GM.

The real problem is making cars that people want and selling them. I'll give you a clear example with the history of Fiat :

Fiat is an Italian auto-maker that had a very bad decade, the cars weren't selling and their reputation was bad, when you tought about Fiat, the first image that came to you was a subpar car. After they attempted everything else (cutting costs, you guess how), they finally resolved to fire every single guy with a tie in the company, from the simple chief to the CEO, the WHOLE management that was pointing to the high cost workers, unions, etc. as the sole responsible for the demise of the company, all these people that refused to take responsability were fired and replaced by new heads, an unprecedented move.

Guess what ? It worked. Fiat is making a strong come back in Europe and their reputation is building up again. Their cars are not synonymous of subpar anymore, they sell, even if it takes a lot of time to restore confidence and change your image, their strategy is ultimatly working.

I believe GM could take a lesson or two here. The problem is when the management refuses to take responsibility of a failure, they aren't qualified anymore to excercise responsibility, and their real chances of saving the company, bailout or not, are very slim.

eru3• 18 years ago

Sources?

timr2• 18 years ago

I'm tired of reading posts by internet libertarians, blaming the GM employees for the sins of the company.

GM's labor costs are high because of pension costs. They promised an entire generation of workers old-age benefits if they gave their life to the company, and now the company wants to eliminate that deal, because they simply didn't plan for it correctly (oh yeah...they also made crappy, fuel-inefficient products that nobody wants).

My grandfather was one of those pensioners. He retired from GM after over 30 years -- having sacrificed his hearing and his back to the job -- and the pension gave him a modicum of comfort until he died. His widow still relies on it to survive. There are thousands of other people just like them, who made a deal with the company in good faith, that the company would just love to revoke.

I think GM should be allowed to go into bankruptcy, but if they do, the judge would do well to fire or eliminate the salary of every executive who failed to plan for pension costs, resisted fuel-efficiency standards, eliminated new product programs, and otherwise destroyed the company. Then, perhaps they can think about cutting the pension benefits of the blue-collar guys who gave their health to a corporate machine.

Prrometheus3• 18 years ago

Nice anecdotes, but they also have rooms where workers they don't need and can't fire come in and sit for 8 hours everyday. The unions are a millstone around their neck.

Airlines, car makers, government, schools. Four sectors that are unionized, four sectors that are grossly inefficient, four sectors that are kept alive by taxpayer money.

mgb• 18 years ago

>is the unreasonably high labor obligations

While Porche is insanely profitable because it exploits the slave labour wages and conditions for German autoworkers?

eru3• 18 years ago

Porsche does not pay pensions directly.

patrickg-zill• 18 years ago

Does anyone know for sure, what happens to the benefits and pensions of GM retirees, should GM go bankrupt?

My understanding is that the plan is fully funded and is a separate entity at this point; thus no change for those already retired.

cjenkins• 18 years ago

I believe they would be protected under the http://www.pbgc.gov/ at the very least. I'm not sure how it is structured in GM's specific case though.

Kilimanjaro• 18 years ago

Let * go bankrupt

That's what capitalism stands for.

Those who kept a well managed admin and saved for the worst should be rewarded, not those who failed.

jbert3• 18 years ago

> Those who kept a well managed admin and saved for the worst should be rewarded, not those who failed.

There's an interesting issue there, though. Given:

1 - in general, higher risk => higher reward (if the risk comes off ok) 2 - fast growing competitors can dominate a market, wage a price war or buy slower-growing companies

Isn't there a potential problem that companies which are sensibly prudent can be simply out-competed by those which don't hedge against low-probability devastating events?

i.e. the natural state of the current economic system could be said to favour companies which grow more quickly by accepting risks which mean they cannot survive in the long term?

gaius2• 18 years ago

Economists call this the Dotcom Fallacy.

lutorm2• 18 years ago

I think so too, like I said in my other post: check out "fooled by randomness" and the stories of investors who blow up.

modoc3• 18 years ago

Is there a reason to bail those companies out of bankruptcy with tax payer dollars?

If you're simply pointing out the potential advantage that a large number of higher risk competitors may hold, remember that advantage is tempered by lacking the pole position and the resources that the large company typically enjoys.

My startup is competing against some very large companies, and while we are faster, cheaper, better service, etc... They have existing marketshare, long term contracts, huge advertising/sales budgets, long track records, massive good-ol-boy networks, etc... We're doing great (we only want/need a few customers, not the whole market), but I doubt we'll ever "out-compete" the big fish to the point that they fail or we lead the market space. Being the big fish has a ton of advantages, even if they are slow moving.

fauigerzigerk• 18 years ago

Yes I think that's true in the short run and it's a legitimate strategy. But bailing them out means to make the taxpayer pay for making it true in the long run as well, and that's a mistake.

nradov• 18 years ago

GM was not ruined by a low-probability devastating event. They made bad management decisions over and over again for decades. This was a train wreck that everyone could see coming from miles away.

steveplace• 18 years ago

1 - in general, higher risk => higher reward (if the risk comes off ok)

That's why we look at risk-adjusted returns.

gaius2• 18 years ago

Exactly. This is not a crisis. Under the capitalist system those entities (individuals or organizations) who demonstrate their ability to manage resources effectively get more to manage, those who don't are ringfenced from doing too much damage by their resources being taken away. That is how the system is supposed to work, and how the system is working now.

jotto• 18 years ago

it seems natural and appropriate to let poorly run businesses fail. unfortunately, our central bank doesn't prioritize based on inflation rates: http://www.house.gov/jec/press/2005/10-18-05.pdf instead they do the following:

instead of managing inflation, they generally do everything possible to prevent periods of deflation (which requires propping up the money supply) which is what happens when you let industry leaders fail. if we let all of the businesses fail instead of bailing them out the fallout would likely be unprecedented.

see jason calcanis's explanation of the belt tightening effect and the resulting death spiral. imagine if every industry was experiencing this. http://calacanis.com/2008/11/06/the-future-of-startups/

people need to realize that this is not an adam smith capitalistic system, this is a system heavily influenced by the government. this leaves room for regulation loopholes and mistakes which create bubbles which ultimately pop. this bubble has been patched for years, its getting too big to pop. popping it would remove our status as world police and likely be a large security threat.

george bush wanted to let these companies fail, but he was told, albeit mostly by market and industry leaders that letting them fail would create a chain reaction of failures and deflation.

the answer is probably to let some companies fail so as to punish poor businesses, but we have to be wary of purging the entire system.

sown2• 18 years ago

"That's what capitalism stands for."

I think that is something we tell ourselves even though it is not really true. We live in some amalgamated economic system built on various rules of thumb, tradition and what ever else works to at least try to benefit real people and not perceptions. I guess the system also gets out of hand at times. ;)

Prrometheus3• 18 years ago

It is ugly, though, to see the pigs begging for a place at the trough. What was sold as a bailout to sore up systemic instability in the financial sector has become an everybody-invited tax money giveaway free-for-all for the favored donors and supporters of Congressional election campaigns.

The next time I complain about high taxes and someone says "STFU the government does so much for you like libraries and fire stations", I am going to throw this trillion dollar pile of shit in their face.

jhancock• 18 years ago

America is a Democracy or a Republic, not a "Capital-something". Capital is just a tool. A smart country reaches into its toolbox and chooses the best tool for the job. Extreme models; extreme capitalism, extreme free-market views, etc... will always get you into trouble. It pays to be agile.

Should we bail out GM? I don't want to, but if we do it won't crack my top 10 list of things the gov wasted money on over the last 20 years.

dallasrpi• 18 years ago

If GM and Ford go bankrupt Detroit will resemble that movie "Escape from NY"

andreyf• 18 years ago

Why?

fallentimes• 18 years ago

It already does.

dzohrob• 18 years ago

You've obviously never been there - see http://www.forgottendetroit.com/

vaksel3• 18 years ago

the problem is that GM is just too big to be profitable, and its just not competitive anymore. Hell GM is the biggest manufacturer in the world yet its losing money left and right.

modoc3• 18 years ago

It's actually #8 on the 2008 list. Although Toyota is the only auto maker above it (at #5). And my understanding is that Toyota is profitable. I'm not sure that's a valid excuse for GM.

vaksel3• 18 years ago

Is that worldwide? Just doesn't seem right. I mean they were #1 for 2007 when they did the stats in January. I'm talking about vehicle sales, not profitability.

axod• 18 years ago

Don't forget the fact it makes truly awful cars.

lutorm2• 18 years ago

It seems that the first lesson that should be learned from all of these "too big to fail" entities needing bailout is that there are other reasons to prevent mergers than just antitrust. If we prevented corporations above a certain size from growing (by merging), wouldn't these problems with mega-sized failures sending shock waves through the system be fixed?

Maybe it would be less efficient, but it makes me think of a similar situation where pure profit-driven capitalism has lead to a bad situation: agricultural monocultures. Hunting for efficiency has produced a state that is finely tuned to be maximally efficient in the current environment while being dangerously sensitive to changes in that environment.

It's just not prudent to go all out, even if you think you have a good hand... especially if you're gambling with your children's college funds...

Prrometheus3• 18 years ago

I don't think they're too big to fail. They are too big to fail without causing a political issue that challengers can use against incumbents. That is not equivalent.

thomasmallen5• 18 years ago

Sure, do just that, but you'd better have a damn good safety net unless you want Detroit in flames. In spite of my libertarian views, this is why I voted for Obama: On the issue of labor. I figured that the economy was already screwed, and we needed somebody who could look out for the middle class that will be left to the wolves.

hugh3• 18 years ago

Auto workers are a pretty weird subspecies of the "middle class" though. As far as I can figure out, they're lower-class people with lower-class jobs who get upper-middle-class money.

thomasmallen5• 18 years ago

What makes that a lower-class job? The fact that you're not at a desk? However, you make a good point: I maintain that the prevelant college degree requirement for most desk jobs is responsible for the declining middle class. We're barreling towards a two-class system with a college degree as the price of admission into the upper class.

ojbyrne2• 18 years ago

I visited some auto manufacturing plants back in the 90s and the managers were very careful to point out that being an auto worker required a significant amount of math, computer programming and statistics because of Statistical Process Control, and Robotics, and they would point out that some of their foremen had masters degrees. High wages breed competition.

omouse• 18 years ago

Detroit has been fucked for a long long time.

thomasmallen5• 18 years ago

In a way, I named "Detroit" as a symbol of other rust-belt American cities, and more generally, industrial labor in America. US Steel cut pensions, GM cut all salaries by 10% and stopped matching retirement, and this is just the very beginning of a series of moves that corporations will take to protect themselves. I won't comment on the ethics at play here, but I will say that if handled improperly, you will have many angry workers with a lot of time on their hands and little to lose.

anamax• 18 years ago

> Sure, do just that, but you'd better have a damn good safety net unless you want Detroit in flames.

Giving in to extortion is a bad idea. Giving in to dumb extortion ("we'll trash ourselves") is even worse.

indiejade• 18 years ago

Good idea.

GM should accept the fallout resultant from their poor production choices.

American auto manufacturers, GM especially, kept rolling out massive gas-guzzling SUVs, trucks, etc when the rest of the conscientious world was switching to smaller, more fuel-efficient vehicles. GM's production decisions, coupled with their obliviousness to market economics and the shift of tastes in the _world_ economy is what hurt them. A governmental bail-out of GM would be devastating, really. Let the old, tired monolith die so that baby innovations can bloom.

gills• 18 years ago

Don't kid yourselves, and don't pity the pigs at the trough. Long ago GM's core business became lending (GMAC), and vehicles the conduit by which they ensnare borrowers. It doesn't matter if they're ugly and unreliable as long as people sop up the 'Buy American!' bullshit and keep borrowing.

They got sloppy with running the business while they were getting drunk over at the debt trough. Don't pity the executives and shareholders, they either knew what they were doing or lied to themselves - both feats worthy of losing their shirts in a bankruptcy restructuring.

They did this to themselves and deserve the consequences. The blog is right, bankruptcy stands the best chance of keeping the right number of people gainfully employed at a new debt-free GM.

rw• 18 years ago

My family survives on G.M. salaries.

davidw• 18 years ago

Wouldn't it make more sense to cut out the middleman and help out families in trouble, rather than bail out entire companies that have been declining for years?

Incidentally, this is yet another article that really is just politics/economics. Sigh.

louislouis• 18 years ago

Party at Flint, Michigan?

http://www.imdb.com/title/tt0098213/

Let G.M. go bankrupt

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