The auto company bailout: the end--or just the beginning?

By Wes Vernon

xWhen you're talking about taxpayer help for an industry that arguably is the very engine of our economy, flip answers won't do.

One of the considerations is whether a bailout for the auto industry will cure its chronic ailments, or serve as a band-aid until it is necessary for the car-makers to come back to the well again...and again and again.

Roger and us

For several years now, Wall Street analysts have been telling their clients that in the not-too-distant future, Ford and General Motors will not exist as we know them.

Back in the eighties, GM had a CEO who was far-sighted enough to see this coming. Roger Smith believed GM should expand into other fields. He saw the American auto industry headed for bad times. Several reasons have been cited for this...gold-plated wage, health, and retirement plans (while foreign manufacturers operating in this country were — and are — healthy and with contracts more in tune with reality); also problematic were (and are) government strictures on auto-emission standards and increasing fuel efficiency goals.

Whatever the cause, Smith could see the domestic industry on a slippery slope of failure. Under his regime, the company invested in the then-burgeoning efforts to expand satellite communications. He invested billions in Hughes Aircraft and Electronic Data Systems. The problem was his successors did not follow through, preferring the same old same old.

Mediocre management?

The GM CEOs who followed Smith lacked his vision. They may have reflected a trend in the executive suite as seen by multi-billionaire financier Carl Icahn, who told the Wall Street Journal during the weekend that many corporations lack serious accountability because typically "the CEO puts his friends on the board, his cronies, and in the end those guys are not going to throw him out. These CEOs with many exceptions are mediocre guys."

Icahn himself is controversial as a corporate raider, but for business smarts, he did not become the world's 46th richest man through a tolerance for "mediocrity."

His harsh assessment of corporate inertia appears to have been supported in the resignation from the GM board two years ago of one Jerome B. York, who warned that without huge changes, GM was heading for the "unthinkable." York urged the company to face up to this early 21 Century reality: It now has 20% of the market. While signficant, that is a far cry from its sixties heyday when it sat atop the world with 50%. Yet GM still clings to a structure that was crafted in those "good old days."

The contracts

Employee contracts for GM workers and retirees include health insurance with no deductibles or co-pays. Wouldn't we all love to have that? Some contracts allow people on the payroll for doing precisely no work. They have an Orwellian term for that — a "job bank." That goes beyond the realm of mediocrity or inertia and wanders into the swamps of insanity. It is a rip-off of the shareholders, whose returns per share have diminished into the low (almost invisible) single digits.

It's easy to take shots at the employees and their bargaining agents for this. But all they're doing is pushing the envelope as far as they can. They want the best deal they can get, and if management is weak-willed enough to cave in, that is management's responsibility. It is they who are charged with protecting the best interests of the company, and acquiescing to a demand so over-the-top is a rip-off of investors, big and small. The unwillingness of the GM bosses to take a strike if necessary raises the question as to whether they belong in their jobs.

It is also a rip-off of dealers who sell fewer cars because of the increased priced tag that results from the lavish pay and benefits, and it is a rip-off of those consumers who do buy the car. Sending a blank check to Detroit would top off the outrage by ripping off the taxpayers.

The small cars

Taking a strike, however painful, is easier than bucking federal mandates for this or that. In the name of fuel efficiency and cleaner emissions, the government (figuratively speaking) has a gun to the heads of Detroit's auto managers. As a result, General Motors — even as it reels toward a crash landing — is throwing money at the Volt, a plug-in hybrid that the company acknowledges won't make money. People don't want to buy it. But the heavy hand of Washington is demanding it.

Why the rush to "bail out" Detroit?

The sudden push on Capitol Hill to hurry up and send a taxpayer check to Detroit has little or nothing to do with the Wall Street mess. The Detroit industry was heading south long before mid-September when the financial panic hit. The tin cup scenario is a case of piling on and striking at an opportune time when people fear the worst and derive comfort in the knowledge that Washington is "doing something."

But notice it's Barack Obama, Nancy Pelosi, and Harry Reid who are pushing for the bailout — yesterday, if not sooner. The sooner Congress rushes into "doing something," however, the less likely we are to give careful consideration to unintended consequences — unintended that is, for the American people — perhaps not unintended as far as some political ideologues are concerned.

Infusing Detroit with cash without a proviso that the industry restructure itself means that the companies will be back to the Washington well in a few short months. That is because doing more of the same things that got Detroit into this mess in the first place will simply produce the same disastrous result.

Consumers' choice? Or government mandates?

Coming back again and again for more money will ultimately gin up the rationale for a complete government takeover of the domestic auto industry. And once that goal is accomplished, with government completely in the driver's seat (no pun intended), that is when the ultimate socialist dream kicks in — the obsession with forcing the consumer to buy what the Washington planners insist that the consumer ought to want, whether the consumer actually does want it or not. Off we would go into the brave new world of the "green" society. Limiting consumer choice to the "green" Volt and other pillbox cars that few car-buyers really want is what the "green" lobby has wanted for the last 30-40 years.

So what should we do?

The fear of losing three to four million jobs in the auto and auto-related industries (including suppliers) is not easily dismissed. It is important that we have a healthy, robust American car industry. That is why we cannot keep on doing what we've been doing.

The airline model?

First, any restructuring of the U.S. Detroit car manufacturers should result in accountable boards of directors on the model suggested by Icahn for industry in general. Needless to say, a policy of more responsibility in the executive suite would not accommodate those executives who — as Icahn lamented — "play golf all day."

A well-thought-out plan means reorganization under something resembling the board created to oversee the airlines immediately following 9/11. That entity consisted of government officials and staff people from the private sector. It also means employee contracts would be renegotiated. As soon as the job is done and the auto industry is on a certified glide path to good health, with a corporate structure in place to prevent a slide-back into old bad habits, the government overseers would disband and get out of the way.

No more contracts without a resemblance to reality. No more cronyism in the board rooms. No more cars that consumers do not want to buy. If Obama/Pelosi/Reid and company want to shove small, ineffective, uncomfortable or unsafe cars on the market, they can go out and lecture to their constituents that they're too ignorant to shop for their automobiles. See how far they get with that.

© Wes Vernon