Bankrupt Thinking

What in the world is the Obama
administration thinking? The GM bankruptcy -- entirely avoidable --
seems designed to hurt every constituency it is supposed to assist.

First, as to the avoidability issue: There's no doubt that chronic
mismanagement and the deep recession have left GM in dire straits. But
with the government pouring tens of billions of dollars into the
company, it is clear that needed restructuring could have been done
outside of bankruptcy. By last week, even the problem of bondholders
who sought $27 billion from the company (the government and GM were
offering a 10 percent stake in the new company) was moving to
resolution. Yet the Obama administration's auto task force has plunged
GM into bankruptcy nonetheless. Why? There's no obvious answer to that
question.

Why does it matter? It matters because bankruptcy may further tarnish
GM's already very weakened brand, and make recovery for the company
much more difficult. It matters because it creates some unique
problems. And it matters because it forecloses -- or, at least makes
more difficult -- other ways to reorganize the company.

The
GM/auto task force plan for bankruptcy and restructuring -- shaped by a
secretive, unaccountable group of Wall Street expats without expertise
in the industry -- seems designed above all to perpetuate GM as a
corporate entity. Preserving corporate GM should be not an end, but a
means to protecting workers and their communities, preserving the U.S.
manufacturing base, forcing the industry onto an innovative and
ecologically sustainable path, and advancing consumer interests. It
fails to meet any of these objectives, in entirely avoidable ways.

GM probably needs to be downsized, but there are questions about the
extent to which it should be downsized and the method. There are very
significant questions about decisions being made to eliminate brands,
close factories and terminate dealer relationships. The auto task force
may well be needlessly costing tens or hundreds of thousands of jobs at
auto plants and suppliers. It has authorized the closing of many
hundreds of GM and Chrysler dealerships, even though these dealerships
do not impose meaningful costs on the manufacturers. Dealership
closings alone will result in more than 100,000 lost jobs.

While there is probably a need to reduce GM's capacity, there is no
need to cut worker wages and benefits. Auto worker wages contribute
less than 10 percent of the cost of a car, so even the most draconian
cuts will do little to increase profits. Yet the Obama administration's
auto task force helped push the United Auto Workers into further
acceptance of a two-tier wage structure that will make new auto jobs
paid just a notch above Home Depot jobs. This will drag down pay across
the auto industry, with ripple effects throughout the entire
manufacturing sector. Stunningly, the Obama administration brags
that "the concessions that the UAW agreed to are more aggressive than
what the Bush Administration originally demanded in its loan agreement
with GM."

The ultimate evidence of the task force's disconnect from its public
mission is its approval of GM plans to increase outsourcing production
of cars for sale in the United States. GM has now disclosed its intent
to begin production in China for sale in the United States. What is the
possible rationale of permitting a company propped up with U.S.
taxpayer funds to increase production overseas for sale in the U.S.
market? The point of the bailout is not to make GM profitable at any
cost, but to protect the communities that rely on the automaker, as
well as U.S. manufacturing capacity.

Finally, if the Chrysler bankruptcy is a harbinger, the bankruptcy is
likely to wipe out the legal claims of people injured by defective and
dangerous GM cars.

None of this need be so. The government could have averted bankruptcy.
It could have sent its plans to Congress for more careful review. It
could have demanded that worker wages and conditions be maintained or
improved, rather than worsened. It could have been more surgical in the
downsizing it is requiring, and more forward-looking at preserving
manufacturing capacity. The government could (and still can) choose to
accept sucessorship liability in the New GM for the injuries inflicted
on real people by Old GM.

Some of these avoidable harms can still be averted, if the Obama
administration chooses to exert the control that attaches to owning 60
percent of GM. Unfortunately, President Obama says, to the contrary,
that "our goal is to get GM back on its feet, take a hands-off
approach, and get out quickly."

More on a different way to manage the GM restructuring in my next column.