Although the credit crisis and recession took a toll on all sectors of the economy, until December '08 the feds had only directly propped up financial firms. Other industries had been left to fend for themselves - but that changed when President Bush presented GM and Chrysler with a $17 billion Christmas gift to keep their assembly lines running through the new year. In exchange for the handout the automakers were charged with coming up with a plan to keep them in long-term business, which they did on February 17, while asking the government for up to an additional $22 billion in loans. But the Obama administration balked, saying the auto firms had done too little to negotiate down their debts and chart a realistic course toward fiscal health. Instead the US offered to handhold the auto giants through bankruptcy proceedings, orchestrating the downsizing and sale of Chrysler to Fiat and putting a 60% stake in a new, reborn, GM.
The bankruptcies of Chrysler and GM are done deals, but that doesn't stop opinions from differing on how much the government should have stepped in to prop up the aging auto industry. The debate originally pitted pro-bankruptcy conservatives against pro-bailout liberals. As with the bailout of "too big to fail" Wall Street firms, some economists worried that letting Detroit tumble could send a destabilizing ripple through the rest of the economy. Fiscal conservatives, however, weren't convinced an auto bail-out was necessary or wise. True to its splitting-the-difference form, the Obama administration failed to satisfy either camp, creating a "bail-out bankruptcy" of sorts with the companies forced to file for bankruptcy while the government pitched billions to keep the auto firms in business during their restructuring.
Below is an overview of Detroit's path to bankruptcy, with a rehash of some of the arguments for and against bailing them out.
The Road to Bankruptcy
The US auto industry was in trouble long before the recession hit. Back-breaking financial obligations and fleets of out-of-fashion gas-guzzlers made it hard to keep afloat. But the credit crisis threw an added wrench in the industry's efforts to go green(ish) and turn losses into profits. In late 2008 GM was running out of cash the quickest and asked Congress, along with Chrysler, for loans to tide it over during its transition to profitability. Ford all along has said it probably had enough money to last it through its turn-around but it asked Congress for a credit line just in case.
Automakers first asked Congress for $25 billion in November, but upped that number to $34 billion in December. Even though Congress had put auto execs through the hearing-wringer, lawmakers came close to tossing GM and Chrysler a $15 billion life-line to cover their operations through early 09, but the rescue package failed to pass in the Senate. (Democrats had originally wanted to bail out Detroit using TARP funds, but their failed bill ended using money from an earlier energy bill that set aside $25 billion for Detroit to "green" its fleets.)
Ultimately the Bush administraion picked up the slack, using cash from TARP, the $800 billion bailout bill passed fall 2008, to give the automakers $17 billion in loans to last them through March '09.
The administration's bailout resembled the loan agreement that was worked out in the House. That loan came with a few strings. A "car czar" would oversee the companies and restrictions will be placed on exec compensation and dividends for investors until the loans were paid back. By March 31 the auto companies will have had to convince the car czar that they have a viable plan for profitability, otherwise they could be nudged into Chapter 11. GM and Chrysler would also have to renegotiate wages and health funds with workers. Although Ford was going to bailout bat with its two competitors, it was not part of the president's bailout. (NYT, WP, WP, WP, WP)
A couple weeks later, the Fed followed up with a $5 billion mini-bailout for GMAC, the financing company (partially owned by GM and Chrysler) that covers your GM car loan. (NYT) Chrysler Finance got a similar $1.5 billion package at the start of '09. (NYT)
In February 2009, auto execs returned with their promised plans for restructuring and a request for an additional $14 - $21 billion in backing (depending on how bad the recession gets). (WP) By March 31, the Obama administration made it clear that their plans did not fly; in particular both companies still were under the strain of bloated financial obligations (mostly to employees) that made profitability a pipe dream. (WP) The administration instead offered to fast track the dying firms through a bankruptcy re-birth, using its muscle and financial backing to seal deals and keep assembly lines running.
Chrysler's bankruptcy was given the green light in June (after the Supreme Court passed on a petitioner's request to stop the deal). As part of the package, Fiat would take over the new, slimmed down Chrysler, with a union retiree trust owning 55% and Fiat, the US and Canada owning the rest. (NYT)
GM filed for bankruptcy in June and wrapped up procedings by early July. The new GM is vastly slimmed down (with a third fewer employees from last year) and mostly government owned (the US government, that is, at 60%, with Canada owning another 12% and auto workers staking a 17% claim). (WP, NYT, WP).
All those in favor of a bailout
In normal times when a company gets into billions of dollars of debt and keeps bleeding losses, a good capitalist would say that company should be allowed to fail - to make room for smaller and smarter companies. But these are not normal times, at least according to those who are pushing a Detroit bailout. The recession has made it both impossible for the car industry to survive its own slump (largely because prospective car buyers can no longer get car loans) and extremely risky for the government to let Detroit go under.
The "too big to fail" argument goes like this: yes, the Big Three messed up, but if we let them collapse, that could lead to not onl only a loss of 130,000 direct jobs, but also the potential loss of the jobs that depend on Detroit, including suppliers, transportation, surrounding communities, etc. That might be a shock that the economy could absorb in good times, but with a still spiraling stock market and increasing lack of confidence in the economy it could have a devestating effect today.
Filing for bankruptcy under Chapter 11 might be a way to keep cars on the assembly line while the companies are chopped up and restructured, but the auto industry may be beyond Chapter 11. At this point their only alternative would be to go the Chapter 7 route, which means liquidation. Chapter 11 may also be a nonstarter because publicly going "bankrupt" could kill confidence - and so sales - in the US auto industry.
As for the cost of the bailout, any way you slice it, Detroit will end up costing money. If the Big 3 go down, the government will be picking up the tab in unemployment and pension payments. Then there's the potential larger loss to the economy that a Detroit collapse could spin off. If the government decided to back the car companies as they go
through Chapter 11, that could prove pricey, with GM predicting
it would need $36 - $103 billion in assistance. (WP) Even a $125 billion bailout ends up looking cheap by comparison.
Balking at a bailout
At this point few economists and politicians think Detroit should be left to crumble wholesale. Many, however, think a bailout is not the way to go; rather, GM and Chrysler should be pushed toward Chapter 11 bankruptcy with, if necessary, some help from the government. Their argument isn't so much that CEOs should be punished for poor management (which is definitely part of the story), but more that Detroit won't be able to survive without bankruptcy.
Bankruptcy, the argument goes, would save the US auto industry by unshackling the Big Three from the insurmountable debts and obligations which now make it impossible for them to compete with foreign brands. Bankruptcy court could give the auto companies a fresh start - with renegotiated debts and contracts - and so a chance to compete again.
NYTimes blogs on the different views on Capitol Hill
Time's Bill Saporito lays out the pros and cons of saving/not saving Detroit
The New Republic's Jonathan Cohn says a bail-out may be the least bad option
A former airline exec argues that bankruptcy is the better way to go
Updated July 12, 2009