Bridge Loan to Nowhere Congress and business 'viability' rarely mix.Once upon a time -- about two weeks ago -- GM, Ford and Chrysler came to Washington to seek emergency financing. Congress sent them home empty-handed but gave them some homework: Give us a plan to restore your businesses to viability, and then we'll think about giving you a loan.
This week, the Detroit Three were back, plans in hand and determined to show that they were appropriately chastened. In the interim, their need for taxpayer cash grew to $34 billion from $25 billion -- and GM said it needs $4 billion just to make it to Christmas.
But instead of viability, what they've come up with is green political correctness. Their plans -- and Thursday and Friday's hearings on the bailout -- show how dangerous it is to throw your business upon the harsh benevolence of Congress.
All three restructuring plans are heavy on promises to build the "green" cars that a Democratic Congress wants built. GM promises 15 hybrid models by 2012 and 37 miles per gallon on average for its cars. Chrysler commits to putting flex-fuel engines, which can run on ethanol or gasoline, in half of its cars. Ford promises to save 16 billion gallons of gas by using "advanced technology" and to invest $14 billion to improve fuel efficiency.
All three CEOs also drove to Washington in hybrid vehicles as penance for their private-jet flights back in November. This bit of political obeisance was supposed to show that they'd gotten religion both on their perks and their carbon footprint. But it may not have been enough. One Congresswoman wanted to know why they couldn't hit a 50-mpg fuel-economy target by 2015. Another asked whether, maybe, they weren't selling enough cars because everyone in America was waiting with baited breath for the coming revolution in fuel economy.
After Barney Frank was done roughing up the CEOs, he hustled them out to hear from David Friedman of Union of Concerned Scientists and Jeffrey Sachs of the Earth Institute. Mr. Friedman warned the Members not to give one inch on fuel-economy standards and not to relax the environmental strings attached to the $25 billion Congress has already made available to the car companies.
You get the picture.
If there was ever any question whether Congress actually wants to "save" Detroit, this week dispelled it. This is not a bailout that Congress is debating. It is a federal takeover. We don't mean that in the sense that the feds will own the companies on paper, although that can't be ruled out.
What Congress wants to own is their business plan, and Detroit seems prepared to oblige.
Yet amid all the hopeful talk about the brave, new green car world, the men from Detroit were
studiously silent on whether they can sell these new cars at a profit any better than they can their current lineup. Yes, the restructuring plans, especially GM's, have some stark numbers about downsizing -- 30,000 blue collar jobs are on the chopping block at GM alone. And this is accompanied by gauzy predictions of matching Toyota's labor costs by 2012. But it's hard to see how that gets done without a bankruptcy judge to tear up the contracts and start over. Once the auto makers agree to let Barney Frank run their businesses, does anyone really believe organized labor will roll over and let them gut the United Auto Workers?
The core problem is that the companies can't pay their creditors in fuel-economy standards. Two economists testified that the ultimate cost of this bailout would certainly be much, much higher than $34 billion. Mark Zandi of economy.com put the number at up to $125 billion -- and he supports the bailout. NYU's Edward Altman said the company proposals were "doomed to fail." He proposed a prepackaged bankruptcy for GM and Chrysler, with the government providing the debtor-in-possession financing if necessary. His point, which ought to be sobering, was that outside of bankruptcy there is no way to make these taxpayer loans senior to existing secured debt --
meaning the government might never get paid back if the companies go bankrupt later.
Mr. Altman's suggestion has a lot of things going for it. Instead of the politically driven "car czar" being mooted to oversee the bailout,
you'd have a bankruptcy judge to make sure that the companies did, in fact, emerge as more viable businesses. The resulting restructuring would be far more likely to be driven by business considerations than political and environmental ones.The car makers' request for a bridge loan, by contrast, looks like a $34 billion bridge to nowhere. It has already morphed into an opportunity for political extortion -- and we don't even have a bill yet.
When, in a couple years, costs have not come down as expected because of political pressure to keep the unions happy and the green cars aren't selling -- because they were designed in Washington, not for consumers -- the companies will be back for more money.The bailout commitment, in other words, is effectively open-ended, no matter what anyone says. And with the feds so invested in the companies, it will only be a short step for Congress to begin to coerce consumers to buy the cars that Washington prefers. Mr. Friedman, the concerned scientist, is already planning for that day. He said Friday that we'll eventually have to impose a "fee" (read: tax) on cars that "pollute too much" or use "too much gas."
This fairy tale, in other words, does not end happily ever after. A bankruptcy, prepackaged or otherwise, keeps looking better.
The Bridge Loan to Nowhere
