Automaker Bailout Rescue, The Presidential Way

Cross posted at The Stafford Voice

On Friday, Dec. 19 of 2008, President Bush took stage and offered an address to the people; announcing that he would use his power to bailout the failing automakers, namely General Motors and Chrysler.

With opening remarks stating. . .

For years, America's automakers have faced serious challenges –- burdensome costs, a shrinking share of the market, and declining profits. *

. . .many were stricken with hope that someone finally got it, and also that no financial help would be offered. However, things quickly turned sour when he said:

If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers. Under ordinary economic circumstances, I would say this is the price that failed companies must pay –- and I would not favor intervening to prevent the automakers from going out of business.

But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed. Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws -– and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court. But given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time. *

Disorderly bankruptcy? Since when was bankruptcy either orderly or disorderly? Any way you look at it, someone is bound to point fingers rather than accepting defeat. Without exception, Pres. Bush pointed his finger saying:

Additionally, the financial crisis brought the auto companies to the brink of bankruptcy much faster than they could have anticipated –- and they have not made the legal and financial preparations necessary to carry out an orderly bankruptcy proceeding that could lead to a successful restructuring. *

Offering a helping hand of sorts to the abysmal U.S. "2" when they haven't protected themselves, is but one thing: INSANITY.

So, what did the President have to offer?

A more responsible option is to give the auto companies an incentive to restructure outside of bankruptcy -– and a brief window in which to do it. And that is why my administration worked with Congress on a bill to provide automakers with loans to stave off bankruptcy while they develop plans for viability.

These loans will provide help in two ways. First, they will give automakers three months to put in place plans to restructure into viable companies -– which we believe they are capable of doing. Second, if restructuring cannot be accomplished outside of bankruptcy, the loans will provide time for companies to make the legal and financial preparations necessary for an orderly Chapter 11 process that offers a better prospect of long-term success –- and gives consumers confidence that they can continue to buy American cars. *

Seemingly somewhat contradictory to a statement made earlier in his address, stating:

American consumers understand why: If you hear that a car company is suddenly going into bankruptcy, you worry that parts and servicing will not be available, and you question the value of your warranty. And with consumers hesitant to buy new cars from struggling automakers, it would be more difficult for auto companies to recover. *

American consumers understand that this industry has failed, due simply to a failed business plan and the high demands that the Union has placed on them. Americans also understand that if they were to perform an "orderly bankruptcy," it would allow these companies to restructure and reorganize; keeping a level of "confidence" among consumers.

So, the next thing to examine would be: "Where is the $13-$17+ billion coming from? What are the terms of this 'loan'? and When does it have to be paid back?"

[It] will be drawn from the financial rescue package Congress approved earlier this fall. The terms of the loans will require auto companies to demonstrate how they would become viable. They must pay back all their loans to the government, and show that their firms can earn a profit and achieve a positive net worth. This restructuring will require meaningful concessions from all involved in the auto industry –- management, labor unions, creditors, bondholders, dealers, and suppliers.

In particular, automakers must meet conditions that experts agree are necessary for long-term viability –- including putting their retirement plans on a sustainable footing, persuading bondholders to convert their debt into capital the companies need to address immediate financial shortfalls, and making their compensation competitive with foreign automakers who have major operations in the United States. If a company fails to come up with a viable plan by March 31st, it will be required to repay its federal loans.

The automakers and unions must understand what is at stake, and make hard decisions necessary to reform, These conditions send a clear message to everyone involved in the future of American automakers: The time to make the hard decisions to become viable is now -– or the only option will be bankruptcy. *

While this puts an enormous amount of stress on the plate of the Big "2", it still leaves a glimpse of hope by the tax-paying Americans who are footing this automaker bailout rescue. It also leaves many people wondering what is next, and if they themselves will get a "bailout." Some are still left wondering the difference between an "orderly" vs. "disorderly" bankruptcy. Then again, everyone is forced to play the "wait, watch, and see" game.

* - RealClearPolitics