President Obama just finished speaking about his plans for the ailing domestic auto industry. And, as reported already, he is offering some pretty tough medicine.
Obama's auto task force has determined General Motors can become a viable company. But it will take more radical restructuring, starting with more concessions from creditors, unions, and dealers. GM gets 60 days to make that happen. The transformation in management began over the weekend, with the ousting of GM CEO Rick Wagoner.
The verdict on Chrysler is less sanguine: The task force has decided it cannot stand on its own. Chrysler will get 30 days to find a partner, which means pursuing a proposed merger with Fiat. If, in 30 days, Chrysler hasn't made such a deal, the company is on its own. In other words, it's finished.
The government will provide operating money to make these transformations possible, although no more in $6 billion for Chrysler.
But--and this can't be emphasized enough--Obama says it's entirely possible that effecting the necessary changes will require a "surgical bankruptcy."
Some of that may be posturing, aimed in particular at GM bondholders who have been resisting calls for concessions. Still, the administration seems entirely serious about the possibility. And, among people who have been involved in this debate, there's increasing talk about a fast restructuring using Section 363 of the bankruptcy code--a process that would, in theory, allow the core of either company to continue operating without the burden of their huge debts. (More on that here, via Harvard Law Professor Mark Roe.)
Obama, in other words, is giving the industry a lifeline. But it's not too long. Even with $6 billion in federal financing, Chrysler and Fiat might not make the partnership work. And whatever happens, the workforces of both Chrysler and GM are going to continue shrinking, as they have for a while now. (As Obama noted, the auto industry has already lost more than 400,000 jobs in the last year.)
Still, this is a much more promising path than the options on the table just a few months ago, when Congress was trying to craft a bailout and then--when that failed--President Bush stepped in with his own rescue.
For one thing, Obama and his advisors have done due dilgience. The task force immersed itself in every aspect of the auto industry, tapping outside consultants (including the well-respected Boston Consulting Group auto unit) and meeting one-on-one with major stakeholders. Obama and his advisers may not yet be experts in the auto industry, but they surely know more than almost anybody who was talking about this issue back in December in January.
That much is apparent in Obama's rhetoric about bankruptcy. As many observers--myself included--had warned back in the December/January debate, a routine bankruptcy for the auto industry might be disastrous. In this financial environment, the companies might struggle to get the "Debtor-in-Possession" financing allowing them to operate. The shadow of bankruptcy could destroy sales, since consumers might worry that warranties on their cars would become invalid.
And most important (at least to me), the bankruptcy process itself was very messy. Prolonged litigation could paralyze and ultimately destroy the companies, as the courts worked through every claim on company assets. That last problem could disrupt payments to suppliers, who are teetering on the edge of collapse, setting off a cataclysmic chain reaction.
But notice what Obama said about bankruptcy just now:
While Chrysler and GM are very different companies with very different paths forward, both need a fresh start to implement the restructuring plans they develop. That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger. Now, I know that when people even hear the word “bankruptcy” it can be a bit unsettling, so let me explain what I mean. What I am talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet and onto a path to success; a tool that we can use, even as workers are staying on the job building cars that are being sold. What I am not talking about is a process where a company is broken up, sold off, and no longer exists. And what I am not talking about is having a company stuck in court for years, unable to get out.
In December and January, nobody was speaking in such clear, detailed terms about how the government could make a limited bankruptcy work. And given that the Bush Administration was still in charge, there was no reason to think the government even had that ability. That makes bankruptcy a much more reasonable option.
To be clear, there remain a lot of unanswered questions. Will the taxpayers get equity in the new companies, as they should?
A Section 363 proceeding would likely mean ripping up the old union contracts. The United Auto Workers would likely retain at least some leverage--more than other parties--because the companies will need workers and it's hard to imagine the Obama administration sitting idly by if either GM or Chrysler decided to take advantage of the situation to bust the union altogether. But what can--and should--the UAW get? Is there a way to give the union a larger stake in ownership/management, in exchange for more financial concessions--a deal that might, in the best of worlds, reshape the whole labor-management relationship so that it more closely resembles the more cooperative and productive arrangements abroad?
On paper, a Chrysler-Fiat merger makes sense. Fiat makes the kind of fuel efficient cars Chrysler doesn't--and would take years to develop on its own. Chrylser has a U.S. market share that Fiat could exploit. But if American taxpayers are putting money into this merger, to what extent can they be assured jobs won't simply continue to go overseas?
Obama is committed to pushing the auto industry to become greener even as it becomes leaner. And that is absolutely the right goal. But right now the big obstacle to selling more fuel efficient cars is on the demand side. Consumers just don't want them badly enough, at least not with gas prices as low as they are. Can Obama fix that problem, too, by enacting some sort of pollution tax (whether in the form of a direct carbon levy or a cap-and-trade system)?
Last--but certainly not least--the heart of the auto industry, particularly my home state of Michgian, can expect a lot more pain. And that's despite the fact these regions are feeling plenty of pain already. Obama is dispatching economist Edward Montogomery, a former Labor Department official, to coordinate federal assistance to the affected regions. If that sounds a bit like a disaster relief effort, that's probably appropriate: This is a disaster, at least in economic terms. But will these efforts amount to anything? Or will they be mostly cosmetic?
This much, however, we do know: This administration isn't clueless. They may not have all the answers, but they have clearly spent a lot of time pondering the questions. Indeed, experts I've consulted in the last 24 hours seem generally optimistic about this plan--or, at least, as optimistic as one can be given the dire circumstances. "The auto task force got it right, except that they ignored my plea that they insist on the public getting equity, and with it control, in return for its loans/investments," said Dan Luria, a leading industry expert at the Michigan Manufacturing Technology Center.
Obama said again "the United States government has no interest in running GM." But it's clear the government is prepared to get heavily involved in these companies, as the ouster of Wagoner indicates. And I suspect that's a good thing. A smaller, more efficient auto industry would benefit everybody. But that tranformation won't take place without the government taking charge.
Update: I should add that it will take time for experts to go through the plan carefully -- and that, almost inevitably, they'll come up with more concerns and questions as they do.
--Jonathan Cohn