Dan

Calabrese

Read Dan's bio and previous columns here

June 1, 2009

GM: Know What? That $12 Billion We Asked For? Let’s Just Make It $18 Billion $30 Billion! $72 BILLION!!! (Oh, and We’re Going Bankrupt Anyway; Thanks for the Money)

General Motors is now exercising the option that was not an option. It is declaring bankruptcy – a move erstwhile CEO Rick Wagoner insisted could not be allowed to happen, not long after he pronounced himself “pleased” by the company’s 2007 losses of $38.7 billion.

As GM has hemorrhaged cash over the past several years – a total of $88 billion since 2005 – the company’s leaders have been joined by Michigan political, business, community and media luminaries of all stripes and political persuasions in begging the federal government to do whatever it took to keep the company out of Chapter 11.

The federal government took the bait, committing an astounding $60 billion in taxpayer money that will never be repaid ($72 billion if you include the cash injected into finance arm GMAC). Now, the company is filing Chapter 11 anyway.

But wait. It gets better. Detroit’s movers and shakers now get the exciting opportunity to have the government of the United States as the new majority owner of its leading corporate citizen. Its bondholders are stuck kissing goodbye the $27 billion investment they will never see again, and will instead end up with roughly 25 percent equity in a company whose stock is at its lowest point since the Great Depression, whose market share is sinking like a stone and whose greatest triumph of late is a new deal with the United Auto Workers to reduce its annual labor costs by approximately $1.2 billion a year.

I know. It’s hilarious, isn’t it? The company regularly loses more than $5 billion a quarter, and it thinks a UAW “giveback” of $1.2 billion a year is some sort of accomplishment.

Of course, the UAW has supposedly also agreed to eliminate ridiculous work rules, which might mean that workers will actually have to work for their still-generous wages once in awhile. Thank goodness for small favors.

So, for what exactly did the taxpayers of the United States invest an amount roughly equivalent to 10 percent of the nation’s entire defense budget? (A wartime defense budget, mind you.)

The real danger, we were told, was that the bankruptcy of even one of Detroit’s Big Three automakers would cause suppliers across the country to collapse, resulting in the loss of as many as 3 million jobs. That was a good one. Not one but two of the automakers ended up in Chapter 11, with Chrysler set to emerge as early as this week – and while no one can claim the auto industry is in good shape, nothing in the same universe as the predicted supplier collapses or job-loss calamities have occurred.

This entire exercise has been one of the biggest fiascos in the history of either business or government, let alone both at the same time. GM could and should have been investigating bankruptcy scenarios at least two years ago, but refused to do so because it insisted it would damage consumer confidence in the brand – and we wouldn’t want that to happen. Better to have your CEO fly to Washington D.C. in the company jet and grovel hat-in-hand for federal money. The public will love that.

In December 2008, outgoing President George W. Bush went ahead and allocated $17 billion out of the Troubled Asset Relief Program to keep GM and Chrysler out of what he described as a “disorderly” bankruptcy – probably just to avoid handing over a collapsing auto industry to his successor – arguing that if the automakers were going to end up in bankruptcy, they should at least have a few months to prepare for it.

They’d had years to prepare for it. Out of arrogance, denial and an expectation that Uncle Sam would surely bail them out, they declined to do so. They blamed the 2008 credit crunch for their problems, as if the credit crunch was in force in 2005 when the worst of their losses began. They proclaimed their triumph in having negotiated a deal to hand over retiree health care costs to the UAW, without mentioning that the consummation of the deal would cost billions they did not have and would ultimately never come up with.

And the Michigan glitterati went all out to pressure Washington to come to the rescue, because this – unsustainable wage and benefit structures, anachronistic business models and the insistence that it all makes us so important and special – this is Michigan’s way of life. It could never change, no matter how economically unviable it became.

Well! It’s changing now. Detroit is about to become owned lock, stock and barrel by the federal government. The unimaginable bankruptcy – the second in as many months for the Big Three – is going forward. Brands will disappear, and hundreds of thousands of jobs with them.

The company that was too big to fail just might become small enough to survive, although I wouldn’t bank on it based on the plans we’ve seen so far. But one thing we do know is that we could have done all this six months ago, and saved the country $72 billion in the bargain.

Oh well. It’s just money. GM’s new bosses sound remarkably like the old ones.

© 2009 North Star Writers Group. May not be republished without permission.

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