Similar to Churchill's famous observation about democracy, the Administration’s new plans for General Motors are a dismal idea, except for all of the alternatives. Under the plan, GM has to come up with a detailed strategy by June 1 that plausibly will allow it to survive and so receive nearly $12 billion more from the taxpayers or file for bankruptcy. By then, the government will have lent GM $27 billion.
What’s new in the plan is that the Treasury will swap half of that debt for equity (GM shares). In the end, the government and a healthcare trust managed by the United Auto Workers will hold 89 percent of the auto giant. Unsecured bondholders will own the rest, if they agree to swap their debt for equity too. (Even as they complain bitterly, the bondholders will have little choice, since if they don’t go along, GM goes belly-up and they get nothing). With the clarity that often accompanies impending doom, GM is finally taking serious steps to restructure itself -- something it could have done a decade ago and avoided all this. Toppled last year by Toyota as the world’s Number One automaker, the former Detroit titan is now headed for much leaner territory. In exchange for the government’s billions and the UAW concessions that have kept it afloat for the last six months, GM has already announced plans to close down Pontiac (Saturn and Hummer will follow soon), shutter nearly 30 percent of its plants and, by the end of 2010, reduce its workforce by one-third and pare its dealership network from 6,200 to 3,600. If all of this works, GM will end up the Number Three automaker operating here and Number Four or Five in the world.
Already weak before the financial crisis and recession hit, GM probably might have been able to stumble through a normal business downturn without much help. But like a number of other national brands, GM found that it couldn’t survive a protracted financial-market freeze that dried up its credit lines and a deep recession that decimated its sales. The risk now is not that GM managers won’t be able to come up with more, reasonable plans, especially with their countless advisors from investment banks, consulting firms and the President’s auto task force. The real risk here is that GM won’t be able to produce competitive automobiles that will sell and keep the company in business into 2010 -- and the government can’t do anything about GM’s capacity to turn out sellable cars.
That’s actually the good news here: Larry Summers, Tim Geithner and Steven Rattner won’t try to tell GM how to run itself. Instead, once they approve GM's new plans, we all become passive investors, much like the big pension funds that hold large stakes in hundreds of other companies. The government doesn’t know much about running an airline or a retail chain either, two other industries with huge market leaders near bankruptcy. So why hadn’t it offered to lend billions to United Airlines or the GAP, and then swap those loans for majority equity positions?
What the easy critics of the plan don’t see is that GM is part of a much larger and deeper global network of suppliers and distributors, so like Lehman Brothers and Bear Stearns -- and Citigroup and AIG -- GM's sudden failure would have cascading effects. On top of that, there’s the deep recession -- and it’s still getting worse, not better -- which could dangerously aggravate those cascading effects. In short, an abrupt bankruptcy by one of America’s largest and most iconic companies during the worst recession in 80 years could drive down the economy another big notch, making all of the current problems that much harder to solve. So, if it costs the Treasury another $12 billion to try to head that off -- or another $20 billion down the line -- it will be worth it if it protects the rest of us from an even more dismal economy.
Think about it: If the Bush administration had done that with Bear Stearns more than a year ago and then with Lehman Brothers, all of our current problems would be a lot more manageable.
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