At the same time, GM North America generally had only about $5 billion of receivables because it collected from dealers within days of delivery, leaving the GM treasury with a net $20 billion piggy bank to fund its operations. The fact that it burned through this massive cash hoard near the end of 2008 was a measure of its total dysfunction, not proof that it needed a loan from taxpayers.
Upon a bankruptcy filing, this favorable payables-receivables float would have been rapidly regenerated because all of GM’s pre-petition obligations, including the claims and invoices of suppliers, would have been frozen. Accordingly, any serious DIP lender would have seen that GM was readily capable of floating its own boat, once it was freed of contractual debts and cash-burning plants.
Indeed, GM was insolvent precisely because it had accumulated too many fixed contractual obligations—the very thing bankruptcy was designed to alleviate. In addition to its $45 billion of bank loans and bonds, for example, it also owed $55 billion for retiree health care, pension liabilities, and similar obligations.
Nothing could have been more obvious than the fact that this $100 billion of bad debts would be put on the chopping block. Any bankruptcy judge worth his salt could have cut that number to $40 billion or $15 billion or whatever figure a viable post-bankruptcy enterprise could support.
The “hit” for these bad debts was strictly the business of GM’s unions, employees, and lenders who had made bad bargains for decades, not the taxpayers of America who were innocent bystanders. Moreover, while the court was working toward an equitable shrinkage of this mountain of bad debt, payments would be stayed and the DIP loan would be spent on revenue-producing operations.
The fact that a $100 billion liabilities freeze was available through the regular bankruptcy process just plain destroys the spurious claim that only Uncle Sam was rich enough to keep General Motors operating. Indeed, absent the cash drain of the frozen liabilities and closed factories that would have been enabled by Chapter 11, GM’s remaining needs for operating cash were so strikingly small that the Washington operatives running the bailout did not dare disclose this truth to the public.
At the end of 2008, for example, the company’s US operations consisted of forty-seven power-train, stamping, and assembly plants which employed 62,000 hourly workers and produced product for eight different vehicle brands. Under an honest bankruptcy process, all of these metrics would have been dramatically downsized. In truth, GM has only three viable brands—Chevy, Cadillac, and GMC Trucks—and needed only a handful of plants to produce them.
In a steady-state 15 million unit US light-vehicle market, therefore, a properly downsized and three-brand GM might have profitably retained a 15 percent market share. This means that it would need to source about 2.3 million light vehicles per year—about 1.8 million from its best US plants along with about 500,000 from the efficient plants it operates in Mexico and Canada.
Based on the North American industry benchmarks published in the annual Harbour Report, the startling truth is that GM could produce its downsized vehicle requirements in eight US assembly plants and in an equal number of power-train and stamping facilities. That means it would need sixteen US-based plants, not forty-seven. This drastically downsized production complex, in turn, would have required a total of only 25,000 hourly employees, assuming productivity levels of about twenty-five man-hours per vehicle that were already being achieved in the company’s best operations.
Moreover, under a court-supervised process, GM would have paid at most $28 per hour in cash wages. This is so because the vast bulk of the $60 per hour fully loaded cost under the UAW contract was for pensions, health care, supplemental unemployment benefits, and other contractual items which would have been frozen by the court. GM’s monthly cash wage bill under a US bankruptcy scenario would have been just $100 million per month.
With a DIP loan of $10 billion, GM could have provisioned a year’s worth of hourly wages and still had $9 billion available to strategically liquefy prepetition supplier payables where necessary to support production. But that’s not all. It also could have covered plant operating costs, corporate overhead, marketing, and product development until its natural, large working capital float was regenerated within a few months.
In a free financial market, even under stressed-out conditions like in 2008, there is never a shortage of high-risk investors interested in earning double-digit interest rates on the kind of modest DIP facility that GM actually needed. Their funds would have been used to restart a drastically downsized but viable “GM Lite” while being protected by a $100 billion liability freeze, and collateralized many times over by GM’s tens of billions of good assets.
THE GM BAILOUT: QUINTESSENCE OF CRONY CAPITALIST PLUNDER
The entire urban legend about “no DIP and no alternative” to a Washington intervention, therefore, was actually a smoke screen. The “bailout” was really about the transfer of GM’s bad debts to the taxpayers, not its need for Uncle Sam’s cash during a bankruptcy. And most certainly it did not involve any “need” on the part of the American economy for the company’s remnants outside a potentially viable GM Lite; that is, there was no need for thirty redundant plants, 40,000 excess UAW wage workers, and its dead-in-the-water car brands like Pontiac, Hummer, Saturn, and Buick.
If a GM Lite had emerged from regular-way bankruptcy, it’s likely that $30 billion of bonds would have been wiped out and that its retiree health-care plans would have been frozen at existing asset levels, not funded eighty cents on the dollar as actually happened. Likewise, the Cadillac-style UAW pension plan would have been terminated with a 25 percent benefit haircut and any remaining funding shortfall paid by the federal Pension Benefit Guaranty Corporation (PBGC).
In this respect, the argument that the bailout saved the PBGC from billions in losses is laughable. The same case could be made for rescuing every single company that files for bankruptcy if it has an insured pension plan. What the bailout actually saved was a UAW pension benefit plan that was so rich no auto company on the free market could actually afford it.
In the same manner, the bank group led by JPMorgan would have taken a severe haircut on their $6 billion loan facility, and suppliers would have eaten some of their pre-petition payables. Similarly, redundant workers at several dozen closed GM plants would have gotten the same unemployment insurance benefits as all other American workers. The company-paid layer on top—the so-called supplemental benefits that provided 95 percent of take-home pay—would have been cut off by bankruptcy.
The ills of crony capitalism are not limited to economic inefficiency and the dead-weight costs of propping up uncompetitive companies, however. The even greater societal evil lies in the inequities: the “impressing” of innocent taxpayers into funding bad debts and economic privileges that often far exceed what rank-and-file citizens can obtain in the private market and from public programs such as unemployment insurance.
Needless to say, Republicans had no basis to support the auto bailout except rank opportunism. In voting twice for the auto bailout, Congressman Paul Ryan’s conclusion that the GM’s Janesville, Wisconsin, plant deserved a better fate than the verdict of the free market was dispositive.
Yet it is the progressive Democrats who were the most hypocritical. At a time when they deemed that a generous ninety-nine weeks of extended unemployment payments was good enough for 10 million unemployed American workers, the Obama White House singled out 60,000 aristocrats of labor for the extra-special privileges of the state.
The sheer facts of the North American auto industry make clear that in bailing out GM, the fundamental purpose of the Obama White House was the crass political objective of payback to the UAW. As indicated above, the bailout did not save a single net job; it just altered the allocation of automotive sales, production, and jobs among companies and regions.
The claim that the entire auto industry was at risk and that the nation faced the loss of more than a million jobs is plain stupid propaganda. Worse still, th
e pro-industry shills who issued it, such as the Center for Automotive Research, actually received substantial funding from taxpayers.
In truth, the North American auto industry was at the time swamped in excess capacity—a reality punctuated by the plunge of capacity utilization to just 27 percent at the January 2009 bottom. And it remains amply supplied even after nearly 3 million units of capacity have been shuttered. On a three-shift basis and with activation of mothballed plants, there are still 22 million units of light-vehicle assembly capacity in North America, but no economic scenario in which sustainable demand for NAFTA (North American Free Trade Agreement)-built cars and light trucks would exceed 16–17 million units.
At the end of the day, the GM bailout was about whacking up the wage bill between plants north and south of the Mason-Dixon Line. Under steady-state conditions the wage bill for the power-train, stamping, and assembly operations of US OEMs is about $15 billion, representing around 300 million man-hours at a fully loaded average cost of $50 per hour. This flows from the basic math of auto sales, output, and productivity.
Because of the deep-seated brand preferences and buying behavior of the American consumer, it can be easily stipulated that imports will capture 20–25 percent of the US market, as they have for several decades. Accordingly, assuming a steady-state US demand of 15 million light vehicles, about 3.5 million vehicles will be imports and 11.5 million will be sourced in North American plants, including about 10 million units from the US assembly plants operated by a dozen NAFTA-based auto OEMs (the other 1.5 million units would be sourced in Canada and Mexico).
From these facts of auto industry life, the political food fight over the auto wage bill can be seen as the stark, straightforward battle it was. Senator Richard Shelby of Alabama fought for the free market and the twenty-seven newer, more efficient auto assembly complexes mainly in the South. Ron Bloom, the labor bosses’ designated hitter on the White House auto task force, fought for the fifty older, high-cost UAW-organized plants in the north.
When the dust settled after GM’s whirlwind forty-day faux bankruptcy, several billions of the national auto wage bill had been arbitrarily shuffled from Senator Shelby’s side of the line to Ron Bloom’s. Had nature been allowed to take its course, GM Lite would have emerged from bankruptcy with 25,000 hourly jobs, representing about 45 million annual man-hours. Owing to the White House political fix, however, GM ended 2011 with 48,000 US hourly jobs, representing about 85 million man-hours. At $60 per hour, the 40 million man-hour difference made for a lot of UAW political gratitude—about $2.5 billion worth to be exact.
HOW THE FREE MARKET WAS LOST AND THE 2012 ELECTION WON
Yet even this stupendous figure does not capture the full measure of gratitude the Obama administration paid to the UAW. None of GM’s “bad debts” related to labor issues were canceled or even significantly hair cut—not pensions, not retiree health care, not wages. Auto czar Steve Rattner removed all doubt when he later told the Detroit Economics Club, “We did not ask any UAW member to take a cut in their pay.”
Needless to say, this capricious $2.5 billion shuffle of wages from the plants of one region to those of another generated no public welfare benefits whatsoever. American consumers will not buy one more car because of the bailout, even if they are presented with about 600,000 more vehicles (i.e., reflecting GM’s current 19 percent market share rather than 15 percent) coming out of GM plants and the same amount less coming out of Ford, Toyota, Nissan, Honda, and Hyundai plants.
Likewise, there are approximately 20,000 auto dealers in the United States and they, too, experienced not a whit’s gain in volume—only a shuffle among brands. In fact, all the usual suspects trotted out by bailout apologists fit this same template. Everything claimed as a “benefit” from the bailout—from higher payroll checks to increased electrical power purchases, plant maintenance contracts, hazardous waste hauling volume, local taxes, and more contributions to the United Way—amount to nothing more than a reshuffling of these expenditures among approximately two dozen counties within the United States that host the major auto OEM complexes.
During the two years after the bailouts, auto sales recovered smartly from the 9–10 million unit panic lows of late 2008 to a 13–15 million unit level after mid-2010. However, this natural but modest rebound in final sales had a bullwhip effect on production of parts and finished vehicles, because the auto industry’s supply chain had been virtually depleted of inventory during the first half of 2009. In fact, never before in peacetime history had the automotive supply chain’s cupboard been this bare. Accordingly, the ballyhooed “booming” production of 2010–2011 was actually just an aggressive one-time fill of this depleted inventory pipeline.
Not surprisingly, in the midst of this inventory refill in November 2010, Wall Street triumphantly brought GM public at a nosebleed valuation. The fast money then bid up even higher during the next few months, so that at its early 2011 peak GM was valued at $60 billion.
Needless to say, that wasn’t the real thing—the White House auto task force had not sprinkled GM with fairy dust. Instead, Detroit’s lumbering dinosaur was temporarily minting profits by restuffing its dealer channel with a new round of excessive inventories and burying some of its running costs in the massive cookie jar of “fresh start” accounting reserves created upon its bankruptcy exit. Likewise, money printing by central banks the world over had engineered a short-lived auto rebound that had staunched GM’s losses in Europe and generated sales and profits boomlets at its operations in Brazil and China.
By the end of 2012, however, GM’s miraculous recovery was all over except the shouting. Stuffed dealer lots in the United States put the clamps on production and profit in North America. At the same time, GM’s European operations plunged into multibillion-dollar losses, Brazil headed south, and the bulging profits out of China were rapidly vanishing as red capitalism entered its hard landing phase.
The White House’s forty-day rinse cycle had cured nothing. But it did produce a temporary rebound that was perfectly feathered into a completion date of November 6, 2012. Pure and simple, the leading edge of President Obama’s reelection was in the General Motors (and Chrysler) precincts of Ohio.
The pro-bailout triumphalists who celebrated GM’s post-IPO surge because they didn’t recognize a Wall Street ramp job when they saw one will now receive a stinging rebuke. GM is heading for a relapse into red ink, and its now vastly diminished market cap has already shed much of its post-IPO value.
What happened between mid-2009 and mid-2012, therefore, was not a miracle in Motown; it was just another lamentable episode of crony capitalism on parade. Wall Street fixers—first Secretary Paulson and then auto czar Steve Rattner—had wantonly eviscerated the curative mechanisms of the free market. The outcome was “winners” picked by Washington and “losers” who didn’t even know what hit them; that is, taxpayers who had to foot the bill and competitors from whom the bailsters stole the business.
In this respect, Chrysler had also been kept alive when there was no earthly reason for it in a North American market already served by seventeen different global suppliers. Any number of them would have gladly purchased its only viable components, the Jeep franchise and Dodge Ram trucks, but none would have been interested in its rundown UAW-controlled car plants.
Indeed, the wage bill at the latter plants was about $1.5 billion, meaning that from the artificially resuscitated parts of GM and Chrysler combined, the auto task force had gifted the UAW with a wage bill of about $4 billion that would otherwise have gone to workers at the North American plants of Hyundai, Toyota, Honda, Ford, BMW, and six other OEMs. By the same token, the auto task force did not add one dollar of sales or one job to the supplier base; it just spun the roulette wheel on the available business, shifting the mix to parts plants in the rust belt from those in the mid-South.
Nevertheless, even this arbitrary tampering with the auto supply base came at a large price. The unmistakable message of the bailout was that
the auto OEMs are also in that privileged class of “too big to fail.” Even more importantly, it demonstrated unequivocally that the White House is for sale and, therefore, that the nation’s fiscal solvency and free market economy have been mortally compromised.
THE AUTO BAILOUT LOBBY:
BORN AND BRED IN THE ECCLES BUILDING
Self-evidently, it was not the car company executives who famously brought their tin cups to Washington in Gulfstream jets that pulled off the auto bailouts. Nor could this blatant heist have been accomplished even by the assembled might of the UAW alone. In truth, the auto bailouts happened because the entire auto supply chain—from toolmakers and parts suppliers to vehicle haulers and car dealers—was up to its eyebrows in debt.
The era of bubble finance had left this vast swath of the US economy massively leveraged and therefore vulnerable to a cascade of bankruptcies and harsh downsizings in the event of a material decline in car sales. Consequently, when new car sales temporarily plummeted in the weeks after the Lehman failure, the level of desperation across the entire auto chain was palpable, and especially so among car dealers.
There was nothing about the sheet metal moving business that wasn’t immersed in debt. Dealers had hocked their showrooms and had borrowed nearly 100 percent of the wholesale value of cars on their lots through floor plan loans. Likewise, they were utterly dependent upon loans and lease financing, much of it with deep embedded losses, to support their retail customers. All of this was the handiwork of the Greenspan-Bernanke Fed’s financial repression policies and the resulting destruction of honest price signals in the lending markets.
Not surprisingly, the nation’s 20,000 auto dealers and the 2 million job holders reported by the BLS for “motor vehicle and parts dealers” were not about to acquiesce to the harsh justice of the free market—not after Wall Street’s ten giant banks had lined up in Hank Paulson’s office on October 10 to receive checks for $10 billion to $25 billion each. And so a mighty caravan of car dealers figuratively descended upon Washington demanding an auto bailout. Leading the pack was the nation’s largest car dealer, a giant pyramid of debt called AutoNation and its shrill, crony capitalist CEO, Mike Jackson.
The Great Deformation Page 85