GM calls Treasury’s bluff

When the Bush administration and Congress started discussing a bailout for American automakers, critics pointed out that massive loans would do nothing to fix the problems of GM, Chrysler, and Ford.  In fact, we argued that bailouts would prove counterproductive, as it removed the incentive for the real stakeholders in the company — stockholders, management, and labor — to substantially change their economic model to make themselves more competitive in the marketplace.  Two stories bear that out this weekend.  First, GM, Chrysler, and the UAW remain stubbornly unable to reach a realistic contract:

Talks between the United Auto Workers and General Motors Corp central to a turnaround plan for the struggling automaker have broken down over the issue of retiree healthcare costs, a person briefed on the talks said on Saturday.

A parallel set of talks between Chrysler LLC and the UAW over similar concessions were continuing over the weekend but little progress had been made, a person briefed on those negotiations said.

The breakdown of talks at GM and the stalled negotiations at Chrysler come with just three days remaining until both automakers must submit new restructuring plans to the U.S. government as a condition of the $17.4 billion in federal aid that has kept them both operating since the start of the year.

“It doesn’t seem like the stakeholders are really prepared to give a whole lot,” said independent auto industry analyst Erich Merkle. “It’s a high-stakes game of poker right now.”

Well, gee, why might that be?  Why would neither management nor labor work towards a compromise?  They have little incentive to do so as long as third parties keep refilling the bank accounts with cash.  The bailout allowed both sides to hold out longer and maintain unrealistic demands, just as I predicted it would.  Only when faced with imminent collapse and the loss of millions of jobs will these two sides start acting in the best interests of their business, rather than in the best interests of themselves.  The government bailout only delayed the inevitable.

As if to prove that again, GM has now demanded another bailout as the price of continuing talks:

General Motors Corp., nearing a federally imposed deadline to present a restructuring plan, will offer the government two costly alternatives: commit billions more in bailout money to fund the company’s operations, or provide financial backing as part of a bankruptcy filing, said people familiar with GM’s thinking.

The competing choices, which highlight GM’s rapidly deteriorating operations, present a dilemma for Congress and the Obama administration. If they refuse to provide additional aid to GM on top of the $13.4 billion already committed they risk seeing an industrial icon fall into bankruptcy.

Some experts and members of Congress say bankruptcy reorganization is the surest way for GM to cut costs and become viable. But it could be a politically unpalatable development during a recession that already has thrown millions of workers out of jobs.

In fact, bankruptcy processes exist for just this kind of situation.  Instead of bailing out GM and Chrysler, the government should have stayed out of the situation altogether.  If labor didn;t want the companies to declare bankruptcy, they could have negotiated a contract that would have avoided it.  Now we have wasted billions of taxpayer dollars to get us right back to the same point we were in the fall.

Obama can’t afford to alienate the unions by cutting the automakers loose.  He’ll wind up pushing through another expensive bailout, which will kick the can down the road to about June or July.  And once again, we will find ourselves at the same exact point, because the upcoming bailout will do what it did the last time, which is to allow management and labor to avoid making some hard choices about their business model.

The definition of insanity is doing the same thing over and over again and expecting a different result — or perhaps that’s the true definition of Hope and Change.

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