Automaker Bailout Part 2: It is Raining Money!

I will give them credit—they cut their white collar payroll, managed to get rid of that union job bank and they came up with restructuring plans—but after doing all of that, they are back with their hands out. Previously, General Motors and Chrysler received $17.4 billion; but now, as part of their restructuring plans, they are looking for a total of  $34 billion to stay out of bankruptcy.

What Do They Want, What Will They Give?

GM is seeking $30 billion from the Treasury, which is up from previous estimates of $18 billion and includes $13.4 billion the company has already received. GM claims that it could run out of money by March without the additional funds, needing $2 billion next month and another $2.6 billion in April to keep going. Chrysler is looking for a mere $5 billion to keep going.

What are they willing to do to get this money? The automakers say they are ready to trim the proverbial fat with plans that call for thousands of additional job cuts, the elimination of models and brands, plant closings, union concessions and the possibility of additional expense cutting later on. Word of Union concessions is beginning to trickle out as well, concessions that will eliminate the jobs bank, limit overtime, change work rules, cut lump-sum cash bonuses and get rid of cost-of-living pay raises and generally help bring the companies' labor costs into line with their Japanese competitors with plants in the United States. Talks are continuing regarding retiree healthcare trust funds and the question of whether or not the companies can fund the funds with stock.

And If They Don’t Get It…?

The hammer that the auto industry is holding over the heads of Congress and the Administration is the threat of bankruptcy and the cost to the economy of one or more of the automakers going under.

According to GM Chief Operating Officer Fritz Henderson, the company looked at three bankruptcy scenarios, all of which would cost the government more than $30 billion with the worst costing $100 billion because of a severe drop in GM's revenue. That is a legitimate worry since a bankrupt car company may have a lot of trouble selling cars. Henderson cites research that suggests sales would “fall off a cliff.”

The Bottom Line

I have to wonder, how much worse for the economy would actual automaker bankruptcy be? Considering that these companies, in order to get government relief, are restructuring their businesses tells me that this is really a bankruptcy, but without the name. The automakers are going lay off thousands, close plants, cut models and brands, reduce their contract obligations—they would have to do all these things during their bankruptcy, but they would have to meet certain standards, one of which would almost certainly be a time limit.

The fact that they are coming back to the public trough for another helping, and that they expect to need more funds next month and the month after, tells me that they are going to move on their restructuring at a stately, glacial pace. During a time of crisis, taking it slow is not the way to handle things. These companies need to move to aggressively clean up their acts so they can once more be competitive, so they no longer have to go to Congress to beg for money. After all, it is only a matter of time before the government decides that it is time to nationalize the automakers. If it can do that with the banks, why not the backbone of American heavy industry, the automakers?

This second helping also raises questions about if and when there will be a third, or a fourth. There is already disbursement of TARP II funds and rumors are flying about plans for a second stimulus program, so it is not beyond the realm of possibility. Will this become a quarterly event, and if it does, how long will it be before the cost of keeping GM and Chrysler becomes greater than simply allowing them to go to the wall?