Bottomline:
BANKRUPTCY DOES NOT EQUAL "GOING OUT OF BUSINESS" (and it isn't "heartless")
It equals reorganizing, which is what happened anyway. (They either could have stood on their own or not.
and a bridge loan could have been made as a last resort by the federal government.)
The government bargained:
Let go alot of workers (16% loss of jobs and dealerships),
Lower wages for new employees ($14/hr vs. old $28/hr) (Heartless? Or necessary for survival?)
Allowed unions to not pay for awhile to cover heavily underfunded pensions
See below: Financial bomb for later.
Let 70% or more of the salaried employees pension be lost.
American auto makers had a competitive disadvantage
Foreign auto makers American plants had lower fringe benefits, but comparable productivity.
It is interesting to note that Romney is accused of heartlessness when what he did is the same as the government did: cut down costs to save a company and thereby saves the remaining jobs, which would have been zero if he didn't succeed in saving the company. I think attempting to save a company, even if it is for profit (the key motivator in capitalism) is a good thing. Romney does a good thing - and he does it legally and realistically - no fairy dust here - and he does it exceptionally, which is why he should be the best President we've ever had.
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WHAT ROMNEY ACTUALLY SAID AND THE REASONING BEHIND IT
In 2008, former Massachusetts Governor Romney published an opinion piece in The New York Times titled “Let Detroit Go Bankrupt”, a misunderstood title selected by the Times. It outlined a process whereby the Tottering Two would go through a managed bankruptcy process with a government guarantee of post-Chapter 11 financing, allowing them to cut costs by shedding dealers and renegotiating labor contracts. The government guarantee was contingent upon them restructuring to be a safe economic company - and to avoid risking taxpayer money. (Read The Actual Facts Of What Romney Said About Detroit.)
And, as Romney points out: “That’s what happened,”
Yet, the twisters say untruthfully that "if it was up to him we’d all be driving foreign cars" Blame is not what we call a constructive conversation and certainly making up things that are not true is a dangerous cumulative practice for Americans.
BANKRUPTCY ISN'T GOING OUT OF BUSINESS, BUT IS REORGANIZING
Contrary to popular belief, bankruptcy does not mean companies close their doors and send employees home. This is a false message that it appears President Barack Obama tried to sell on his victory tour of Detroit. If General Motors had gone through a normal bankruptcy without taxpayer bailouts, there would still be GM jobs--maybe even more than there are now. We do not know because that was the road not taken.
"Chapter 11 bankruptcy restructures insolvent companies with the aim of allowing them to emerge as viable concerns. It corrects past errors and is a vital link that makes market capitalism work. If we now have the federal government rather than an impartial bankruptcy judge leading this process, capitalism has lost. "
Notice that if those companies went out of business, the foreign companies would have to add jobs of an equivalent amount so the jobs problems would be solved, though they wouldn't rehire the low productivity workers or slackers, which we assume would not be a major portion anyway. The wages and benefits total would have to be lower because that is what they pay - and why those automakers didn't have the same problems as the high cost of American auto workers' unions.
GOVERNMENT LOAN GUARANTEES COULD BE APPROPRIATE, IF AND WHEN...
Although some ideologues would consider it "bad" to do any loan guarantees, it makes sense from a practical point of view, in terms of the benefits. When there is no other alternative to preventing damage, it could feasibly be a legitimate government function. It would be illogical and close-minded to not consider this strategy.
THE EFFECTS OF GOVERNMENT INTERVENTION
Government intervention permits potential corruption and political favoritism. It allows the current government to reward contributors to its political campaigns and, perhaps more significantly, to posibly scare others into costly political activities. All of this logically would lower the productivity of the economy and therefore make all of us poorer. If GM becomes the precedent and we repeat such things that logically would lead to a lowering of our economic condition, plus a loss of rule of law.
THE BAILOUT - PHASE I AND II
Under Bush
In December 2008, U.S. President George W. Bush agreed to a $17.4 billion bailout for General Motors and Chrysler using his broad authority under the $700 billion fund established to help the failing banks known as the TARP.
Under Obama
At the end of March 2009, U.S. President Barack Obama declined to provide financial aid to General Motors, and requested that General Motors produce credible plans, saying that the company's proposals had avoided tough decisions, and that Chapter 11 bankruptcy appeared the most promising way to reduce its debts, by allowing the courts to compel bondholders and trade unions into settlements. Chapter 11 filing was necessitated largely by the inability of the former GM entity to support its pension liabilities and also to form commercial alliances with other automakers that could have aided cost reductions in its existing business model.
On June 8, 2009, General Motors filed for reorganization under the provisions of Chapter 11, Title 11, United States Code, and as a direct result investments of all former common stockholders were lost completely, (Reference Wikipedia)
The "restructuring" had a number of adverse effects: One-quarter of GM and Chrysler dealerships were closed within three months of the firms' bankruptcies, John Berlau told us; he's the director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. Those jobs all were eliminated.
The "rip-off of the bondholders and secure creditors," Both GM and Chrysler still were viable companies, with factories and inventory. But those assets effectively were taken over by the government, with large shares given to the United Auto Workers union. The bondholders and creditors reasonaly could have found a way to restructure GM and Chrysler on their own, or do something else productive. Instead, they received only a fraction of what they were owed.
Finally, the government intervention shut off other potential avenues GM had to work out its own problems; notably, the 2009 bailout lessened the pressure on GM to come to a deal to sell the since-defunct Saturn line to Penske Automotive Group. Instead, Penske withdrew the bid, Saturn production was ended, and the jobs were lost.
The government took over Delphi's pension plan during the company's reorganization in Bankruptcy Court. Roughly 21,000 salaried employees lost up to 70% of their pensions, as well as life and health insurance.
LOST JOBS AND CUT COSTS - JUST LIKE ANY TURNAROUND
Both companies terminated agreements with hundreds of their dealerships
On the date GM filed its taxpayer-funded bankruptcy, it had 92,000 employees. After bankruptcy it shrunk to 77,000, for a 16% loss of jobs.
One-quarter of GM and Chrysler dealerships were closed within three months of the firms' bankruptcies,
It is interesting to note that Romney is accused of heartlessness when what he does is cut down costs to save a company and thereby saves the remaining jobs, which would have been zero if he didn't succeed in saving the company.
TOOK AWAY PENSIONS FROM NON-UNION PEOPLE
The government took over Delphi's pension plan during the company's reorganization in Bankruptcy Court. Roughly 21,000 salaried employees lost up to 70% of their pensions, as well as life and health insurance.
THE GOVERNMENT PICKED WINNERS AND LOSERS
"The administration picked winners and losers where the pensions of many salaried Delphi workers were lost.
The agreement stipulated that GM would make whole, or "top up," the remainder of the pensions not covered by the federal government. GM made no such agreement with salaried employees.
ALLOWED THE "FAKE" BENEFIT OF NOT FUNDING BENEFITS
As with Social Security and Medicare, future obligations need to be funded on a fiscally sound basis. The refusal to face this issue and deal with it does not make it go away, as there is no magic - somebody will end up paying the bill, not some vague mysterious magical entity but taxpayers, and more so future generations.
GM’s relatively robust free cash position – one of its major selling points in its pending IPO – is being artificially propped up by the fact that it is not yet legally required to make multi-billion-dollar payments into its “heavily underfunded” U.S. pension funds.
How underfunded are they?
Well, the U.S. plans alone are $17 billion underfunded as of the end of 2009, Fitch says. When you include global operations, the total is $27 billion.
THE FINANCIAL BOMB(!)
Announcement: GM earned $4.7 billion in 2010, the most in more than a decade. It was the first profitable year since 2004
If it owes, besides any remaining outside debt, $27 billion to the underfunded pensions and is allowed not to pay now what does that mean for the future.
Assuming it needs some of the profits plowed back in to additional capacity, the debt to profit ratio would be 5.74 at the least and more likely around 9 to 1. That would mean an employee, who saved $5,000 a year would have debt of $30,000 or more and that there were no prospects of catching up, but for sure incurring lots of interest cost. It is "nonviability" and insolvency waiting to happen. We can only hope.
WAGES FOR NEW WORKERS REDUCED - AND PRIOR LACK OF COMPETITIVENESS
The UAW-negotiated wage was roughly $28 an hour in 2007. For new workers, the hourly wage was lower at $14 an hour; senior workers made more money. The major cost difference between UAW members and employees in foreign-nameplate factories in the U.S. comes in fringe benefits.
Average annual wages for production workers at the Big Three were $67,480 in 2007, and $81,940 for skilled workers. In Canada, GM’s 2008 average labor costs (including both wages and benefits) were $69 per hour, and Toyota's at $48 per hour, with similar productivity.
HOW BAD WAS IT BEFORE?
By eliminating much of its debt in bankruptcy and significantly cutting labor costs, G.M. reduced its break-even point, so that it needs to sell about two million vehicles a year in the United States to be profitable, half the number it needed to three years ago. It sold 2.2 million last year, compared with about 3.8 million in 2007, when it lost more than $38.7 billion, the most ever for any automaker.
