The recent financial bailouts approved by Congress have given manufactures a reason to ask for federal loans. The latest requests are coming from Detroit's Big Three auto manufacturers: Ford, General Motors and Chrysler. The bailout loan requests started at $25 billion, but now the automakers are asking for $34 billion.
The requested $34 billion would help the automakers restructure while avoiding Chapter Seven bankruptcy, the form that oversees liquidation. Taxpayers would ultimately foot the bill, and to make up for it, the Big Three have told Congress that they will pay off the loan, make pay cuts for executives and sell off car brands such as Pontiac and Saturn. Ford CEO Alan Mulally and GM CEO Rick Wagoner said they'd accept a $1 yearly salary if they borrowed money from the government.
Congress will return next week to vote on the proposed loan package.
"The liquidation of the Detroit-based auto companies would have serious negative repercussions for the entire U.S. economy," United Auto Workers President Ron Gettelfinger said in an address to the Committee on Financial Services on Nov. 19. "Almost four percent of our nation's GDP is related to the auto industry, and almost 10 percent of our industrial production by value."
Gettelfinger added that if the bailout failed, the national economy would continue to collapse while unemployment in Michigan and abroad would spiral higher.
"Based on the reports that the manufactures are telling us, they'd run out of money in 2009," said Bruce Belzowski, the associate director of Transportation Research Unit at the University of Michigan.
"Once government gets started in this thing, there's no bright line saying where it stops," said Professor of Political Economy Gary Wolfram. "The question is if you were to loan GM the money, is it going to take longer for them to be able to become profitable than if you just had them go bankrupt."
Instead of waiting for a federal loan, the automakers could still file Chapter 11 bankruptcy, which would allow them to restructure both management contracts with unions within their companies. However, Chapter 11 bankruptcy still requires massive amounts of money.
"The cost of restructuring is not free," said Belzowski. "It will cost them a lot and the workers a lot. And there is no reason to believe they could get money for Chapter 11."
Daniel Ikension, Associate Director of Center for Trade Policy studies at the Cato Institute, said he did not know who would fund the Chapter 11 bankruptcy, but suggested banks or equity loaners may foot the bill.
But restructuring the Big Three may not be that easy.
"You can take the best manager in the world - I don't know if they could get GM to make it with the legacy costs they have. They're losing money on every vehicle," Wolfram said. "Those contracts have changed," said Belzowski. "Those contracts have changed significantly in 2007 the go into full fledged action in 2010. So labor contracts are not an issue at this stage."
But unions are what cause the problems to begin with, Ikension said, "Let's say that I'm an auto worker on the line, and I break a wrench. I know how to fix the wrench, but I can't fix it due to the union. Instead, I have to wait for another guy to come down and fix it for me."
Ikension said that the 2007 negations were a step in the right direction, but union needs to agree to the elimination of work rules and be comfortable with pay cuts in order for the Big Three to remain competitive in a fast market.
Gettelfinger said the UAW is open to reopening talks on union contracts.
Wolfram said, "If you want the market to turn around quickly then you need to get resources out of the hand of people who are making mistakes, and put them in the hands of people who are less likely to do so."
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