2008 December 19 Friday
US Car Financing Deal Requires UAW Cuts

The Bush Administration has reached a deal with GM and Chrysler to lend them enough money to keep them in business for 102 days to give them time to negotiate a large restructuring with their creditors, suppliers, and union workers. The deal requires GM and Chrysler to negotiate lower labor costs with the UAW.

The conditions of the Bush plan require that GM and Chrysler satisfy a number of restructuring goals spelled out in the legislation that failed to pass in the Senate earlier in December. The companies will have to reach a new wage and benefit agreement with the United Auto Workers and retirees that puts the automakers on parity with foreign companies manufacturing vehicles in the U.S., such as Toyota (TM) and Honda (HMC). Investors holding GM and Chrysler debt will also have to take a huge "cram-down" or discount on their bonds, reducing debt by two-thirds.

The Big Three can't compete long term unless all their costs are competitive with their competitors. So this need is obvious.

These loans from the US government are needed to give GM and Chrysler time to negotiate the sorts of deals which normally happen during bankruptcy. What they are going thru is bankruptcy in all but in name.

But some are skeptical that the deal will force sufficient cost cutting on labor.

Industry critics say this plan won't force the automakers to do what is really necessary to become competitive with the nonunion auto plants operating in the United States by overseas automakers. They wanted tougher rules that would have forced the companies into bankruptcy unless the union agreed to painful wage and benefit cuts.

"Over and over again we've seen these guys use creative math to give the illusion of competitiveness," said Peter Morici, a business professor at the University of Maryland.

Reaching agreements with a large number of debtors and with the UAW in 102 days will be very difficult. During bankruptcies these sorts of measures normally take a year or two. This deal basically requires GM and Chrysler to do something similar to bankruptcy without officially filing for bankruptcy.

More daunting may be targets set by the White House, which require the companies to work toward reducing debt by two-thirds, cut in half the cash owed to an employee health care plan and make UAW wages competitive with those paid by Honda, Nissan and Toyota at their U.S. operations by the end of 2009.

The president's designee, by March 31, can waive those targets but must explain why.

The Obama Administration does not have to honor the terms of this agreement. It can let the UAW off the hook and force the Big Three to keep paying uncompetitive prices for manual labor. Some politicians do not want to see labor cost cuts that are needed to make the Big Three cost competitive. Barney Frank inhabits a fantasy world where the Big Three can achieve competitive costs while paying more for unskilled labor.

Still, House Financial Services Committee Chairman Barney Frank is calling the stipulation "an unfair assault on working men and women" that could force them to accept "a disproportionately large reduction in what is currently legally owed to them."

The provision, Frank said, "could give foreign auto companies in effect the ability to dictate wages for all America auto workers."

He already is pushing for president-elect Barack Obama to change that portion of the emergency loan package, something Treasury said the incoming administration will have the power to do.

If the Obama Administration decides to let the UAW off the hook then the Big Three will get even more deeply in debt and the crisis will hit again but with the GM and Chrysler in just as much debt but the next time around with the US government.

The Big Three also need a restoration of credit and demand for cars.

"The automakers will hemorrhage red ink until auto lending and leasing revives. Without credit, vehicle sales will at best remain at their current 10 million unit annual sales pace," said Mark Zandi, the chief economist at forecaster Moody's Economy.com.

"The Big Three share of these sales is less than 5 million units. Their break-even sales rate is closer to 7 million units."

Share |      By Randall Parker at 2008 December 19 09:27 PM  Economics Transportation

Wolf-Dog said at December 20, 2008 4:22 AM:

"These loans from the US government are needed to give GM and Chrysler time to negotiate the sorts of deals which normally happen during bankruptcy."

True. But more importantly, the main fear in well informed circles is the fact that a disorderly bankruptcy is likely to cause the loss of the new electric cars that Chrysler, GM, and Ford are developing now. There is significant progress in electric cars, and all we need is an additional evolutionary improvement in batteries. But if there is a chaotic bankruptcy that decapitates leadership, then all the American electric car technology will be bought by foreign competitors at fire sale prices, and then the U.S. will fall behind in electric car manufacturing FOREVER: this would be a national security issue.

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