A government bailout won't save GM
Posted
Oct 28 2008, 01:18 PM
by
Kim Peterson
Rating:
It's a sad reality that, as more companies get in line to ask for government bailouts, some will be turned down.
General Motors should be one. As much as I'd like to see an American institution survive, this company cannot be saved. It's a shell of its former self and has been run into the ground.
GM is pushing hard for some tax dollars. Chief executive Rick Wagoner has been making the rounds in Washington, asking for about $10 billion to help finance a merger of GM and Chrysler. Of course, he'd love a direct handout. But other options include a loan or having the Treasury buy some of GM's toxic assets.
It's a "minor miracle" that Wagoner still has a job at this point, according to the New York Times. GM's share price hit a 58-year low this month as the news sunk in that people aren't buying new cars and probably won't for some time. Shares are trading at $5.76, down 84% from a year ago.
The Wall Street Journal says there's no doubt GM will get a bailout, and maybe should take the name "Government Motors." Taxpayers will end up financing a merger in an industry that should have consolidated long ago, writes Evan Newmark.
The problem is that GM is trapped in a complex and expensive web of its own making -- and a bailout won't change that. It's still stuck with burdensome union contracts, pensions and health-care liabilities, Newmark writes. It's suffering from poor product design and quality control.
"The sad reality is that to save Detroit, Washington will have to destroy Detroit," he writes.
GM can't find an outside investor willing to fund its merger with Chrysler. No one wants to go down that road. So that's why it's asking the government for the money.
And we'll hear lots of reasons why a bailout should happen. GM is too big to fail. Too many employees will lose their jobs. Dealerships will go bust. Then there's the argument about fairness: If banks and insurance companies got rescued, why can't Detroit?
But there are two huge reasons why GM should not get a bailout. First, we have no idea if the bailout will even work. GM burned through $1 billion a month in its second quarter. At that rate, a $10 billion handout doesn't seem like it'll do much good. Will it help save jobs? No guarantee. Will it make the merged company financially solvent? We don't know.
Secondly, as others have pointed out, a GM or Chrysler bankruptcy might be the best thing to get Detroit back on track. It would be immensely painful and damaging in the short term, but it might help the rest of the industry get to the point where it can nimbly compete with the Toyotas and Hondas of the world.
The Treasury will have a hard time saying no to GM, particularly because the former head of the Treasury is now the chairman of Chrysler's parent company. But it's time to cut GM loose. It cannot be saved.
Related reading:
Can GM and Ford survive?
Auto sales crash and burn
Car dealerships the new endangered species?
Not charged up about GM's electric car
