Taking the medicine----

In the 1959 Broadway hit musical “Lil’ Abner”, that was based upon the enduring comic strip by Al Capp, General Bullmoose, in a cynical takeoff on the congressional testimony of Charles Wilson, a former Chairman of General Motors, sang “What’s Good for General Bullmoose is Good For the USA”. Bullmoose, an evil industrialist, tried wine, woman and song to steal Lil Abner’s potion for strength (Steroids?) but the paid fem fatale, Passionata VonClimax, proved unable to separate Lil Abner and Daisy May and Dogpatch fought off the special interests, that were determined to make Dogpatch ground zero for an atomic bomb test.

This week in Washington, the three current chairman of GM, Ford and Chrysler, all of whom are in dire financial shape are aping the late Mr. Wilson by claiming that the bankruptcy of any of the big three automakers will unleash an economic disaster upon the entire country and hence the government must provide an open ended bridge loan until the economic tide turns.

In short, the rubber has hit the road and the now the wheels are about to come off for real. General Motors management has informed our elected officials that the corporation is facing imminent death, as they are hemorrhaging the life blood of all businesses, money.

Congressmen, senators, President Bush and President - elect Obama all agree that the country must maintain a vibrant automobile industry as a foundation of our dwindling industrial base. The industry representatives estimate that counting suppliers, dealers and after market businesses the industry gives employment to some 3 million people and that failure of any of the Big Three will mean losses of massive tax revenue and will be on the hook for huge amounts of unemployment insurance. No one, however, has been really coherent on how the government could help other than by just writing a check. Many disparage the idea of a bridge loan, pointing out that it would be throwing good money after bad by supporting a failed model.

The have a very valid point.

Many economists, lawyers and business people have called for the automotive companies and especially GM to use the existing remedy of bankruptcy to gain time to restructure. Mr. Wagoner, the GM Chairman states that GM is not even considering such a step and that no restructuring plan has been laid out by GM management. He is also taking the position that since he and his colleagues are the ones with experience in running large car companies who else is better suited to handle things after the “loan” is granted.

I was going to go off on a tear and do a blog on prepackaged, debtor in possession, Chapter 11 being a possible solution, but in Tuesday’s New York Times, Andrew Ross Sorkin did the job for me.

(http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html)

First consider the dire predictions of Mr. Wagoner, et.al. If the 3 million job losses are accurate it would mean that the companies would file for Chapter 7 under the bankruptcy laws, meaning the companies would close their doors and a trustee would lead in an “orderly” liquidation. If this were to happen I would agree with the overall tenor of Mr. Wagoner’s predictions as orderly is a subjective word and an immediate liquidation of the Big Three would be chaos.

But as Mr. Sorkin points out Chapter 7 is not called for but rather what is appropriate is Chapter 11 of the code. In Chapter 11, guided by the courts and not the politicians, a company presents a plan for the restructuring of a business into a workable model. Huge powers are given to the judge who hears all the competing claims from creditors, shareholders, employees, suppliers, customers and by far the most important, the demands of the entity willing to put up the new money needed to keep the concern in business. In short, the new money talks and the old BS walks. The new money, steps in front of old debts and effectively “crams down” it’s terms on the other interested parties.

Leases and all contracts can be broken, creditors can be forced to take a haircut on what is owed them and when they will get it. Debts, except for the new money, may all be adjusted for the common good. Everyone feels the pain but hopefully the level of pain is better than the alternative, death of the entity. For the shareholders it is not a pleasant thing. They usually get wiped out or diluted to near zip by the new money.

But can we, the country, take the medicine. The real money will still come from the government but the deal the government demands must be at least as tough as I have outlined . But, that will be tough to accomplish if for no other reason than that the Democrats draw massive support from the unions all of whom will stand with the United Auto Workers (UAW). It is the UAW contracts that are a primary reason why our auto makers can never climb out of the hole that has been dug going back to the 1960's. Congressman Barney Frank, who brought us sub - par Fannie Mae and Freddie Mac, has already opined that Chapter 11 is simply another union busting trick.

If the domestic auto business can be rationalized and restructured for today’s world it will be far reaching but with immediate short painful effects. But it could work. All labor will be repriced and it will force a very real readjustment to fixed assets like homes, etc. All adjustments will be down but will at least stabilize and be more competitive in all fields as time moves on.

But can we take the medicine. No spoonful of sugar will make this medicine palatable.