Just When You Thought It Couldn’t Get Any Worse

The Big Three automakers are in trouble. For years they have frittered away their market shares through a combination of uninspired designs, bloated union contracts and wasteful spending. The stories of the salaries and bonuses of the industry’s top executives raise the hackles on every consumer’s and taxpayer’s neck.

Leaving aside the spouses of these incompetent bums, is there anyone else that doesn’t think, “Could we find any worse managers?”

The answer is “YES” and we are about to prove it. Who could be worse than these jokers? Well, the government for starters. It is beyond comprehension how we can look to a United States Senate committee chaired by Sen. Chris Dodd (D-CT) and believe that therein lies the solution to the moribund domestic auto industry. This is the same guy who accepted favors from Fannie Mae and Freddie MAC in the form of reduced rate mortgage and massive campaign contributions and thereafter insisted that the nation’s financial institutions start providing loans to people who could not and would not repay them thus creating an artificial inflated housing market and the inevitable collapse of the mortgage industry.

The last time we had the government assert direct control over industry in an attempt to avert an economic crises was when Richard Nixon and a Democrat Congress imposed wage and price controls. It was a disaster. The mere idea of a government, beholden to an array of special interests (including the labor unions), exercising control over any business should bring chills to every taxpayer. If there was a single instance in which government has improved a business by exercising control over it, one might take heart. But you can run through an unbroken string of inefficiency, waste, and corruption in every effort the government has undertaken starting with the postal system, running through Amtrak, the public education system, the housing finance system, and the nation’s healthcare system. Throw in the corruption attendant to the rebuilding of New Orleans and a host of other “emergency aid” funds.

A better solution to the auto industry crises is to utilize the bankruptcy process. While I am the first to admit that the judiciary is subject to political bias, it most often is resistant to political pressure — something that the Congress yields to at the drop of the hat.

By forcing General Motors into bankruptcy several beneficial things could happen that would heighten the likelihood that a new General Motors would emerge with the ability to actually compete in a highly competitive marketplace. The first thing to understand is that bankruptcy does not necessarily mean that an entity must cease operating. The bankruptcy laws, in fact, provide methods of reorganizing such that a business can continue current operations pending a restructure. All of the prophecies of doom by Wall Street and the automobile executives are baloney and designed to stampede a Congress with the collective intelligence of a bag of hammers into undertaking another stupid act — in this instance throwing money at a bunch of losers.

A bankruptcy court has virtually unlimited powers in restructuring a business including the appointment of “special masters” to assist in the examination of existing business practices. In the instance of General Motors, the bankruptcy court could do the following:

1. Suspend and restructure payment on all current debts. This includes the significant amount of debt that General Motors has accumulated through the issuance of bonds. The interest payments to bondholders are staggering and in most instances, these bondholders have priority interests in the assets of General Motors — priorities that are senior to the shareholders. The bankruptcy court could force these bondholders to convert some or all of these bonds to equity interests and thus eliminate the ongoing interest expense to General Motors.

2. Restructure existing union contracts. This includes reducing current hourly wage rates to those comparable to autoworkers in domestic plants of foreign car companies (Honda, Toyota, Subaru, etc.). More importantly, the court can restructure work rules that promote staggering inefficiencies in the production of automobiles.

To understand the inefficiencies imposed by these work rules, I return to a time from my youth when I was working summers for a heavy highway construction firm that was fully unionized. I was a base laborer but during a time when we were moving an asphalt plant we worked for twenty-two straight hours. For all but three hours of that time I worked as a laborer (loading bracing timbers, lifting conveyor belts into place, etc.). During the final three hours I spelled the driver of one of our semi-transports and drove it 180 miles while he slept. Because of union work rules I was required to be paid teamster wages (about two and one-half times those of a laborer) for the entire twenty-two hour work shift. But that wasn’t all, because of work rules I was required to be paid for time and one-half for every hour over eight hours even though I had not worked a forty hour workweek.

One only needs to look at the auto industry in Brazil to see the operating efficiencies that can be garnered through deployment of “robots” but current union work rules limit the deployment and use of those same robots for domestic production.

There are estimates that the auto industry could attain twenty percent operational efficiency through the elimination of these union work rules.

3. Restructure the benefits packages for all employees, including healthcare and pension benefits (at least on a going forward basis). Most of these healthcare plans require minimum participation by the employees and are gold platted with benefits that not every employee requires. For instance, do single men really require obstetrics and gynecology services? Do women need access to erectile dysfunction services? Healthcare benefits could be restructured to allow employees to choose the level of services required and to participate financially in the provision of services in excess of a basic set of services.

Most union pension plans are known as defined benefit plans. These plans guarantee a prescribed monthly payment based on final wages and the number of years worked. Most of the plans are under funded simply because life expectancy has increased since the date they were adopted and funding has not kept up with longevity. In addition, the plans are structured to provide incentives for workers to retire before their productive years are over. In doing so three phenomena occur. First, the employees draw more than the plan originally anticipated. Second, the employer is required to hire a new employee to replace the retiring employee effectively requiring the employer to pay for two people to do one job. And third, because the employee is relatively young, (s)he regularly moves on to another job and becomes a double dipper.

Changing existing defined benefits plans to defined contributions plans cures all of these problems and give employers a predictable and limited expense for production. (This is a lesson that the state legislature should learn and utilize with regard to public employees on a going forward basis.)

4. Impose a disciplined approach to executive compensation that provides ample reward for long term success instead of rewarding dysfunctional activities that focus on quarterly results. If such compensation plans were in place today, we would not see the failing CEO of General Motors being rewarded $89 Million while his company is sinking into oblivion.

I pick on General Motors because they are the worst of the lot. Their cars are crummy, their designs are boring, and their marketing is offensive — at least to me. Their compensation is outrageous and, apparently, their board of directors is uninterested in providing competent guidance. They have failed to exercise prudent management in their collective bargaining resulting in excessive wages, burdensome work rules, antiquated manufacturing processes and gold-platted benefits.

In all probability, Ford and Chrysler are equally guilty. However, Ford has said they probably don’t need a bailout (only a standby line of credit) and we should put them to the test. As Ford watches a GM bankruptcy unfold, it should provide Ford the incentive to make hard decisions (similar to those mentioned above) more quickly and without court supervision. Chrysler simply needs to be sold — that is to someone other than General Motors — and the quicker the better.

As inefficient as bankruptcy can be, it is more likely to produce a sustainable result than is the Congress and this president (and apparently the next president who supports the Congress in this foolishness.)