$25 billion won’t save the auto industry

While Congress mulled over an inevitable, albeit still wildly unpopular, auto bailout yesterday, I practiced helping automakers by flushing some cash down a toilet.

Ford, GM and Chrysler as essentially asking American taxpayers to pay $25 billion for something bankruptcy courts do every day: give them time to reorganize and settle debts.

Ford and GM collectively ran through nearly $15 billion last quarter. So that $25 billion rescue package will last them until, say, May, at which point auto sales will still be in decline, the Big Three will be filing for bankruptcy and American taxpayers will have flushed $25 billion down the crapper for nothing.

I agree with the bailout proponents on one point: something needs to be done. Shutting down the Big Three would be crippling to Michigan’s economy, not to mention the millions of jobs at risk when automotive suppliers start to feel the crunch.

Maybe bankruptcy isn’t what it used to be, but filing Chapter 11 does not mean you have to close your doors and shut down production. Will jobs be lost? Sure, and in no small numbers. But it’s unlikely these cash flow problems will force Ford, GM, Chrysler and their suppliers to turn off the lights and close their doors forever.

A Chapter 11 filing typically allows businesses to maintain control of operations while being subject to court oversight. The debtor can also make their own proposals for reorganization.

As of this posting, the automakers have failed to outline any changes they would make to help pull their companies out of trouble. Just borrowing more money is not going to help, guys. Your cash flow crisis indicates you’ll need significant structural and administrative changes. Luckily, a bankruptcy court will be happy to take care of that for you. Chapter 11 would force the automakers to come up with their own proposals, or let creditors bring their ideas to the table in court.

Recently, some have called for the resignation or ousting of CEOs at the Big Three. I don’t think ousting the CEOs is the answer, but it’s also a bad idea to hand over cash to drowning businesses, not matter how many strings are attached.

If I had the ear of the auto CEOs for five minutes, I would offer this golden nugget of advice courtesy of Jim/Dad: shut down your excess car dealerships. Auto sales among the Big Three are comparable to those of foreign cars, but the foreign companies own roughly half as many dealerships. Those things are expensive to maintain. If I were an executive at Ford, GM or Chrysler the first thing I would look at as I prepare my Chapter 11 proposal would be how many of those dealerships we could shut down (hint: it’s probably half of them). I mean, I can buy a car on the Internet these days; we don’t need to have dealerships scattered about like McDonald’s drive-thrus. The Big Three’s problems are probably less related to fuel efficiency and safety ratings (all three manufacture models on par with foreign cars) and more a result of careless business practices.

Chapter 11 bankruptcy is not a death sentence. It’s a second chance. The Big Three haven’t engaged in any sketchy or illegal activity (a-la-Enron), so they have a good chance of surviving reorganization.

When it’s done right, Chapter 11 save jobs, maintains the engine of profitability (i.e. the business) and reconciles the company’s debt with creditors, the very reasons automakers argue we need the bailout. So let’s save ourselves $25 billion dollars and let the market work her magic.