Saving Detroit

June 4, 2008, must seem like light years ago for Detroit. On that Wednesday night, the Detroit Red Wings hoisted Lord Stanley’s Cup in Hockeytown, U.S.A. Since then, it’s been nothing but the doldrums. The Detroit Lions managed to lose every single football game in the 2008 season and are on the verge of becoming the only winless team in NFL history. Of course, the bigger news is that Detroit’s Big Three automakers are struggling, and the chief executive officers of Ford, GM and Chrysler will make their second trip to Capitol Hill this week to plea for government assistance.

When the three CEOs flew to Washington in their private jets a few weeks back, House Speaker Nancy Pelosi responded with her best Jerry McGuire impression:

Until they show us the plan, we cannot show them the money.”

In response, Ford published their plan for the Senate Banking Committee and the request was:

A “stand-by” line of credit in the amount of up to $9 billion at Government borrowing rates, for a 10 year term, with TARP conditions, to support our restructuring, including the acceleration of products that consumers want and value.”

The 33-page plan, available here, offers laudable goals such as ensuring each 2009 Ford vehicle have better fuel economy than its Toyota or Honda rivals. The problem is that these decisions should have been made years ago to stay ahead of the curve rather than falling behind it. Granted, they have been making some strides in developing more fuel efficient cars and while the government didn’t help by federally mandating corporate average fuel economy (CAFE) standards, the long-term problems of high labor costs, unnecessary dealership contracts, legacy costs and poor decision making are the real causes of Detroit’s turmoil.

Everyone is in agreement that Detroit needs restructuring, but putting the tab on the taxpayer’s dime isn’t the way to go.

Pre-packaged plans tend to put the cart before the horse and rarely work out for the business or the consumer. Barron’s Sandra Ward argues that the only viable pre-packaged plan is bankruptcy:

Under a prepackaged Chapter 11 bankruptcy, everyone would have to share the pain. Executive pay and benefits would have to be reduced. Top managers should be required to invest a portion of their net worth in warrants or options exercisable when the company emerges from bankruptcy. Uncle Sam could force the companies’ brass to accept such conditions, in return for the bankruptcy financing.”

William Clay Ford Sr. fired Lions’ President and GM Matt Millen after eight tumultuous seasons, in which it felt like he needlessly drafted a wide receiver with each high first round draft pick he got. William’s son, Bill Ford Jr. declared, “The fans deserve better.”

The taxpayers deserve better, too. That’s not to say Ford needs to fire everyone to restructure for the long-term – it means they don’t need the taxpayers’ help. CEO Alan Mulally recently asserted: “With the assumptions we have in place, we believe we have sufficient liquidity to make it through this downturn.” Ford may not hit bankruptcy; GM and Chrysler are another story. In any case, a bailout isn’t the answer.

Subsidizing bad business practices will only lead to more of the same. A proper restructuring through bankruptcy will create a long-term solution, more jobs, and a healthier Detroit.

Addendum: CNN Money reports that GM is asking for $18 billion in loans. Add that to Ford’s $9 billion proposal and the new bailout request is already above the initial $25 billion without including Chryler’s numbers.

Found @ The Heritage Foundry

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