Auto Industry Seeking Tow Truck

By Tim Holland

The U. S. auto industry continues to make its case for a piece of Treasury’s T.A.R.P. to protect it from bankruptcy. However, as the three remaining U. S. auto companies plead with Congress, two camps are emerging: should Troubled Assets Recovery Plan (T.A.R.P.) funds be used to bail out industrial companies or should those firms be permitted to enter bankruptcy as a way of solving the problem.

The public hearings held on Wednesday did not appear to resolve the problem either way but the outlook looks grim based on the comments of key members of both partiers. Sen. Richard Shelby, the senior Republican of the Banking Committee is a particularly vocal critic of the auto makers and has made it clear that he has no confidence in the management of the companies to use the government bailout funds any better than they have used their own.

The CEO of General Motors Corp (GM), Rick Wagoner, is proving to be his and the big three’s own worst enemy. He is asking for a $25 billion emergency package be made available, of which he would like the lion’s share for GM, and threatens that the company would run out of cash without it. GM is reported to be using up to approximately $5 billion in cash every month and, while originally refusing to say how long the company would hold on, he later estimated that GM would run out of cash by year end without the loans.

One does not have to be a math wizard to do a simple calculation that if GM were to get $15 of the $25 billion and they are burning through $5 billion a month and their current funds run out in early January and the economic downturn will last through most of 2009, $15 billion will only get GM to March.

With GM having spent the $15 billion by March the government will then be faced with the same argument: either give them more so they can survive another two to three months or admit they wasted the first $15 billion and let GM go under.

With Chrysler we have a different problem in that it is not currently a publicly owned company. It was taken private a few years ago by some very smart Wall Street people and, in retrospect, we know how really smart Wall Street people have proved to be of late, especially when viewed over the long term. For example, take a look at who they chose to run their newly owned company, Robert Nardelli. Nardelli, you may recall was in the running to replace Jack Welch at GE but Welch decided he wasn’t the right CEO for the company. He was, apparently, a good Division guy but not good enough for the top spot at GE. Nardelli disagreed with Welch’s view and wanted to be his own boss so he talked himself into the top job at a hardware company.

Home Depot, under Nardelli, became a great business school case study of how not to run a company. He was finally forced out, with a nice package, of course.

The new “smart” guys from Wall Street who found themselves running a car company must have figured that the “smart” move would be to hire someone with visibility but didn’t think a knowledge of the auto industry to be a major criteria for the job. And now we are being asked to trust them with $10 billion or so of taxpayer money?

So what to do? Actually, the person who seems to have made the best case for handling the problem facing the U. S. auto industry is Mitt Romney. In his Op-Ed in The New York Times on November 19, 2008, he makes far more sense than anyone so far. His recommendations seem harsh but they are probably the right ones. “If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automobile industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.”

The approach that Romney advocates sounds like the Romney of old, the one who became Governor of Massachusetts not the – be all things to all people but don’t anger the conservative base of the Republican party – presidential candidate.

Romney’s tough medicine approach surely has much merit. “A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warrantees are not at risk.”

If I remember correctly, one of the ideas that President-elect Obama was known to float was the concept of an auto industry Czar. Could it be that the best way to loan funds from a T.A.R.P is to handle them with a Mitt?