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  • Saving Detroit

    Detroit Lions (Photo by Rashaun Rucker/Newscom)

    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 have managed to lose every single football game in the 2008 season and are on the verge of remaining winless this season. 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 taxpayers’ 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.

    Posted in Economics [slideshow_deploy]

    11 Responses to Saving Detroit

    1. Steve from Arizona says:

      The only persuasive argument I have heard against bankruptcy is that nobody will buy a car from a bankrupt company. The solution to that is to create a federal program to guarantee the warranties of cars bought from a U.S. automaker in bankruptcy, in the event the company can't, in fact, reorganize. What could that cost? A few hundred million? A pittance compared to what these companies are asking for.

    2. Pingback: detroit news | Digg hot tags

    3. Pingback: Saving Detroit « Conservative Thoughts and Profundity

    4. Michael Haltman, Jer says:

      I agree with you totally. This is from my blog today:

      This is what it has come down to. Three of the nations oldest industrial companies seeking a bailout, bridge loan or cash infusion in order to survive. With a potentially crippling trickle down of bankruptcies and job losses that would result, they were initially grilled on their use of private jets to get to the hearings. As if this was the crux of the problem, and had they found an alternate way to get there, all of the actual management mistakes and the economic downturn would miraculously disappear and the companies would be well on their way to profitability.

      With that in mind, these corporate leaders, these icons of industry, chose to drive from Detroit to Washington so that the senators and congressmen would now know just how serious they are about taking these companies from the brink back to profitability. Now they know. These politicians have to stop pandering to the folks back home and focus on the problem at hand, without looking for the buzz phrase that will get them the headlines and face time. This stuff is serious business, and should not be used as just a tool to get ammunition for the next re-election cycle.

      Mike Haltman

      The Political and Financial Markets Commentator

    5. kent/virginia says:

      The 'Big Three' American Auto makers should be allowed to declare chapter 11 bankruptcy and re-structure so they can begin to compete with foreign companies both in America and abroad. Any government bailout is a sellout to Unions. We will just have to do it again in several years–how many bailouts will it take before the Democrats finally face that fact? Their union cronies are making it impossible for U.S. auto makers to compete with foreign auto makers. Let's clean out the dinosaurs in congress with term limits and re-train top union dinosaurs to contribute something positive to American society.

    6. Ed, Leesburg, VA says:

      It's crunch time. This is one of many future instances I see coming when we will be able to see in the bold light of the YES/NO vote which of our chosen, elected representatives side with the unions and inept management or us, the tax-paying public. My guess is that we will lose — again.

    7. mel, colorado spring says:

      So the folks whose companies are producing products need to come up with plans to show Congress and the companies should file for bankruptcy instead of getting loans and lines of credit. How about the plans or bankruptcy filings for those companies are in the financial sector and started all of this mess, instead of outright gifts of more than the auto makers are asking for in loans? And I doubt that those CEOs took comercial air or Amtrak to come ask for their gifts. I guess it's that the auto makers are just looking to keep some of the remaining middle class employed, not give no-strings gifts to the Treasury's former coworkers…

    8. Bob,Fernandina Beach says:

      After reading the GM proposal I am more than ever convinced that bankruptcy is the ONLY true answer. When all is said and done to suggest that labor contracts would "ostensibly" be addresses between now and 2012, makes this plan unworkable. Unless contracts are null and void NOW we can forget ever coming out of this.

    9. Kristina, Gloucester says:

      I would like to disagree with one point about the public not wanting to buy a car from a bankrupt automaker – Remember, the brand is just the window dressing. Take down the frills and the name, the window is still there. The plans for the cars are still on the drawing table to be tweaked, the knowledge of how to build the cars is still in the minds of the workers, and the machines are still in place to build the cars and the supporting parts. When there is a need void, American innovation steps in to fill it, if given the chance. Entrepreneurship will take over and our cars and our nation will be stronger for it. Sometimes you have to break a leg in order for it to heal properly.

    10. Matt Cohrs, Jacksonv says:

      I owe an apology to government employees, for the first 43 years of my life I thought they were the least deserving of a paycheck.

      The big 3 is a poorly adapted dinosaur hopelessly stuck in thier glory days of the 1950's. Speaking for myself the last time I bought an American car I got burned, they have not gotten better as we have been told. Show me one person who is unhappy with thier Toyota or Honda?

      There are many things we as Americans do well, we build the worlds finest Aircraft, Ships, Computers however when it comes to the Auto industry it's simply time for them to go the way of the T-Rex: a once mighty animal who failed to adapt.

    11. Pingback: The Big Three’s Plans for Change « Conservative Thoughts and Profundity

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