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Thursday, November 20, 2008

More on the Detroit Three

The CEOs of Ford, Chrysler and General Motors managed to commit yet another spectacular blunder when they traveled to Washington in their corporate jets. The irony of watching beggars claiming penury, while spending company money - not their own - like drunken sailors, is almost too much to bear. The fact that Rick Wagoner of GM received total compensation of $15.7 million in 2007 and Ford CEO Allan Mullally received $21.7 million merely compounds the irony.

If Congress (i.e. the taxpayer) is willing to bail out the domestic automobile industry, it should not do so by means of low interest rate loans that are unlikely to be repaid. It would be better, by far, for each of these companies to undergo a "prepackaged" Chapter 11 bankruptcy. As a part of exiting from Chapter 11, the taxpayer would provide funds in the form of equity. An appropriate form of equity investment would involve Convertible Preferred Shares, which pay a substantial dividend, plus Warrants to buy Common Stock. Although the prospect that any of these companies will return to profit is not high, at least taxpayers would make a substantial profit were it to occur.

Shareholders and bondholders would take the biggest hit but they largely deserve it. In addition, all members of senior management, as well as all Directors, should be replaced for lack of performance. More importantly, however, Chapter 11 would offer the opportunity to completely rewrite union contracts that are entirely unaffordable.

Auto workers, including retirees, have lived in a financial fantasy world for the last thirty five years and the day of reckoning is close at hand. The United Auto Workers Union (UAW) did its job by asking for the the sun, the moon, and most of the stars. Management's greatest failure was to surrender in the face of the short term costs of a lengthy strike. By acceding to these demands, the companies accepted a cost structure that could only be supported by the sale of large, and expensive, gas guzzlers with little practical use to most purchasers.

That the current generation of employees must suffer for the greed of previous generations - and the incompetence of management - is regrettable but reality must be faced. It will be hard for employees to accept rewritten contracts, but far harder to suffer extended unemployment with few prospects.

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