Barack Places Blame on Auto Industry Leadership

Yesterday President Barack Obama outlined his administration’s intervention plan for the grave crisis in the automotive industry. The plan involves using public funds to support the demand for cars during the recession. But it also involves direct intervention in the management of General Motors and Chrysler.

The two companies in great difficulty have, since last December, already received 17 billion dollars of aid at the expense of taxpayers. Before receiving new public funds GM will most likely be forced through a quick bankruptcy proceeding backed by the government, which would allow them to reduce and to reorganize the debt and to plan a new development model. Furthermore, the Obama administration has directly intervened by asking for the resignation of GM’s managing director and indicating a partnership with Fiat as an essential prerequisite for the restructuring of Chrysler.

The direct management intervention by the government, which could appear to be an undue intervention in the private interests of shareholders, instead seems appropriate in this particular case. Above all because the company would be in bankruptcy without governmental assistance, leading to loss of shareholders’ control. At least in the case of GM, the board of directors has demonstrated an absolute lack of independence towards management. CEO Rick Wagoner has enjoyed being in favor with the board as of 1994, despite the fact that GM’s market share in the United States has decreased from 33.2% to 18.8%, and despite the fact that the company’s market value has fallen from 70 dollars per stock in 2000 to $4 today.

The Obama administration’s decision to use laws related to the bankruptcy proceedings to restructure the two companies seems courageous to me. These laws, in fact, allow the company’s bondholders – not the unions, nor the creditors – to act with determination. Every one of these parts will be required to convert portions of their own claims (or, in the case of the union, the benefits from its health insurance and pension) into shares. There is talk that this will include about two-thirds of the bonds and half of the insurance and pension benefits.

The bondholders have limited bargaining power, if any, in this situation. The success of the restructuring of GM and Chrysler instead will depend on how many sacrifices the administration will be inclined to ask of the unions. The new development model of GM and Chrysler cannot put aside considerations that the hourly salaries it had negotiated with the unions are remarkably greater to those of another company. For example, compared to those Toyota pays its own non-union workers ($70 per hour versus $46 in the case of the workers with greater experience); not to mention health insurance and pension funds.

In his speech yesterday, Obama explicitly placed the blame for the failure of the auto industry on its leadership – “from Washington to Detroit” – without directly dealing with the issue of the unions. He has read this failure as the lack of innovation in the production of more efficient and “clean” automobiles. This interpretation is shared only in part. It is wrong to forget that at the root of the crisis is the irresponsibility of the managers and unions that signed financially unsustainable contracts. They did so in the hopes that no administration would have the courage to end heavy intervention and support of the automotive industry. Under these conditions, producing competitive automobiles came in second to maintaining peace in the unions with support from local and federal politics.

The crisis has forced the Obama administration to confront the relationship between politics and the economic oligarchy. This relationship exists in the car market as it does in the financial markets, where large private companies have been able to avoid market competition by replacing it with revenue “kindly offered to them” via political streams.

Unfortunately, up until now the administration has not known, in my opinion, how to intervene with the strength and the independent judgment necessary to strangle these revenues and reestablish an efficient and functioning market. It did not do so days ago with the large banks. It did better yesterday with the automobile industry. We will see if they will be able to do it tomorrow with the powerful auto unions (and the day after tomorrow with teacher’s unions).