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Carlos Osorio/AP
If history is any indication, bankruptcy filings by American automakers could have aftershocks around the world.
Would the auto industry, and would we all, be better off if Ford, General Motors and Chrysler were allowed to go bankrupt?
The possibility became more real last night, as the Senate rejected the bailout proposal endorsed by President Bush and Congressional Democrats. A case study from 30 years ago--one with remarkable resonance for the global financial crises of today--suggests the risks ahead.
If you are of a certain age, you remember the headline: “Ford to City: Drop Dead.” It was from the New York Daily News in October of 1975 after President Gerald R. Ford (not the Ford automobile company) gave a speech rejecting New York City’s request for federal loans to avert a default on city debt. Ford’s speech pleased many at home, but the possibility of a default on billions of dollars in debt sent tremors beyond American shores. The overseas reaction was perhaps the first signof financial globalization and its perils, now grimly familiar in the meltdown of 2008.
Who can be sure that if the Big Three auto makers go down, it won’t be like Lehman Brothers earlier this year, with surprising impacts around the world and at home?
New York City debt, to borrow a phrase from today, was a toxic asset. But such debt represented an estimated 20 percent of the equity of the biggest commercial banks on Wall Street. A default threatened Chase Manhattan Bank, Morgan Guaranty Trust, Citibank and other giants with a major blow to their solvency.
Shortly after giving his speech, just before Thanksgiving, President Ford traveled to Rambouillet, an 18th century chateau outside Paris for the world’s first economic summit, summoned by President Valery Giscard d’Estaing to deal with the worldwide downturn. Arthur Burns, chairman of the Federal Reserve, attending the Rambouillet summit with Ford, asked both Giscard and Chancellor Helmut Schmidt of Germany what they thought if the city that served as the capital of global finance went bankrupt.
“The answer was loud and clear,” recalls Felix G. Rohatyn, the investment banker who helped engineer the New York City rescue, and who later served as an ambassador to France under President Clinton. “The European leaders felt that a bankruptcy of New York City was unthinkable.”
Rohatyn, who heard about this conversation from key participants on both sides of the Atlantic, says that Giscard and Schmidt told Burns that a New York City bankruptcy would be seen as a bankruptcy of America itself, causing a run on the dollar and extreme difficulties for leading American financial institutions.
Soon after Rambouillet, the Ford administration softened its opposition to helping New York City. While it was popular, then as now, to bash Gotham, mayors and governors around the country were uneasy about interest rates going up on their own borrowings, and even some southerners worried about welfare recipients packing their bags and going to other states. (In 1976, Ford lost New York State in his close contest with Jimmy Carter for the White House.)
In addition, by late 1975, some in Ford’s inner circle, as well as some at Burns’s Federal Reserve – including Paul Volcker, then president of the New York Fed and now the new chair of President-elect Barack Obama’s outside advisers, the Economic Recovery Board -- were beginning to argue that New York City had done a lot to get its finances in shape and was deserving of help, especially since the risk of bankruptcy was becoming increasingly clear.
There was also the chaos factor. I covered the city fiscal crisis for The New York Times as a City Hall reporter in my 20’s. What I remember vividly is that no one could guess the consequences of bankruptcy throughout the American financial system. For one thing, no one knew for sure who owned all that debt and what institutions in the chainwould be at risk. Many individuals whose incomes had gone up with the hyper-inflation in the 1970’s had alsopurchased New York City bonds and notes because of their tax-exempt status.
There was talk then, as there is now with Detroit, of a “cram down” solution in which a bankruptcy judge would force various parties to accept sacrifices. But in 1975 the experts wondered where a bankruptcy judge would hold court to hear the competing claims of New York City’s stakeholders – its untold numbers of creditors, municipal workers and taxpayers. Yankee Stadium? And would they have to reserve Shea Stadium just for the lawyers?
Tracy Quan's latest novel is Diary of a Jetsetting Call Girl, set in Provence and praised in The Nation as a "deft account of occupational rigors and anxieties before the crash." Tracy's debut, Diary of a Manhattan Call Girl, and the sequel, Diary of a Married Call Girl, are international bestsellers. A regular columnist for The Guardian, she has written for many publications including Cosmopolitan, The Financial Times, and The New York Times.
Joe Mathews is a journalist, an Irvine senior fellow at the New America Foundation, and a contributing writer at the Los Angeles Times. He previously served as Justice Department reporter for the Wall Street Journal and as a city desk reporter at the Baltimore Sun. He is the author of The People’s Machine: Arnold Schwarzenegger and the Rise of Blockbuster Democracy.
Gerald Posner is the award-winning author of 10 investigative nonfiction bestsellers, ranging from political assassinations, to Nazi war criminals, to 9/11, to terrorism (www.posner.com). Posner lives in Miami Beach with his wife, the author Trisha Posner.
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Why do we keep bashing Detroit based on a number of myths?
Ford and GM are still two of the world's largest and most successful automakers. They make and sell cars all over the world not just in the USA!
They do make good and reliable cars and have beaten foreign makes in quality and durability.
They do make Hybrids, the Ford Escape has been around before the Toyota Prius and more of the big three are launching new hybrids.
They do not only make gas guzzlers, I drove a Ford Fiesta in Europe that did 65 miles to the gallon and there are US models like the Focus that are well above the average in miles per gallon.
They do make cars that Americans want. Unfortunately the American market wants large gas guzzlers like the SUV's. Every automaker in the world has been trying to bring successful SUV's to the American Market.
The government is blaming the big three for making cars that the market wants! This is what a capitalistic corporation is supposed to do; sell cars that people want and make a profit doing it!
It is true that the cost per automobile is too high, although I am not sure the comparison to foreign car makers is not an apples to oranges scenario.
Social costs of foreign labor are measured differently. Most foreign manufacturers also have a government taking care of health care costs and pensions which are paid for by the taxpayer. The big three are all carrying the full burden of these costs (health care and pensions) that in most other countries are carried by a government.
The current problem of the big three is exacerbated by the current financial crisis. Credit is tight, it is hard for them to rollover/renew their credit lines and their ability to raise new capital has been greatly diminished by the precipitous decline in their share price.
The problems of the Detroit three is not a lack good, quality or fuel efficient cars that the people want, it is their burden of taking good care of their current and past employees and the current economic crisis; the government should help them.
This problem needs to be discussed. There are lots of unknowns, serious impacts like nationalizing an industry or giving away 100s of billions of dollars to float a failing industry, 100s of thousands if not millions of jobs at risk and above all of this the arrogance of the automaker management who have been betting against America for the last 25 years to help their Oil buddies rip us (you and me) off. The Japanese Auto Companies are more American Friendly that the 3 detroit auto companies.
I'll get it started. We need an industry that will support the greening of America. It's ok to make money, and lead the way in the world, and create many new well paying jobs. Just do it in a moral and ethical fashion given the global situation we find ourselves in. In a sense our economy is being held hostage by a bunch of arrogant anti-American greedy short sited hypocrits (I'm speaking of the 3 CEOs that flew their private jets to a hearing to ask for a down payment on the bailout of their companies to the tune of $25,000,000,000.00).
If we are to justify 100's of billions of taxpayer dollars to prop up this dinosaur of an industry it must come with strings to guide the industry into doing what is right for America. It's our money anyway. I don't know if the CEOs need to be fired, although that would be a good lesson to other industries that are thinking of asking for a bailout, but their energies certainly need to guided in the right direction (greed is no longer considered good).
If they want my money to survive, they need to start building the right kind of vehicles.
A side comment, Republican driven laissez Faire policies seem to be bankrupt as illustrated by deregulated financial empires gone berserk. And clearly given $4/gallon gas prices Detroit should have been making clean, efficient electric vehicles for the last 30 years ($4/gallon was the price in 1972).
Again, I say if they want my money, they need to clean and green their act. What do you say?
All forms of subsidy capitalism need to be investigated, from sugar price supports to subsidies to oil, mining and agriculture. And some here in MIchigan find it extremely offensive that we can put huge bags of money on the train from DC to NYC to bail out bankers and Wall Street screwups with nary a word of debate but whine about three Detroit auto execs and their private planes, as if none of the Wall Street clowns have their own jets. And I tire of hearing about the abuses of the auto union or unions in general. Look at Wall Street: how many union menbers are represented there? In fact, one could reverse the argument and say that it is the non-union workers on Wall Street and in the banking industry who are at fault in the current crisis. Make these stupid clods join a union, where they might be supervised.
Vankukh is RIGHT ON TARGET. GM, Ford, and Chrysler make cars that are equal to Japan or Korea on every level of size, comfort, MPG, quality (yes, quality), and cost. I work in an area where American-made cars make up maybe 20% of the market. I ask my friends and neighbors, did you check American cars? It's not even on their short list. So how can we blame Detroit for 'not making cars people want' if they're not even visiting the dealership to check?
A $20,000 purchase of an American-made car generates 4 times the federal and state revenues than the same $20,000 for a foreign car. I am subsidizing my neighbor's purchase of a Japanese car by paying for defense, education, social services, and other government expenses at a higher rate than they are, yet we enjoy those services equally. Perhaps a penalty on foreign cars to equalize the tax burden would be a reasonable economic response.
Let's do the arithmetic; if you close down the companies the government will have to take care of the retirees and the current employees.
GM alone pays $4.9 billion for 291,000 retired employees so let's assume Chrysler and Ford pay half of that each that makes $9.8 billion total.
Remember this is an annual payment! It only addresses current retirees! You lay off another 100,000 current workers and if you include dealers and suppliers that will go down with them, and the bill will come to "God only knows" what number. Certainly more than the current $15 billion price tag of the bailout. Do not forget the bailout is a loan that will be repaid. The other bill for disaster will be paid in perpetuity!
The "God only knows" what number will have to be paid for by the government in perpetuity for Medicare/Medicaid, Pensions, Unemployment, Food Stamps and so on.
From an arithmetic point of view this bailout is a no brainer.
Now from an operational point of view in particular with regard to the part suppliers, this bail out makes sense also: The part suppliers will go bust if the big three are allowed to fail. Where do you think the implants will have to get their parts from? They will have to import them! Bingo, more jobs will be exported and so on and so forth.
Anything I missed?
Well said, Van Kuyk!
@vankuyk: I'll agree with you, but only partially. The Ford Fiesta you speak of is a diesel burner, not petrol. Americans moved away from this form of gas in the 1980s. Also, the prius predates the Escape (which was released in 2004) by 3 years (the first Prius came out in 2001 in the US-it actually went on sale in Japan in 1997!)
I will say that I had a Yota. While I was able to get a good 13 years of use out of it, it was not 100% problem free as Consumer Reports likes to tout. I ended up dropping about as much as I paid for it over the 13 years for repairs.
American car manufacturers have done a great job of moving foward and changing their manufacturing methods to include quality control that matches or rivals the foreign competitors-specifically the Japanese.
But I think you have hit the nail on the head with the labor cost, this is where we are on a drain. The unions have uneccessarily inflated the cost per worker and that in turns does create a loss of profit that can never be recouped.
This is another Republican fiasco. Are they shortsighted, stupid, ignorant, or traitors? Killing an industry in the US weakens us in every way. Their disastrous financial and defense policies for 8 years brought the US to this. If they had been paid for by foreign conspirators to bring down this nation, they could not be doing a better job.
Well, in a way, they ARE working on behalf of foreign companies. Notice the Southern accents of the Senators most opposed to the bailout: Corker, McConnell, and Shelby. Their states have BMW/Honda/etc. plants, drawn to the South by cheaper wages/less union activity.
2 issues that I find interesting about the whole 'bailout' fiasco:
1) I agree that any company getting our taxpayer funds should be asked a lot of hard questions but where was congress and the senate when we gave blank checks to the financial companies? These companies have thousands of employees that make more than those union 'fat cats', they have CEO's with jets and other perks who make millions, and they also obviously need to 're-tool' their business model or else they would not have lost billions and billions of their investors $$.
Why weren't they put under this microscope?
2) The talk is always about how the Big 3 can file bankruptcy and they will restructure and be fine (or not) and maybe if this was the economy of 10 years ago they would be right; however could we all at least all concede the fact that these are extraordinary times (just ask the 500,000 who lost their jobs last month). So I would ask of those who voted no: If we don't bail out what is the plan?? It is NOT a strategy to just say no to the money w/o elaborating on what needs to be done with so many jobs in the balance....
I would feel bad for them, IF they actually tried to adopt alternative-fuel cars wholeheartedly, instead of half-assed. The fact that a meltdown was required for them to promise more energy-efficient cars, just pisses me off. Remember, these are the same people who played a part in destroying the electric car in the 80s.
Don't get me wrong, I fully sympathize with all the people who will lose job over this. But do I secretly hope they go down in flames? Of course!
@vankyuk: I agree with the union issue but it's hard to get on your side on the quality of American cars. I'm not aware of a study that places US autos above the leading foreign brands. Even more so when the carmakers themselves apologize for making crappy cars: http://uk.biz.yahoo.com/08122008/325/gm-says-disappointed-betrayed-consumer s.html
I agree that business should be responsible and forward thinking but I find it fascinating all the odes to 'irresponsible car makers' when financial institutions were even more remiss. When consumers put money in banks or investment firms we do it so that the money will used in a responsible way to generate more capital for ourselves and yes, our country as a whole, not so for extremely risky loans or unproven investment securities...Wall Street has gambled away hundreds of billions of (our) dollars -- at least when Detriot does it we get a (crappy) car out of the deal.
As I see it, you, the taxpayers can do one of two things:
1. Sit back. Do NOTHING.
After all,
you don't own or lease a U.S. automaker vehicle;
you don't plan to purchase or lease one in the future;
you aren't employed, have any relatives or friends who work for the U.S. automakers, their thousands of suppliers, vendors, banks, consultants, raw material suppliers, dealers, service providers, advertisers, etc.;
you don't believe this loan / bailout is necessary or deserved for these executives or union workers
You don't believe it will fix anything.
You want them to learn a lesson.
You want them to go bankrupt.
You want them to close, and your life will continue on uninterrupted and peacefully.
This will not have ripple effects on the economy, crush the state of Michigan, Ohio, Illinois, Missouri, etc.
Or, I emplore you to Act.
You realize the devastation that will surely follow when they are forced to declare bankruptcy. You've paid attention to the news, the senate and house hearings, the editorials across this nation, the informed politicians like Thaddeus McCotter of Michigan.
You believe in the estimates provided by the Center for Automotive Research.
You don't want millions of taxpayers to all of a sudden become unemployed, default their loans, have their homes foreclosed by the millions, and become dependant on your tax dollars for their well being.
Obviously, this industry is not perfect. It hasn't ever been. There are many obstacles to overcome.
There are far too many problems throughout their history that cannot be forgiven.
They may not be profitable for years to come.
But, you know that supporting this bill, allowing these companies access to these loans they so desperately need, is absolutely necessary.
You can hopefully prevent millions of taxpayers losing their jobs, their homes, their life savings, and their livelihoods, just with a phone call or an email to your senators and representatives this weekend.
Estimates are roughly $200 Billion dollars. $200 billion in future taxpayer dollars needed to put food on their plates, pay their bills, pay for their health care.
Choose, yes it is your choice, to let them declare bankruptcy and you will be responsible for letting millions of taxpayers become dependant on your taxpayer dollars.
Choose to support this bill, and you will hopefully avert more foreclosures, more bailing out, more TARP, more taxes, and more pain for all.
The "it's not my problem, sit on the sideline, nothing I can do about it crowd, can make a difference.
The phone lines are open.
The email boxes are waiting for your emails.
Make the call.
We could certainly use a lot more in the US Senate cut from the same cloth as Corker.
Thank you.
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