No UAW Bailout



No UAW Bailout

By INVESTOR'S BUSINESS DAILY | Posted Friday, November 14, 2008 4:20 PM PT

Carmakers: Why not let the Big Three just file Chapter 11? It's not a problem-free solution, but it beats using taxpayer money to prop up a failing union. Maybe that's why Democrats seem to dismiss it out of hand.

Detroit is in nose dive, no doubt about that. So is a $50 billion government bailout the answer? President-elect Barack Obama thinks so, and House Speaker Nancy Pelosi points in the same direction with her call for extending "emergency and limited financial assistance" under the $700 billion bailout plan enacted last month. Democrats clearly want something big and something soon for the Big Three.

We agree that the automakers can't go on much longer burning cash and piling up an Everest of debt. They're close to the breaking point. But there's a system in place for dealing with crises such as this, even at the scale of massive corporations. It's called bankruptcy, and it should not be written off as unthinkable.

Filing for Chapter 11 protection under bankruptcy law is the normal way a company stays in business when facing an unmanageable financial situation. It keeps creditors at bay while the company reorganizes under court supervision and settles its debts. In recent years it has served as a refuge for major airlines (Delta and United) which, you may notice, continued to fly while in Chapter 11 and, post-bankruptcy, fly today.

Bankruptcy protection also frees companies from union contracts. Could this be why it seems to have been taken off the table as an option, at least among Democrats? We can only surmise, but it's clear that a bankruptcy process would be rough going for the United Auto Workers.

The Big Three's high labor expenses would no doubt need a trim. During the last round of contract talks in 2007, the average hourly costs were over $70 at all three of the domestic automakers, compared to about $48 for Toyota.

Detroit has made progress since then in dealing with one of its crucial labor issues, the funding of health care for retirees, but its unionized plants still put it at a disadvantage to rivals such as Toyota, Nissan, BMW and Honda, which run lower-cost, nonunion operations.

The success of those foreign transplants has led to a steady drain of autoworkers from both the Big Three and the UAW. The union's membership has fallen from a high of about 1.5 million in 1979 to 465,000 as of 2007 — the first time since World War II that it has stood under a half million. It would no doubt fall further if Detroit goes through the type of reorganization typical of Chapter 11.

Saving a shrinking union is the worst reason to bail out Detroit with taxpayer money. Unfortunately, it may be one of the strongest, politically. That's why the public needs to be enormously skeptical when it hears that bankruptcy for the Big Three would be a catastrophe for much of the U.S. economy.

There are some legitimate caveats against standard-issue bankruptcy as a way to handle Detroit's crisis. The automakers' obligations may be too large for any private parties to extend them debtor-in-possession financing while they're in Chapter 11. Also, they have a valid concern that customers might not want to buy a car from bankrupt companies.

But even if some federal loans or loan guarantees can't be avoided, Washington needs to make Detroit's experience as close to Chapter 11 as possible. Some suggestions: Zero out the equity investors (who've lost almost everything anyway), replace management (without golden parachutes), shut down surplus dealerships, and force the UAW to face the fact that its good old days are gone forever.

In the end, the American automakers may finally be fit to take on their more nimble global rivals.

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