Detroit is Already Bankrupt

So says Paul Ingrassia in the Wall Street Journal. And he is a name to conjure with having been the Journal’s bureau chief in Detroit and, until recently, a serious contender to run the newspaper. Here Ingrassia tries to engage in five myths about the bailout. The first he says is that the car companies are already bankrupt having publicly admitted that they don’t have the cash to make it indefinitely. These are no longer going concerns.

More to the point, he addresses the question of who should live and who should think about extinction, both CEOs and corporations:

Ford CEO Alan Mullaly has been on the job just over two years. He seems to be making the right moves — cutting costs, eliminating the dividend early on, revamping product plans, mortgaging assets to raise money to fund the turnaround, etc. That’s why Ford, while not in great shape, is in a materially better position than the other two.

Mr. Mullaly is the Detroit chief executive I’d keep on the job. But that still doesn’t mean it’s right to hand federal aid to Ford or any of the other companies without requiring a bankruptcy restructuring in return.

Which raises the third myth: Bankruptcy means death. In fact, it means getting a second chance. Detroit’s car companies point, correctly, to the cost cuts, labor concessions and other stringent measures that they’ve enacted in recent years. Ron Gettelfinger, the president of the United Auto Workers union, got his members to accept two-tier wages and big concessions on the health-care and retirement plans.

Nonetheless, far too many valid contractual claims remain on the car companies’ revenue streams from dealers, employees, retirees and others for these companies to survive — even if we get a modest economic recovery soon. The companies remain saddled with cumbersome contracts with the UAW that make work rules and plant procedures a constant challenge. A bankruptcy trustee or receiver could cut through all this quickly and give the companies a fresh start.

Myth number four is that banning executive bonuses or requiring more fuel-efficient cars will save Detroit, and are strings that should come with any federal aid. Executive pay isn’t the problem in Detroit; and the companies will have to build more fuel-efficient cars to satisfy the market, not to meet mandates. These would be pseudo-strings designed to appease organized labor and the environmental lobby. Instead of saving Detroit, they’ll pave the way for a bigger bailout later on.

It’s that last one that tells you Ingrassia is on the level. There’s nothing doctrinaire about this op-ed. Just a clear-eyed estimation of where we need to get before we can start to fix the problem.


The Auto Makers Are Already Bankrupt
Admitting the obvious is their best chance to restructure.
WSJ, November 21, 2008

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