The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60bn to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Beyond GM, an even bigger worry should be the continuing long loss of well-paying, middle-class jobs that once allowed significant numbers of Americans to share in the country’s prosperity, Reich said. The government bailout of GM, he wrote, will do little to address that problem — in fact, it will only worsen as the automaker cuts jobs to stay afloat for as long as possible. In this new economy, GM’s old adage has been turned upside down, according to Reich. What’s bad for GM these days is what’s bad for America as well.

What does this all mean? Well, it means that GM is headed for bankruptcy. The government will try to push for a speedy reorganization and sale, but the company is a big, complicated beast, and so a standard Chapter 11 process, taking several years, could instead be the result. It’s difficult to sell cars while in bankruptcy (one presumes), so  a protracted process could ultimately lead to liquidation — that is, selling off GM assets down to the last lugnut-affixing robot.

The main problem is that the government is providing the bulk of the bankruptcy financing (some $50 billion), which could give it as much as a 70 percent stake in the new automaker. This is tricky business. For one thing, it means that if the reorganized company doesn’t do well, the taxpayers take a big hit. It also means that the government has a big interest in keeping the reorganized firm afloat, which increases the likelihood of political meddling in the industry and continued cash infusions or subsidies. But the real rub is that GM’s obligations are large while its potentially successful sub-units are small. And those potentially successful sub-units will not be successful if they are saddled with too many of GM’s large obligations. So, for this to really work, the government has to swallow a lot of GM’s baggage and let free a new, trimmed down, unburdened GM. If that new company does well, the equity stake will have value and taxpayers will get back some or most of their investment. If it doesn’t — and in this economy, it will be swimming up a waterfall — then the government will have shelled out tens of billions of dollars just to prop up GM for a matter of months and delay the inevitable reallocation of workers and capital away from an utterly failed enterprise.

High risk, tiny chance of breaking even. What’s not to like?

The Obama administration is preparing to send General Motors into bankruptcy as early as the end of next week under a plan that would give the automaker tens of billions of dollars more in public financing as the company seeks to shrink and reemerge as a global competitor, sources familiar with the discussions said. [...]

Under the GM draft bankruptcy plan, the company would receive just short of $30 billion in additional federal loans, a source said.

The figure is a starting point in negotiations between the government and the company, the source said, and could change. A cash injection that large would boost the U.S. investment in GM to nearly $45 billion. The timing of the filing is also fluid, and could happen the first week of June.

The government previously indicated that it planned to take at least 50 percent of the restructured company, and likely would take the right to name members to its board of directors, as it has at Chrysler, where the government will control four of nine seats.

The United Auto Workers retiree health fund is set to own as much as 39 percent of the restructured GM, in exchange for giving up its claim to at least $10 billion that the company owes it. Yesterday, the union announced that it reached an agreement with GM that will reduce the company’s labor costs.

The boards of Chrysler LLC and Fiat SpA have given executives approval to complete an alliance deal that hinges on the terms for additional aid for the Detroit automaker, according to people with knowledge of the discussions.

The development comes before U.S. President Barack Obama’s expected announcement Monday on rescue funds for Chrysler and General Motors and more than two months after teams from Chrysler and Fiat began reviewing the proposed tie-up and developing a business plan for their combined operations.

Final terms of any deal will depend on what terms the U.S. autos task force headed by former investment banker Steve Rattner imposes on Chrysler as a condition for providing additional funding, according to the sources, who asked not to be identified because of the confidential nature of the talks.

Fiat CEO Sergio Marchionne has met with the auto task force twice and signaled his willingness to adjust the terms of the deal to satisfy the administration’s demands. The UAW supports the Fiat merger, which could save thousands of American jobs.

–

Ed Brayton is a reporter for TWI’s sister site, The Michigan Messenger.

Senate Republicans are following this course for three key reasons — first is payback against a major industrial union; second is payback against states like Michigan and Ohio who have been moving away from the GOP; third is the desire to advantage Japanese auto manufacturers who disproportionately do business in their southern states.

I think the first and second points are key — that the GOP is taking a firm stand against the United Auto Workers, a core Democratic constituency, and in turn, against big-time GM states like Michigan and Ohio.

In recent history, Michigan and Ohio have been reliable swing states. But the actions of prominent Republicans may call into question whether they will retain their status as battleground states in future competitive elections.

As President Lyndon Johnson famously and presciently mused about the impact his signing of the Civil Rights Act of 1964 would have on his own Democratic Party, “There goes the South for a generation.”

I suspect some forward-thinking Republicans might harbor similar concerns about Michigan and Ohio.

The current powers that be — both in Washington and Detroit — can’t be trusted to fix a problem they created, the Republicans say. From the statement out of Rep. John Boehner’s (R-Ohio) office:

The only thing crazier than trusting the same management and union officials who got the Big Three into this mess to get them out is trusting a bunch of Washington politicians and bureaucrats — the very same people who ran up a $455 billion deficit last year.

What the Republicans fail to mention is that they are “the very same people” referred to here. Indeed, when the GOP took control of Congress in 1994, the federal debt was roughly $4.7 trillion. Now it stands above $10 trillion — with nearly $3 trillion of the new debt amassed between 2000 and 2006, when Republicans controlled the White House and both chambers of Congress. (Another $1.5 trillion has arrived in the last two years under the Democratic-led Congress.)

Funny that no one ever forced a pay cut on these lawmakers for reckless management. In fact, Congress has given itself a pay raise nearly every year this decade.

Meritocracy, indeed.

This United Auto Workers advertisement printed in The New York Times on December 3 was accompanied by text that described the auto industry crisis as a Main Street issue, not a Wall Street one. (uaw.org)

When the chief executives of the Big Three automakers first came to Washington to ask Congress for a $25 billion-bailout, they arrived in town on private jets.

When 16 active and retired members of the United Auto Workers headed to Washington on Sunday night to press the need for government help, they drove the 500-plus miles from Detroit in four American-made cars.

Dressed in baseball caps and UAW T-shirts and showing signs of fatigue after the nine-hour drive, the workers appeared at a press conference Monday morning on Capitol Hill to make their case for government assistance. The blue-collar image these members of the Auto Workers Caravan projected contrasted sharply with that of the well-heeled auto and Wall Street executives who had preceded them.

Illustration by: Matt Mahurin

It helped to underscore the difference between how they see the proposed bailout of the auto makers and that given Wall Street. Taxpayer money wouldn’t go to highly paid managers and executives, as it did on Wall Street. Instead, it would be a temporary loan to keep their industry afloat through the economic crisis and protect the jobs of rank-and-file American workers.

“The [auto] companies are asking for a fraction of the money that was given to Wall Street,” said Bill Alfred, president of UAW Local 35 and a member of the Auto Workers Caravan. “They’re only asking for a loan — not a free gift, not a free ride. They want to get this money to protect the industry and pay it back [to taxpayers]. … Those folks from Wall Street came and asked for money for free.”

UAW member Tony Browning emphasized that the money would be paid back to taxpayers once the companies get past the current economic downturn. “I work for the Chrysler corporation,” Browning said. “And we’ve been through this before, in 1979. … We got a loan in ‘79, and we paid it back in record time, plus interest and everything. So that shows our credibility.”

During the debate over whether to bail out the car manufacturers or allow them to fall into bankruptcy, some lawmakers have blamed the UAW for the financial struggles of General Motors, Ford and Chrysler. They say that workers’ overly generous wages and benefits have drained the companies’ resources and made it difficult for them to compete with manufacturers overseas. These union critics want concessions from the UAW as a precondition for any bailout.

Union leaders, not surprisingly, reject the notion that concessions are needed. “Talk of more givebacks by our union ignores the cuts we made just one year ago, when our union agreed to a 50 percent wage cut, down from $28 an hour to $14 an hour, and no pensions for new hires,” said Hammer. “Reducing our quality of life would have a ripple effect on our entire economy, and would just make things worse. The reality is that our labor constitutes just 8 percent of the price of a new car. We could work for free, and it wouldn’t solve the crisis.”

UAW local president Alfred rejected calls by some lawmakers for the ouster of GM CEO Rick Wagoner as part of any bailout. No such demands were made of the financial industry as a condition for receiving taxpayer money, he noted.

“General Motors, Ford and Chrysler are asking for $34 billion, and [some lawmakers] want to remove the executive of General Motors. So how many people do they want to remove from Citigroup for wanting, what is it, $400 billion? I’m thinking that’s a lot of floors they’re gonna have to clear in that building. So before they start calling for resignations, they’ve got to check what they’ve already done and correct that situation.”

It is not every day that the UAW defends the management of a Big Three company. Yet the automakers’ dire emergency has brought the leadership of the UAW and the companies to the same table at congressional hearings to plead for help. “At this point in time, we agree with the auto industry executives that yes, they need the bridge loan, that yes, they are truly in financial difficulty at this point in time, and therefore that the government needs to intervene,” said former UAW Local 235 president Wendy Thompson. “We agree on that question.”

But the auto workers made sure to hammer home their contrasts with the executives. “We didn’t fly here in our jets,” said Chrysler employee Browning. “We left them at home.”

Speaking on Capitol Hill, active and retired union leaders voiced frustration that they were being asked to make concessions when Wall Street firms and banks were bailed out without preconditions.

I’ll have a full piece this afternoon on the auto workers’ take on the debate over the bailout. Stay tuned.

The thinking is that if the union isn’t willing to cede some of these benefits as part of a larger bailout strategy, then Republicans will be unlikely to support it.

But Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, voiced concerns yesterday about a plan that would cut workers’ incomes.

“The union to its credit did just renegotiate the contract and new workers are going to take less,” Frank told CNN. “But frankly, I think there’s already been too much income inequality in this country to give them a tool to start undercutting what people already have.”

United Auto Workers President Ron Gettelfinger has wondered why critics of a Detroit bailout didn’t ask similar concessions from workers of bailed-out Wall Street firms, according to reports.

“Let’s go to AIG, Bear Stearns, active and retired workers: Did anybody go in and ask them to give back wages and benefit levels?” Gettelfinger said on WDIV-TV in Detroit. “What about the bond traders? Did anybody ask them? What about the cleaners in the building? Why would the UAW be any different?”

Democrats hope to take up legislation next month to help Detroit survive the downturn. If one side doesn’t give on the workers’ pay issue, however, it won’t likely move very far.