Detroitus

Listen to this article

00:00
00:00

Yes, there is a role for the federal government in aiding Detroit, but not the one the industry has requested in its lobbying and public relations blitz. This option is not being considered because interested parties such as the powerful United Auto Workers union and large shareholders such as Cerberus would have to take a hit, as would the personal wealth of management and state coffers in Michigan and elsewhere.

The ill-considered $25bn lifeline being debated might merely buy a few extra months for the most distressed manufacturers such as General Motors and Chrysler at their recent rate of cash burn. But a lasting turnround could be achieved in the bankruptcy courts. The only hitch is the dysfunctional state of financial markets. Normally, a bankrupt company can attract low-cost “debtor-in-possession” financing senior to existing claims. Such loans are in short-supply today, as some retailers are discovering. But the federal government could guarantee this funding to the Big Three and their key suppliers at little taxpayer risk.

Under Chapter 11, unionised auto workers who receive the equivalent of more than $70 an hour in wages and benefits could see contracts torn up. So would dealerships currently protected by state franchise laws. Shareholders would be wiped out. Lenders would suffer haircuts in exchange for equity in the reorganised companies. Managers would see their wealth and careers evaporate.

Arguments such as the UAW’s that consumers would never buy a car from a bankrupt manufacturer or that of industry-funded studies showing that 3m or even 14m jobs would be lost are nonsensical. Similarly, anti-bail-out politicians crying for the scalps of senior executives ignore their impressive cost-cutting efforts even before this unforeseen financial crisis. The US auto industry is viable with much lower costs, capacity and debts. But taxpayer cash should only be spent after existing stakeholders swallow some bitter medicine.

To e-mail the Lex team confidentially click here
OR
To post public comments click here

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.


Subscribe now

If you have questions or comments, please e-mail help@ft.com or call:

US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.