Would Washington do a better job running the automobile industry
than Detroit would? Taxpayers may be about to find out. Under
legislation proposed yesterday by congressional leaders,
Detroit-based automakers would be offered some $15 billion in
federal low-interest loans. In return, they would be subject to
unprecedented federal controls on how they run their
This is a deal that would serve neither Detroit nor America's
taxpayers. Detroit needs to change to respond to the 21st-century
marketplace. This plan will instead simply make Detroit more
responsive to Washington's politicians. That is the wrong road for
the auto industry, and taxpayers, to go down.
Rough Road for Automakers
The Detroit automakers--General Motors, Ford, and Chrysler--have
certainly traveled a rough road over the past several weeks. Facing
falling sales and bleeding red ink, the chief executive officers of
the trio came to Congress last month to ask for as much as $50
billion in federal aid. Their requests, however, did not meet with
much sympathy either among the public or among Members. The CEOs
were sent back home to Michigan and told not to come back until
they had plans for restructuring their troubled enterprises.
Last week, they returned, plans in hand, to renew their request
for aid. Again, they received a mixed reception, with few Members
willing to write a blank check to the carmakers on the mere promise
that they would implement the reforms proposed. The result was the
compromise plan announced today: $15 billion in low-interest loans,
but only in return for turning substantial control of their
corporations over to the government.
Bailout by Invitation Only
Eligibility for the program is limited to firms that submitted
restructuring plans to Congress on December 2--thus limiting
participation to General Motors, Ford, and Chrysler, since they
were the only firms asked to submit such plans.
Aid would be provided in two stages: an immediate bridge loan to
forestall possible bankruptcies, and longer-term aid, with
repayment over at least seven years. Nevertheless, at current loss
rates, the $15 billion would not last long, keeping General Motors
and Chrysler afloat only a few months, meaning further funding
would likely soon be needed to continue the program.
The program would be overseen by an individual to be designated
by the President. This so-called "car czar" would authorize
disbursement of money, determine how much goes to each firm, and
establish measures for assessing automakers' progress toward
restructuring. This czar would also have extraordinary powers over
participating firms, with approval authority over all corporate
expenditures over $25 million.
In addition, the car czar would facilitate the development of
long-term restructuring plans for each firm and convene
negotiations with representatives of "all interested parties,"
including unions, suppliers, dealers, and shareholders. If no
agreement is reached, Congress itself, according to the
legislation, would step in to impose its own restructuring plan on
The legislation also imposes a raft of specific conditions on
automakers. Some track conditions imposed in other recent bailouts:
Washington would receive warrants for the purchase of stock in the
companies, dividends would be suspended, and executive compensation
would be limited.
Other provisions are unique to this bailout, and unusual in
their specificity. To no one's surprise, the ownership of corporate
jets is banned. More worrisome, the carmakers are required to
consider conversion of SUV manufacturing plants to mass transit
vehicle production. The bill would also limit the carmakers'
ability to fight further regulation, banning them from pursuing
court challenges to state laws regarding greenhouse gas
Politicians Doubling as CEOs
Detroit's automakers need to change, and in a fundamental way.
Merely handing over cash to the three firms, as some originally
proposed, would simply extend current problems, not resolve them.
For that reason, policymakers were correct in rejecting calls for
largely unconditioned aid for the automakers.
But micromanagement of the auto industry by politicians and
bureaucrats is equally unlikely to achieve the restructuring that
is needed. Whatever Detroit's failings, it is unlikely that
Washington will be any better at knowing how to run a successful
enterprise. Instead, the result will likely be a politically driven
restructuring of the industry that is more focused on pleasing
electoral constituencies than making products that consumers will
A far better approach to restructuring would be the bankruptcy
process, which not only provides the legal means to cancel debt and
lower costs but also provides a fair, orderly, and non-political
process for making the painful decisions that need to be made.
Congress should reject a bailout of Detroit--with or without
James L. Gattuso is Senior
Research Fellow in Regulatory Policy in the Thomas A. Roe Institute
for Economic Policy Studies at The Heritage Foundation.