Auto Bailout

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Should Obama Bail Out the Auto Industry?

Context and Situations

By November 2008, Chrysler’s sales had shrunk 25%.  GM posted losses of $18 billion, and Ford lost $11.5 billion.  Despite Ford’s elimination of 1/3 of its workforce, GM’s elimination of 30,000 jobs, and Chrysler’s cutting of 13,000 employees, the Big Three were on the brink of bankruptcy.  All three testified before both houses of congress asking for loans to avoid default. The Big Three stated their demise would trigger 3 million layoffs within a year, plunging the economy further into recession.

The purpose of the loans was to provide operating cash for GM and Chrysler, and to keep making auto loans available for car buyers. Ford Credit planned to use funds from the Term Asset-Backed Securities Loan Facility (TALF), a government program for auto, student and other consumer loans.

The auto bailout proposal from the Big 3 auto companies totaled $34 billion in government loans. In return, the companies promised to fast-track development of energy-efficient vehicles, and consolidate operations. GM and Ford agreed to streamline the number of brands they produced. They also won agreements from the UAW union to delay contributions to a health trust fund for retirees and reduce payments to laid-off workers. The three CEO's agreed to work for $1 a year and sell their corporate jets.

The Obama administration had to make the call: Bail the automakers out? Or let them go bankrupt without the bailout?

Decisions Framework and Critical Assumptions

During the height of financial crises in 2008, the Capitol Hill’s main objective was to pull the economy out of a deep recession. At the time of the bailout, the auto industry contributed 3.6%, or $500 billion, to total U.S. GDP output. A 30% decline in auto sales translated directly into a 1% decrease in economic output. The auto industry also employed 850,000 workers in manufacturing, and 1.8 million workers in auto dealerships. Therefore, a decline in output resulted in direct job losses, as well as auto-industry related losses[1].

Congress first explored whether planned bankruptcy reorganization was the best alternative for the companies, but realized that would take too long to implement. Fearing that the Big Three downfall would aggravate the broader economy, Obama decided to shell out $24.9 billion of the $700 billion bank bailout fund to rescue two of the Big 3.

Their decision seemed to be fixated on avoiding job losses due to the bankruptcy. We dissect this decision making process to determine what Obama’s best alternative was.

Given this decision framework, Obama assumed two critical assumptions. To begin with, the claim that the auto bailout would save million of jobs was predicated on the assumption that an orderly bankruptcy would have resulted in not only closing GM and Chrysler, but also solvent domestic companies like Ford, foreign companies like Toyota and Honda, as well as part suppliers and supporting companies.

The second and the more critical assumption was that Chrysler and GM would have collapsed and their workforces been dismissed, absent government intervention. This is contrary to the purposes and provisions of Chapter 11, which seeks to preserve and maximize a business’ value. Chapter 11 provides a variety of protections for a business to stay in operation while in bankruptcy.

Stakeholders, Challenges and Consequences

Obama administration as the sole decision maker determined the fate of other stakeholders, especially the labor unions, the taxpayer, and the carmakers. Washington’s decision to bailout carmakers had a deep impact to the economy and the auto industry in particular.

Decision-maker

Challenges for Obama administration: Many opposed the bailout, saying U.S. automakers brought their near-bankruptcy on themselves by not retooling for an energy efficient era, reducing their competitiveness in the global market. In the midst of this disagreement, the...
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