The Hindu Business Line : GM whirlpool sucks in the government

The government is setting itself up to take all the blame for failure if the GM situation only spirals deeper into a pit, the probability of which cannot be ruled out.

C. Gopinath

Hearing Mr Barack Obama’s televised statement last Monday about GM’s bankruptcy filing made me happy. Finally, I thought, here was a person with a clear vision for the company, and knew the hard decisions required to get there. He talked about… But then, wait a minute? Isn’t he the President of the country and not the CEO of the company? Perhaps the 60 per cent of the equity that the government will now own, apart from the almost $50 billion it is s inking into the company, makes him feel personally responsible. Perhaps he will spend one day a week at GM’s headquarters in Detroit.

Bankruptcy is not nearly as bad as it sounds. Under the US Bankruptcy Code, Chapter 11 (under which GM filed) is not really bankruptcy but court-protected re-organisation. The US has one of the most liberal bankruptcy laws in the world, and the unique feature of Chapter 11 is that incumbent management continues in place and they file a re-organisation plan which needs to be approved by a court-appointed creditors committee. Thus, a bankruptcy filing becomes an opportunity for a company to clear a lot of its legacy ills, and start afresh. Creditors cannot take the firm to court over past debts, and new loans get superior status so lenders come forward. Under this scheme, you don’t even have to show your liabilities to be greater than assets.

Since the company can re-do contracts with various stakeholders as it gets ready for a profitable existence, several analysts were recommending this action.

Take a pause

However, it is a little disquieting to see the US Government get deeper and deeper into the auto industry’s problems. It has been front and centre in trying to arrange deals and resolve issues at Chrysler (the other automaker that recently filed bankruptcy) and GM. The government gave Chrysler a deadline to finalise its merger with Fiat and funded its progress through a reorganisation process through bankruptcy.

With GM, the involvement is amazing. You are left wondering if the so-called auto industry task force is the one actually now running the company.

Only recently did we see the government get into the financial industry mess which exploded in the last days of the Bush administration. Although the Republicans swear by the omniscience of the free market in finding solutions to business problems, they were running from pillar to post trying to solve the financial mess.

They let some firms fail, took over a few, pressured others to merge, threatened bankers to limit their compensation, handed over cash to all who did and did not want. They were even calling up companies not to have meetings at vacation resorts. Such involvement can be explained — the government realised that they were sleeping at the switch when it came to financial sector oversight and therefore had to bend over backwards trying to do all it can to limit the damage. Moral hazard and free market considerations were all temporarily put on hold.

But when it comes to the auto industry, one has to pause. The government’s hands are clean here. Other than setting petrol consumption and auto safety standards, it has largely kept away from meddling in this industry. The companies have to take most of the blame for what has befallen them.

Hence, the conditions are ideal for the government to stand back and say that the market needs to find the solutions. After all, there are other companies that can provide cars in the market and companies need to go through painful restructuring in an innovative economy.

But what has changed is that a Democratic President is in the seat now and the auto union (and organised labour in general) are strong supporters of the Democratic Party. So, when Chrysler and GM managements came to Washington with their begging bowls, the government was able and willing.

It enthusiastically jumped in, and set deadlines for what the companies must do. It has appointed a task force for the industry that seems to be running the show. The task force recently told the GM CEO, Rick Wagoner, to step down, which he did with such promptness that it makes you wonder what he knew but hadn’t revealed.

The government is walking in lockstep with the company through the bankruptcy court. In a nation that does not believe in industrial policy, the executive branch has been making major policy and operational decisions about two key industries, with occasional Congressional (that is, parliamentary) noises. Pity the company when politicians and bureaucrats get hold of the reins. There is frequent talk of jobs being protected, and communities being saved, that any objection to the government’s plan may almost sound anti-national. And as always, the tax payers will be left holding the bill.

Unanswered questions

There are several unanswered questions when it comes to the GM situation. Has the task force really analysed the cost-benefit of its restructuring plan versus the company facing bankruptcy on its own? Many actions in the GM situation seem to go counter to the government’s otherwise stated policy.

For example, while the President is withdrawing benefits to companies that outsource so as to keep jobs at home, GM is going to shut domestic plants and increase its overseas production. The government has made strategy decisions for the company (such as pushing it towards new products, hybrid vehicles, etc). But it is signalling that it will not exercise the other responsibilities that come from ownership and board representation. The government’s unnecessary subversion of market forces comes with subversion of governance practices? So a couple of bureaucrats will now get a chance to do what successive CEOs and boards struggled with. The most successful model of government intervention in the past was when it lent money to Chrysler in 1979. It took a hands-off approach, left the management alone, helped it by buying some of the company’s vehicles, and just set repayment terms, including a right to convert the debt to equity. Chrysler did a good job on its turnaround and returned the money ahead of time, which allowed the government to even make a profit on that deal.

Now, the government is setting itself up ideally to take all the blame for failure if the GM situation spirals deeper into a pit, the probability of which cannot be ruled out. The Ford Motor Company, which declined government help, must be thanking its stars.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. )

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