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How the auto bailout plan could succeed

If the rescue is managed right, the government could help the Big Three survive and even prosper.
/ Source: Business Week

Going all the way back to the days of FDR, the auto industry has had a testy relationship with Washington. Whether they were fighting over government support for labor unions in the '30s or the more recent imposition of tougher fuel-economy and safety regulations, Detroit and Washington have long been at odds. Now, with Congress struggling to devise a rescue plan for carmakers, the two wary foes seem set to crawl into bed with one another.

If the rescue is managed right, the government could help the Big Three survive and even prosper. Washington would play bankruptcy judge, forcing the union and creditors to cut long-term obligations and make General Motors, Ford Motor, and Chrysler competitive again. But if a Washington overseer gets too hands-on, say industry watchers, watch out. Politicians could try to influence where cars are built and what technology they run on. The worry, says Charles M. Elson, who runs the Weinberg Center for Corporate Governance at the University of Delaware, is that "once you take their money, you accede to government on issues that aren't economic but political."

The good news is that Washington has a lot of leverage to play the heavy without getting mired in day-to-day business decisions. Maryann N. Keller, an independent auto industry analyst, notes that if Congress approves bridge loans to help GM and Chrysler stagger into the new year, the loans are likely to be slightly less than half the $34 billion Detroit has requested. Under such terms, she says, the government can force the automakers, creditors, and unions to make big concessions.

The bad news: According to the proposed bailout, Congress simply wants Detroit to submit a restructuring plan by Mar. 15. If Washington is smart, says former Treasury Secretary (and former GM board member) Paul H. O'Neill, the to-be-named car czar will put together a crack team of finance pros and industry veterans to make sure the plan is viable. "There isn't anyone in government with a clue how to run an enterprise or reinvent one," O'Neill says.

If the Feds are looking for models, history provides them. Chrysler negotiated away half its debt in 1979 before getting a $1.5 billion loan guarantee. In 1976, the U.S. pulled together several bankrupt railroads to create Conrail, with a government advisory board of industry veterans overseeing the whole operation. Congress had oversight but didn't get too deeply into Conrail's affairs. Instead it set targets for profitability and upgrading the infrastructure. When the company still wasn't making money in 1980, Washington threatened to liquidate it if the union didn't make concessions. It did, and Conrail eventually became profitable.

So if government's main role is to bang heads together, where might the car czar start? The main issue, especially for GM, is slashing debt and health-care liabilities. Auto workers and retirees, says Keller, should be forced to pay the same percentage of health-care costs that most workers do: 30 percent vs. 5 percent. Doing so could greatly reduce GM's $47 billion in union health-care liabilities. Sen. Bob Corker, R-Tenn., has suggested that the car czar should force bondholders to take a serious haircut — trading debt for equity at a 70 percent discount. That would cut GM's $63 billion debt in half, including new low-interest government loans.

Government is already looking at ways to control spending with a stipulation that says it can nix any expenditure over $25 million. O'Neill, who knows a thing or two about the Detroit culture, says the car czar might also set cost-cutting targets that eliminate thousands of hidden perks that add up to millions of dollars each year. Congress is already demanding that Detroit ditch its private jets. But what about the free cars and gasoline that GM provides to its top 9,600 managers?