Several sources reported yesterday that GM and Chrysler intend to make a fresh set of buyout offers to their union employees (see GM, Chrysler Set New Buyouts). They plan to offer packages valued at around $50,000-$100,000 per employee. According to analysts, this action allows GM and Chrysler to circumvent rigid union rules regarding layoffs, and provides the firms a relatively quick way to lower overall compensation costs (replacing expensive, experienced union employees with cheaper, inexperienced employees at the reduced rate of $14 per hour).
Here’s what I don’t understand: Why should GM and Chrysler use money loaned by the U.S. Government to transfer wealth from U.S. taxpayers to exiting GM/Chrysler employees? It’s one thing if a firm does that with the capital of its private shareholders, but quite another if they use public money toward that end.
Granted, UAW employees at GM and Chrysler earn far less than your typical investment bank executive, but I’m not so sure paying those employees an exit bonus is, in principle, different than John Thain paying bonuses to exiting Merrill employees in advance of its acquisition by Bank of America.
As a condition for receiving funds from the U.S. Government, GM and Chrysler are required to produce a plan detailing how they intend to pay back those loans, and ultimately, achieve profitability. In my opinion, there are more effective ways to reduce labor costs and preserve capital than to take U.S. taxpayer money and funnel it to employees: It’s through good old fashioned layoffs, of the uncompensated kind. Most other firms have them. GM and Chrysler should be no exception.
The UAW, and by implication GM and Chrysler management, just don’t get it. The alternative to buyouts is bankruptcy followed by layoffs. In bankruptcy, the automakers could effectively repudiate the terms of their UAW contracts and fire just about anyone without consequence. The UAW (and GM/Chrysler management) should become wise to this alternative, and become more willing to consider layoffs instead of buyouts.
As I watch this episode play out, it is becoming increasingly clear to me that the best remaining option for the U.S. Government is to call its loans in March and allow GM and Chrysler to declare bankruptcy. The U.S. Government could step in ex post to provide DIP financing for GM, …but not for Chrysler (see Pre-Packaged Bankruptcy, Preventing Moral Hazard, and Aid for Chrysler? Just say No! for background on my position on the GM versus Chrysler debate). Although I was initially supportive of offering government aid to GM (though not for Chrysler), the aid was not accompanied by provisions necessary to stave off disaster. At this point then, I believe bankruptcy offers the last best chance to salvage GM, and the U.S. auto industry.
Bankruptcy protection would allow GM (and potentially Chrysler, provided it can find financing) to more quickly and efficiently streamline operations. It provides the degrees of freedom necessary to shutter plants, rationalize brands, layoff redundant employees, and reduce the number of dealerships. More importantly, it would once and for all allow for the wholesale sacking of management – a management seemingly insistent on squandering taxpayer resources.