Prof. Leigh Riddick on the Economy |
This is an interview by OurBlook with Prof. Leigh Riddick of the Department of Finance & Real Estate, Kogod School of Business, American University.  General Motors now wants another $16.6 billion in federal assistance. How should the government respond?LR: GM faces four big problems. First, sales for automobiles of all makes have dropped to historical lows. Second, their cars are no longer as popular due to concerns about gasoline prices and environmental issues. Third, GM has an outdated and unsuccessful business model. Fourth, GM has a looming and large debt obligation that it cannot meet, even in the short run. The firm has responded in two ways: it has presented a plan to the government to alter its operating plans that includes job cuts, changes in worker benefits, reductions in models, and others expense controls. Additionally, the company's bondholders have agreed to negotiate to reduce debt in exchange for stock in a newly organized GM and these meetings are to be concluded later in March. In my judgment, the government should wait until this restructuring has been agreed to before making a decision about giving additional funds to GM. Without significant debt forgiveness and restructuring, the loan will not be enough to save GM. GM also wants $6 billion in aid from Germany, Britain, Sweden, Thailand and Canada. How should those countries respond? LR: Frankly, I don't think GM's problems are the responsibility of any foreign government. That said, it may be in the interest of the countries to assist GM if it affects their citizens in a meaningful way, e.g., through employment. Chrysler wants another $5 billion from the federal government. What should the answer be? LR: Chrysler is in somewhat better shape than GM, as it is farther along in changing its business plan. It is still subject to the same pressures as GM, but I am more optimistic about Chrysler. That said, I think a reorganization will be needed in this case, also, before we will have any assurance that giving the firm more money will help. The U.S. gave GM $13.4 billion in "loans" last fall and Chrysler $4 billion. What did the taxpayers get for their money? LR: The taxpayers who are not involved directly in the automobile industry have not gotten much from these loans except the assurance that these firms would continue to operate in the short run. The expectation was that the two firms would use this money to "buy time" while they sorted out both their flawed business model and the implications of the current economy on their ability to succeed as automobile manufacturers. It is not yet clear if the firms can be turned around without some sort of formal reorganization that forgives some of their massive debt obligations. It may be that both companies receive the additional money. Would it make more sense for the government to simply order $16.6 billion worth of the most fuel-efficient cars from GM and $5 billion worth from Chrysler and give them, say, to members of the military as a new benefit (apportioning some of these orders to Ford to be fair) rather than give the money to GM and Chrysler so they can shut down more factories and lay off more workers? LR: This is an interesting idea, and something along these lines would be a good idea. However, the outstanding debt obligations of both firms must be met for them to continue to be going concerns, and it is not at all obvious that orders for future car delivery will generate sufficient funds for that. Additionally, it is not clear the best fuel efficient cars are available from these two companies. Any plan like this should require strong incentives for better product development, and this will slow down the positive impact of the plan. In short, a good idea, but not by itself a sufficient solution. Is there anything else you'd like to say about this second round of the proposed auto bailouts? LR: My strong instinct is that massive restructuring is needed in the domestic automobile industry. We might be better off letting the firms go through formal reorganization, and using some of the requested funds in the short run to help displaced workers in the industry and the communities in which they live. With a formal reorganization, the market forces will determine what parts of these companies should survive, and I trust the market more than the management teams at GM and Chrysler.
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Comments (1)
  written by horsetail, April 20, 2009
I wonder what this restructuring would look like
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