Another Perspective: Detroit Needs a Selloff, Not a Bailout

Bill Smith, ARRA Editor: Robert W. Crandall and Clifford Winston are senior fellows at the Brookings Institution. In The Wall Street Opinion Journal, they have offered a different perspective to either a bailout or bankruptcy for the auto industry. Since it is unlikely that Congress can come up with a solution and the management of the auto industry has failed to prepare contingency plans, it seem we should consider these type of real world alternatives. Although not prepared to endorse the following plan, I admit that it has more merit than the other two alternatives offered to date with the bailout being the worst option.

by Robert W. Crandall and Clifford Winston: Congress was decidedly unimpressed by the three domestic auto makers' plea for a bailout last week and responded by asking them to do the impossible: conjure up plans by Dec. 2 detailing how a bailout would revive them. After more than three decades of denial about their long-term decline, Detroit's car companies must now face the facts. A bailout will not revive them. Moreover, the leading alternative that has been proposed by others -- bankruptcy -- will not re-energize these companies sufficiently to reverse their decline.

In our judgment, based on experience elsewhere in American industry, the most constructive role the government can play at this point is to provide a short-term infusion of capital with strict repayment rules that will essentially require the auto makers to sell off their assets to other, successful companies. Why is such a dramatic step necessary? For the unavoidable reality that the fundamental problem the auto makers face is not their pension, health-care or other legacy costs. It is that they are not making cars and trucks that enough Americans want to buy. And this has been true to some degree since the first energy shock hit the U.S. in the early 1970s.

In 1970, General Motors, Ford and Chrysler made about 90% of the new cars sold in the U.S. Today their share is closer to 40%. Their market share of light trucks has also declined, but less precipitously thanks to a 25% tariff on many imported light trucks. . . . The gaps between U.S. and foreign competitors simply have become too large to make up by reducing labor costs or rationalizing capacity. Even if the overall economy rebounds and gives Detroit auto makers some breathing room to emerge from bankruptcy, they will likely face similar -- if not more severe -- problems in the next recession.

In the end, the capital and labor of these companies need to be reallocated into better hands. To this end, we suggest that assistance of some form -- short-term financing or government purchase of equity -- be granted under the condition that the Detroit Three restructure their labor relations so as to be able to sell some or all of their major assets. There are a number of potential buyers for these assets. Toyota's market cap is $100 billion and Volkswagen's market cap is $110 billion. Either could bid for these assets. Honda, Nissan and even U.S. companies in related sectors, such as Caterpillar or John Deere, are possible buyers. . . .

By establishing firm mileposts for asset divestitures from which the companies could repay government funds, taxpayers could be reasonably assured that their money is well spent. But if Congress enacts a bailout without our conditions, the U.S. taxpayer will likely be on the line not only for additional support in the next recession, but likely on a regular basis for the foreseeable future. We do not generally support government assistance to failing companies. But we think that our proposal will cost taxpayers less and, in the long run, be more beneficial to labor and the overall economy than either a straight bailout or bankruptcy.

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