Most of our team was tied up yesterday for the bulk of the work day with an urgent project that dropped into our lap, and we didn’t get a chance to comment on a very thought provoking story that ran yesterday in the New York Times. 

Andrew Ross Sorkin wrote “A Bridge Loan? US Should Guide GM in a Chapter 11” – here’s a link to the full article in the NYT. 

Here’s the meat of Sorkin’s argument –

G.M is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized.

But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington. It makes a lot of sense.

Here’s how it could work:

First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.

So, first, the government would force G.M into a prepackaged bankruptcy now — even before policy makers may think it needs to be. As an inducement, the government would allow the merger with Chrysler to go forward. (There’s a lot of resistance to saving Chrysler too, but we need to look at the industry as a whole. And don’t worry: Cerberus, the private equity firm that owns Chrysler, would have its equity wiped out too.)

The merger should reduce costs by as much as $7 billion. But that’s not the tough stuff. The harder decisions are these: Both companies would have to jettison brands — lots of them. In the case of G.M., frankly, the only ones worth saving are Cadillac, Chevy and Buick. (Buick? Yes. Despite its lackluster sales and fuddy-duddy image in the United States, it’s a huge seller in China.)

Sorkin goes on to argue that jettisoning brands won’t be the only tough stuff – plants will need be closed and auto worker issues dealt with.  Sorkin points out some facts about auto workers’ pay and benefits that will potentially set the American taxpayers on their collective ears –

Then the auto workers, whose benefits are off the charts.

G.M. currently employs about 8,000 people who actually don’t come to work. Those who do go to work are paid about $10 to $20 an hour more than people who do the same job building cars in the United States for foreign makers like Toyota. At G.M., as of 2007, the average worker was paid about $70 an hour, including health care and pension costs.

Those costs are already coming down slightly because of a renegotiated deal with U.A.W. last year, but not nearly enough.

Part of the problem is summed up by comments like this one in The Detroit Free Press, made by Kandy O’Neill, 39, an assembler at G.M.’s plant in Lake Orion, Mich., where she builds the Chevy Malibu and Pontiac G6. “I think we’ve given enough,” she said about the cuts to her salary and pension plan.

Sorkin even has a rational response to the auto industry’s claim that no one would buy their vehicles if the companies were in bankruptcy given concerns over warranty issues. 

What interest does the auto industry argument hold for real estate investors?  Two things.  First, in our minds the prospects for many Midwestern real estate markets (many of which are currently in the tank) could get a lot brighter if a rational plan could be constructed to retool the Big Three.  We agree with those who suggest that without a major reorganization of their entire business model, no amount of bailout money will stave off the eventual failure of the Big Three.  Failure of the Big Three would wreak havoc on real estate throughout the upper Midwest; a revitalized and reorganized business model could do just the opposite – encourage real estate investment and help turn the sinking real estate tide in many Midwest markets. 

Secondly, as controversial as the bailout and its implementation has been, it behooves everyone to pay attention to how your government is spending your money.  The bailout program is in disarray right now, and throwing another $25 billion at the Big Three is treating a symptom and not the disease.

BTW - somehow the marketing pics with the smiling, willowy supermodel looks out of place. 

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