Detroit gets the cold shoulder

Regarding my earlier post about Detroit and Obama - it is quite interesting to me to see the new administration (and Congress) standing up to Detroit and the unions.

Some interesting developments:
1. GM admitted this week that bankruptcy could be a possibility which is, in and of itself, shocking.
2. Chrysler and GM will be in a race to see who will run out of operating capital first - GM has a publicly known burn rate which places it somewhere between Christmas and St Patrick's Day to fail to have enough cash on hand to do day-to-day business. Chrysler is privately held and Cerebrus will be riding that ship down to the bottom of the ocean. Cerebrus picked up an 80.1% share in Chrysler for a cool 7.4 billion - a fraction of what Daimler picked it up for in the late 90s. Cerebrus figured that a focus enforced by private capital could whip the auto maker into shape.
3. The government, at this moment, has not taken up a bailout in any meaningful shape for the automakers. Meanwhile, Citi just got an astounding 20 billion of direct money (from the President's allocation of the bailout package - he has discretion to allocate 100 billion) and is now on the hook for potentially hundreds of billions of toxic loans should Citi not be able to cover them.
4. The press made some hay about the fact that the CEOs of the automakers (GM in particular) had rather plush travel arrangements to Washington to ask for a multi-billion dollar bailout. GM sold released, note not all, of their corporate fleet.
5. Obama has made noises about helping out Detroit but the package would require a quid pro quo - Detriot gets money and then has to make fuel efficient cars.

This last point is actually pretty interesting - I was listening to Rush Limbaugh the other day for a bit while riding around at lunch doing some errands - and he hit the nail on the head. Why should we give Detroit money without a coherent plan? Why should we give Detroit money for paying workers who don't work through their Jobs Banks programs? Why should the unions not concede horrendously expensive compensation for their hourly workers and ease their blockages of factory closings? And, most interstingly, how will Detroit make fuel efficient cars that anyone wants to buy given their current small chassis platform?

Detroit has buoyed an idea that bankruptcy is bad primarily because it discourages potential buyers from purchasing a car from a company that could go under, thus threaten the implicit warranties on a car.

This is clearly bogus - no one wants to buy a small car from Detroit because they are garbage. Detroit can't make a small car to save its life - it, however, can make a big SUV or truck. So, Rush asked quite cogently, how will Detroit suddenly pull out this miracle and rapidly convert their product development pipeline to small car design that is interesting and marketable?

Short answer to Rush's questin is the response of Washington - the government knows that Detroit cannot and, more pointedly, will not. Hence the game of chicken has commenced. The politicians are looking askance of Detroit's childish tantrums, and rightfully so, until there is some tangible measure of a plan.

Praise for politicians is not often heard here, but bravo for DC for at least showing some spine and not caving reflexively to the unions or big industry. The banks, however poorly behaved, still hold things of value (i.e. mortgages) which can be leveraged into a long term position (once the default swaps are unwound). Detroit, by comparison, has very little of value beyond their potential to unload tens of thousands onto the welfare rolls. The employees are going to land there anyways - so why not take the bitter pill now and get it over with rather than prolonging the agony?

And they only have to look at Honda and Toyota - both with large manufacturing operations inside the United States - to validate that the wounds are clearly self inflicted. The day of reckoning for Detroit has, at long last, arrived.