Coordinated Bankruptcy for the Auto Industry

The Times offers an interesting editorial proposing that the federal government facilitate the simultaneous bankruptcy of the "Big Three" auto makers, accompanied by extension of sufficient credit to sustain their operations through that process. This beats the current congressional proposal of, "Come to us with a business plan we like and maybe we'll lend you money," as it would allow the auto companies to address problems they cannot discuss as part of such a business plan - for example, how to eliminate failing brands and close hundreds of auto dealerships. If Ford announces, "We're going to close down Mercury," or even more modestly, "We're going to close it down as an independent line, while making select Mercury models available through Lincoln dealerships", they would create immediate consumer concern about Mercury vehicles, and would be immediately sued by Mercury dealers. If they say, "To control expenses, we need to cut the number of dealerships by a third," again they would be facing lawsuits by car dealers afraid of being among that third.

Meanwhile, the fact is that the manner in which cars are sold and distributed in this country is out-of-date, excessively costly, and anything but consumer friendly. At this point if you want to buy an iPod and only an iPod, you can go online to the Apple Store and buy one. But if you want to price shop or compare the iPod to other brands, you can choose from thousands of online and retail vendors who carry multiple brands of MP3 players. While iPhone sales are more constrained, once again you can find stores that offer contracts through multiple services, so you can go in and choose between an iPhone and a variety of service plans, and similar products from other vendors and service providers.

Try that with a car.

What if you're interested in offering a new type of dealership - a concierge type service that caters to professionals at their offices, allows them to arrange to drive a car model of their choice on their schedule, and offers the full range of makes and models they are apt to want to buy? Good luck with that.

What if an auto maker wishes to take the Saturn model to its next logical level, and build a Dell-style website where customers can pick a model - any model they offer - customize it, and have it delivered in days to a dealership with them with no haggling, no surprises, no post-sale pressure for "paint protection" or similar add-ons, no concern about financing (you've already been approved online) or confusing over rates. Get a good price, don't worry that you're paying more than the next guy or being otherwise hoodwinked, and show up at the dealership to inspect your vehicle, go over any special features, and drive away. The manufacturers are already about 90% of the way there with their "design your own vehicle" features on their websites. But do you think there's any chance that the crucial remaining 10% will get past NADA?

Bankruptcy only touches on these issues - facilitating the dropping of brands and closure of dealerships - but it doesn't do anything to overcome anachronistic, protectionist state laws that prevent innovation in vehicle distribution and sales, reduce manufacturer and customer cost, and increase customer convenience. But really, you're unlikely to hear anything about this from the CEO's of the Big Three.

I continue to favor something similar to bankruptcy but legislated by Congress, as opposed to Chapter 11, as being a possible path to reforming the auto industry with a much lower risk of failure. For those who complain, "Foreign auto makers will think it's unfair," I say, "They're not complaining about protectionism in their own nations, and you know what else - they're welcome to join in." If Congress is unwilling to act, cannot act with sufficient speed (as the authors of the editorial surmise), or forces bankruptcy upon the domestic auto industry, I think it's fair to say that it will be the result of a failure of leadership - in Congress, the auto industry, the UAW, and the nation's auto dealers and their "union", NADA (who are strangely omitted from most discussions of the industry's problems).

Bush On The Mortgage Mess

Bush plans to veto the proposed "housing-relief bill", expressing,

The president on Wednesday repeated his opposition to a bill “that will reward speculators and lenders” who have suffered because of their own foolishness.

If that's truly the way he feels, he should be advocating for changes in bankruptcy law that would permit lenders and borrowers to share the cost of their folly through first mortgage cramdowns in bankruptcy court. But of course, he doesn't actually favor that - he seems to instead favor "solutions" which direct taxpayer money to lenders but not to borrowers.

Who Should Get The Taxpayers' Money

In flattering McCain (who Will still appears to detest), George Will presents a false dichotomy, pretending McCain supports a solution to the "economy's housing-related credit woes" that doesn't involve any bail-outs whatsoever. Quoting McCain, Will writes:

He says "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." For now, he is with Senate Republicans in opposing the Democrats' proposal to empower judges to rewrite the terms of some mortgages, an idea that strikes at the sanctity of contracts and hence at the ethic of promise-keeping that is fundamental to social life. He opposes an additional dose of the toxin that has made the credit system sick -- he favors strengthening rather than weakening down-payment requirements for loans backed by the Federal Housing Administration. And he has admirably avoided the rhetoric of victimology, such as that used when The Post editorialized that "lenders pushed tens of billions of dollars in potentially high-interest mortgage debt on people ill-equipped to handle it."

So the honest translation would be that McCain opposes only aid directed at borrowers. While he wants stronger guarantees that federal loans will be repaid, something that to me is a perfectly reasonable demand, he has not actually opposed bail-outs of financial institutions. He just wants to add a few more strings to the bail-out packages they receive.

The honest question this might raise is, why support bail-outs of those who were in the best position to prevent this from happening in the first place, while providing no benefit at all to those (whatever you think of their culpability) on the other side of the loan? If Will were to think about it, he would recognize that offering bankruptcy relief to those borrowers wouldn't let them avoid their loans - it would allow them to discount their loans to the present market value of their homes. The borrowers would have their creditworthiness severely downgraded for a decade. But the owners of the loans, not the taxpayers, would have to absorb the difference. That, it seems, is unacceptable to either George Will or John McCain.

I'm not going to benefit from the bailouts - If I even own stock in any of the financial institutions involved, it's part of a mutual fund. And I'm the opposite of the sort who purchases "more home than I can afford" than maxes out my HELOC. As a conservative borrower and spender, who believes in paying my bills in full, I am hardly brimming with sympathy for those who chose to believe promises that were plainly too good to be true. Yet if my choice is between having my tax money used for a bailout, or having irresponsible lenders take a loss due to the bankruptcies of their irresponsible borrowers? I'll support the bankruptcy reform, thank you very much.