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Is GM too big to fail too?

General Motors Chairman and CEO Rick Wagoner speaks to reporters after GM's 2008 annual shareholders meeting in June.

TEXT OF STORY

Kai Ryssdal:
One more data point to throw into the consumer confidence mix, as if you really needed one? A key measure of the housing industry out today, the S&P/Case Shiller index, showed another huge drop in home prices.
Speaking of huge drops, let's move on to the auto inustry, shall we?
Chrysler and General Motors have been in on again off again negotiations about a possible merger. Marketplace's Mitchell Hartman reports GM wants some government help to make it happen.


Mitchell Hartman:
General Motors is hemorrhaging cash, and its credit rating is in junk-bond territory. Chrysler's not doing much better. Getting together might help them weather the economic slowdown and the credit crunch. The merged company could downsize its workforce, close auto plants, and develop new vehicles.

But GM needs an investment of about $10 billion in equity or loans to make a merger work. David Cole of the Center for Automotive Research says the automakers' failure would spiral into hundreds of thousands of job losses--from assembly plants and parts suppliers, to dealerships.

David Cole: I think fundamentally now the government realizes what the potential cost of a failure would be. And what they're working on is, how do you create a mechanism to provide this kind of support for the industry to get to the other side of this very fast, difficult river that they're in.

Most likely, the plan would include $5 billion now targeted to fuel-efficient vehicles. And another $5 billion from the financial bailout. GM and Chrysler qualify as financial firms because they make auto loans.

There is a lot of skepticism that a bailout will do much good in the long run. Gary Chaison teaches industrial relations at Clark University.

Gary Chaison: I think the companies made several mistakes in the past in terms of not quite clearly understanding what consumers wanted, and now they're paying the price for that. And they're looking for a bailout to help them stay afloat for a while longer.

Chaison says, this isn't really a financial crisis, or even a cost-of-labor crisis. The automakers' challenge, he says, is to develop vehicles that consumers actually want to buy.

I'm Mitchell Hartman for Marketplace.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.
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Mr. Chaison's analysis is incorrect. The product argument is a straw dog - Toyota, Nissan, Mercedes, and other foreign automakers made the exact same misjudgements, increasing investments in big SUV or truck development, and have recently announced similar cutbacks in these kind of products. One might even argue that it was a smart strategic decision, given the market conditions 5, 10, 15 years ago. No one could have accurately predicted the present volatile financial conditions or the vacillating petroleum market prices that dictate the types of vehicles being bought. The US companies labor under a huge burden of providing pension and health care that their competitor's employees get for free, courtesy of their government. The US provides none of these benefits. It is a wonder that the US automakers have remained competitive, and can even exist under these unfair conditions. Bethlehem Steel, my father's employer for 35 years, and one of our largest steelmakers, no longer exists because of the burden of a small workforce unable to support the pensions and healthcare of a giant retiree base. We must look at these costs to business in order for them to survive.

My friend's 80 year old parents just lost their GM health care provided through their retirement; who is going to provide health insurance to two 80-year olds? If this is not a case for national health insurance, I don't know what is!

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