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Fear and Loathing in Detroit

November 19, 2008

“Region braces for car crash,” is the headline for this week’s Crain’s Detroit Business headline (Nov. 17, 2008.) The onslaught of newspaper headlines follows the news from Washington, D.C. as the leaders of the once-big-three plead their cases to the current Congress.

To bailout or not to bailout? That is the question being discussed in every newspaper and 24-hour-news-channel in America. Once the bailout bonanza escalated in October with the $850 package thrown together in Washington and passed quickly after the warnings about our next “Great Depression,” the stage was set for the Detroit bailout. In fact, the terror that our government “leaders” created helped bring America’s economy to its knees. Best Buy, GM, and hundreds of other companies said their business almost stopped in the midst of the panic.

It was already bad in Michigan for the last few years as gas and metal prices rose exorbitantly, putting pressure on the SUV and truck sales that Detroit automakers depended on. It was so bad that they were pressed to switch their manufacturing mainly to small fuel-efficient cars, desperately trying to compete with Toyota and Honda.

Then, the gas and commodity price bubble burst as hedge funds liquidated millions of shares, based on fear of the economy imploding. Then, the credit crisis worsened as investment bank stocks fell to new lows. And the bailout balloon was the final straw that killed confidence. People who had already stopped buying houses stopped buying cars as well, and those who wanted had hard times getting loans.

Crain’s Ryan Beene and Amy Lane write, “Economic woes facing the Detroit 3 automakers have Southeast Michigan bracing itself for losses on many fronts—jobs, personal income, revenue for industry, from taxes and, perhaps, a sense of identity.”

In a survey of Crain’s business customers is a quote from Jim Best, owner of Detroit-based Post Electric Inc. who was once a member of the Chief Executive Boards, a group of small business owners, that I’ve been a member of since 2000. Jim no longer does any work in Michigan and “watched his workforce dwindle from 150 to himself here.” He has a small operation in North Carolina, and remains in Detroit “only because his daughter is still in school.”

Jim Best says bluntly, “I have no hope whatsoever for the state of Michigan. I see no light at the end of the tunnel.” (Crain’s Detroit Business, “Nowhere to go but up?” November 17, 2008)

Despair hangs around this town like a noose, not yet squeezing the blood vessels of the neck. And sadly, all we have to hope for is a $25 billion government bailout that would allow the three companies to withstand their cash burn and save them a few months from going into Chapter 11 bankruptcy. Still, that’s better than nothing.

Ford Motor’s CEO, Alan Mulally, says that if an auto company were to file for Chapter 11 bankruptcy protection, the situation might quickly move to Chapter 7, or liquidation. “Going into that kind of a restructuring, where the consumer has great choices, sales would fall off so fast that you could never recover on the cost side and get out of it,” he said.

The three heads of the Detroit 3 are in Washington, D.C., pleading their cases that they need a bridge loan for salvation. The senators don’t seem impressed. In fact, most seem to loathe the Detroit automotive companies. The southern senators don’t want to hurt the Japanese manufacturers in their states, some want to break up the unions, and the rest want to change the auto manufacturers into green companies that sprout small cars that get 50 miles per gallon.

AIG never had to go through this two day public humiliation to get the $143 billion that they have already received. They still sponsor junkets for insurance salesmen at posh hotels and though it breeds angry blogs, the government has not stopped the flood of money. The belief is that AIG is too big to fail and too connected to the rest of the economy.

If you don’t think GM, Ford, and Chrysler have their tentacles all over our national economy, you are dead wrong.

George Will and Mitt Romney are just two of many pleading to the government to let our car companies go. Romney is urgently dire: “IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.”

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course—the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.” (NY Times, November 19, 2008)

Mitt Romney, son of George Romney, once President of American Motors and former Governor of Michigan, never said anything like this to Michigan when he was running for president and won the Michigan Republican Primary. He convinced the voters that he was the “One” who could get the Big 3 back on their feet. Maybe, he meant then that he would bankrupt and then resurrect them back to their glory years of the 1950s and 1960s.

George Will claims the “answer” is to “do nothing that will delay bankrupt companies from filing for bankruptcy protection, so that improvident labor contracts can be unraveled, allowing the companies to try to devise plausible business models.”

Is that really an answer? Then, the car companies can do what United and Delta did, dump their huge employee retirement obligations on the U.S. Pension Benefit Guaranty Corp. which already has an $11 billion deficit.

The air in Michigan is filled with fear and the hot air in Washington is filled with loathing. If the senators would speak honestly, they would say this, “Let Detroit and its car companies go to hell!”

Meanwhile, the American economy is disintegrating fast. Among the retailers that are closing most of their stores are Circuit City, Ann Taylor, Talbots, Cache, Eddie Bauer, J. Jill, Footlocker, Disney, Bombay, Zales, Whitehall, Piercing Pagoda, Linens and Things, Movie Gallery, Pacific Sunware, Pep Boys, Sprint/Nextel, Wilson Leather, Sharper Image, and KB Toys.

It’s going to be one hell of a Christmas season.

We in the Detroit area will try to forget the fear and despair and wait. For what? A New Year, clinging to hope in a new president, a new Senate and Congress, and an automotive industry that will hopefully survive, with bailout or without bailout.

We desperately pray that 2009 won’t get any worse than 2008.

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