How GM Bankruptcy Affects San Diego
Friday, June 5, 2009
In a long-anticipated move, General Motors filed for Chapter 11 bankruptcy earlier this week. The auto manufacturer said it will close 12 more factories, and could cut more than 20,000 jobs.
GLORIA PENNER (Host): I'm Gloria Penner. I'm joined by the editors at the roundtable These Days in San Diego. Today we'll talk about the General Motors bankruptcy and its fallout in San Diego, the U.S. response to the growing nuclear threat by North Korea, and City Attorney Jan Goldsmith stirring up the DROP debate over the legality of a controversial city retirement plan. The editors with me today are John Warren, editor and publisher of San Diego Voice & Viewpoint. It's good to see you again, John.
JOHN WARREN (Editor/Publisher, San Diego Voice & Viewpoint): Good morning, Gloria.
PENNER: Good morning. Bob Kittle, editor of the San Diego Union-Tribune editorial page. How are you today, Bob?
BOB KITTLE (Editorial Editor, San Diego Union-Tribune): Just fine, Gloria, thank you.
PENNER: And Tim McClain, editor of San Diego Metropolitan magazine. And let me stop here for a moment. Tim has been with us on Editors Roundtable from the very beginning, some eleven years ago. He still looks about 23. But very soon his job as editor of San Diego magazine (sic) will be over because the magazine was sold and the new owner is bringing in his new editor. What did I call it? I called it – Oh, San Diego magazine. I'm sorry.
TIM MCCLAIN (Editor, San Diego Metropolitan Magazine): Metropolitan.
PENNER: You know, that mistake I've made before and now I should make it on your last day. Sorry, Tim.
PENNER: So, anyway, it is San Diego Metropolitan magazine. So we're going to lose Tim at least for a while but, hopefully, not for a very long time. Our call-in number, if you'd like to join our conversation about any of the subjects we're covering today, is 1-888-895-5727. And, Tim, I really should ask you if you want to say anything at all before we go into the content of the program.
MCCLAIN: Oh, thank you for the nice exit, for personalizing that. It's been a great time. You know, I don't want to go on and on. I've had eleven years of a marvelous experience you've – My fame has outsized my talent because of my involvement with this program and I'll be forever grateful for that.
PENNER: Well, that's wonderful, and thank you again and lots of good luck. Okay, so our phone number is 895-KPBS, that's 1-888-895-KPBS. And, Bob, did you want to say something?
KITTLE: I just want to wish Tim all the best. We're going to miss him here. I'm going to miss disagreeing with him from time to time.
PENNER: Well, yeah, that's always a problem, isn't it?
MCCLAIN: I'll be yelling at the radio, Bob.
KITTLE: Ah, fair enough.
PENNER: All right, on to our first story. The second largest industrial bankruptcy in history took place Monday when General Motors filed for Chapter 11 protection. So far, U.S. taxpayers are expected to put $50 billion dollars into GM and, in exchange, the government will receive a 60% ownership of the new General Motors. So, Tim, let's start with that majority ownership by the government of what was a mainstay of the private sector, and that's making a lot of people nervous. What does government ownership of GM really mean?
MCCLAIN: Well, government ownership of GM means many things. One, that it means that the company drastically reduce in size. This is a company that just, you know, a decade ago had about 400,000 workers, will be down to 40,000 workers. So, you know, and as all of us grew up, it was, you know, as goes GM, goes America. That is no longer the case. But they're going to try to keep it alive with our money, and it is, in my lifetime and possibly in the lifetime of the United States, the biggest private sector investment gamble that a government has ever taken.
PENNER: And you consider it a gamble?
MCCLAIN: It's a gamble. And it's a gamble that the government weighed on the side of if they let them just dissolve, which was where they were headed, there wasn't going to be a reorganization with a GM standing that the collapse – and not just of the GM, the 40,000 more job – the employees would be lost but all of the suppliers, all the vendors, just it would create chaos in the economy and put such pressure on the unemployment scene and the social security scene as people entered that that it was a better gamble to go this way, and that's – but that's all it is, it's a gamble.
PENNER: Bob Kittle?
KITTLE: But I think there's another bit of this equation, Tim, that influenced Barack Obama's thinking and that is the enormous power of the United Auto Workers, which is a big part of the Democratic constituency. And, unfortunately, I think this is a terrible gamble for the taxpayers to nationalize GM because while there have been some cutbacks in union benefits, the core problem of wage is costing far more for GM than for its non-union competitors, such as Toyota, Honda, etcetera. That has not been addressed in this downsizing of the company and that, I think, is going to continue to plague GM. I don't think this $50 billion that we – the taxpayers have sunk into GM is going to be the end of it. I think that in order to keep it afloat they're going to have to pump billions more, and in the end, I think we – I think this is a gamble that is not going to pay off at all. It's going to be a terrible loss for the American taxpayer.
PENNER: Well, let me ask our listeners about that. You heard Bob Kittle, he's really concerned about how much this bailout of GM is going to cost you, the taxpayer. Is this the way you want to see at least part of your—maybe a big part—of your tax money going? And so I would like to get your response on that. Or don't you really care? Our number is 1-888-895-5727, 895-KPBS. Before we go to our listeners, John, I want to ask you about this. We had the bailouts of the banks then we had AIG, you know, a company that was too big to be allowed to fail, and now the auto industry. Since socialism means government owning or controlling the means of production, are there valid concerns that these are steps toward socialism? Are these concerns justified?
WARREN: Well, America can't have it both ways. It can't be socialism when it helps people but capital investment when it helps big business. I think the American definition of socialism has been distorted by the conservative rhetoric to frighten people. The collateral damage from GM was much greater than the cost of helping it, and the president made it very clear that this additional $30 billion is not a one-time check writing scenario, it's used for transitioning from a past entity into a future entity that should be more productive. And, thirdly, I'd like to make the observation that while labor is supported from a Democratic standpoint, I don't believe the president was making decisions based on the United Auto Workers. You know, it's a damn if you do, damn if you don't. Damn if you talk about investments but now you didn't go far enough in terms of renegotiating the contracts, and that was not the intent and purpose. And so I think he made measured moves that were necessary and those moves, hopefully, will prove productive. But there's another side to it in that while we're excited and talking about GM, we're not talking about the unfair trade competition that's being created against Ford, who has taken no federal dollars whatsoever and who is now being forced to compete against a GM in terms of GM being able to offer zero financing where Ford does not. So the other side of the equation has to be addressed.
PENNER: Are we saying that GM was in worse–I'm saying 'was' assuming that the $50 billion is coming in—is in worse financial condition than Ford?
WARREN: Well, yes, we are saying it's in worse financial condition but the disparity is in the fact that we're, in helping them correct their financial condition, are we not upsetting the whole concept of free enterprise where now we're pumping an entity up and in the very act of doing so we're creating a disparity for one who is following the American philosophy of generating a profit.
PENNER: So we are doing just the opposite of leveling the playing field.
WARREN: Yeah, we're playing with a seesaw.
PENNER: Before I go back to you, Tim, let's hear from our listeners, and Leonard in Scripps Ranch wants to join the conversation. Leonard, you're at the Editors Roundtable, welcome.
LEONARD (Caller, Scripps Ranch): Thank you. First, I do agree with Mr. Warren's comments even though I'm going to go on the other side in a moment. I'm from the Michigan area originally and I've been involved with the auto industry indirectly for most of my life. I also have a nephew who is in the executive office at General Motors. And the impact – the failing of General Motors would have been disastrous across the country. Now, whether this is the right path or not, I don't know, because the first thing that the congress wanted to do is take decisions and make them political. One of the things they needed to do is shed costs, i.e. dealerships. What's the first thing that congress wants to do? They're saying, well, you can't shut dealerships in my district. This is where the – my concern comes from.
PENNER: Excellent, Leonard. You really – you led us right into the next level I wanted to go to, which was what about those GM dealerships right here in San Diego. But let's get Bob Kittle's response to you, Leonard. That was really a good comment. Go ahead.
KITTLE: No, I think Leonard has gone to the core of the problem of the government nationalizing a large corporation, that is politics will intrude. Politics already has intrude (sic). In addition to complaints from members of congress about dealerships closing, Leonard, you probably know that many members of congress are saying GM should no longer manufacture cars abroad, in Mexico and elsewhere, those jobs should be brought home. Well, that simply makes it more difficult for GM to compete, more difficult for GM to, in the end, emerge as a profitable company again. And the political side of this, the political interference, is not going to go away; it's only going to get worse. And that's what happens when the government owns 60% of GM. To me, you talk about socialism, this model reminds me more of the stateism that existed in Italy under Mussolini before World War II. He managed the economy by nationalizing large companies. Many governments around the world have done this in the past. It's rather passé now because it almost never works. The government is not a good entity to run a big corporation. The market is far better at allocating the resources of a corporation, deciding what kind of cars to make, what color cars to make, what to guarantee, etcetera, than the government.
PENNER: Will they also decide what executive compensation should be and whether there should be bonuses, Bob Kittle?
KITTLE: Again, yes, absolutely. Barack Obama has already taken on this issue. The tax – the government will decide what is proper compensation for top executives at GM. Barack Obama has already fired the chairman of GM and replaced him. So I'd have absolutely no confidence in this administration or any administration or members of congress that they are better – in a better position to make the decisions to bring GM back to profitability.
PENNER: That is a strong point of view, Bob Kittle saying do not turn the private sector over to the public sector, basically. What's private should stay private, what's public should remain public. Maybe what's public should go private, who knows. And do you agree? Do you think that it is a big mistake for the government to be stepping in and taking such a large chunk of a major industry under its wing, and will it change the way business is done in this country? 1-888-895-5727, 895-KPBS. Before we go back to the phones, I did want to bring this to the effect on San Diego. How popular, Tim, are GM cars here? Who might get their business if the dealerships go out of business?
MCCLAIN: Well, of the 101 dealers in San Diego, car dealerships, GM has about a fifth of them, and GM sells less than one of every ten cars sold. So they have an abundance of car dealers. They have way too many car dealers in San Diego County, and they need to get that number down. And San Diego is an example of around the country; they probably should cut it in half. You know, the worry about Ford is justifiable if the government goes out and starts buying fleet purchases and only purchases GM products and things like that. But right now, you know, overall, Ford is kicking GM's tail when it comes to quality cars. Of the top eighty cars in San Diego, only six are GM models. Ford is much better represented in that group. They have models that they're going to be bringing over from Europe. GM is really behind the curve. And as far as Barack Obama firing the chairman, it's too bad the chairman didn't fire himself several years ago. GM and that whole board and that whole management, including going back to an agreement they negotiated about six, seven years ago with the union, they all should be fired for that. They put themselves in this position. They drove the company to the edge of this cliff and if the president, realizing that he has to save this company, shoves them over, I say, you know, goodbye. They, not the American workers, they deserve, in that executive suite, full responsibility for what has happened to this company.
PENNER: And it's up to the government to basically spank them?
MCCLAIN: They have to be – Unfortunately, you know, too big to fail, you hate to say that. You look at what happened with Lehman Brothers. You know, they made – we this experiment back in fall, we let Lehman Brothers fail and it helped make this economy as worse as it got. Had the government gotten in—and I am not for the government taking over companies but we had an extraordinary situation—had the government gotten in and backed some of these companies, backed Lehman the way it ended up backing its arch competitor, Goldman Sachs, we probably would've had a much smoother recession. And the same thing with GM, there's – Obama has been left with no choice.
PENNER: Well, that's Tim McClain's opinion. As you can tell, there are some very strong opinions on this at the Editors Roundtable today. We'd like to hear yours and we'll be back in a moment. This is the Editors Roundtable. I'm Gloria Penner.
[ break ]
PENNER: This is the Editors Roundtable. I'm Gloria Penner. We had to take a break so we could take a deep breath. All of us were getting really excited, talking about GM and whether it's a good thing or a bad thing that the government has stepped in to such a large extent. And, of course, we have opinions on both sides of this roundtable so we'd like to get yours as well and we are going to hear from the listeners now but, once again, reminding you who is at the table today. We have Tim McClain of San Diego Metropolitan magazine, and from San Diego Voice & Viewpoint, John Warren, Bob Kittle from the San Diego Union-Tribune editorial page. And now we have Frank in Chula Vista. Hi, Frank, you're on with the editors.
FRANK (Caller, Chula Vista): Yeah, I just wanted to – First off, before we get too carried away with the socialism line here, there are models for heavy government involvement in the government sector that work. If you look at the defense industry, you don't see any big layoffs coming down the pipeline there, and this is an industry where everything is micromanaged by the government to a certain extent. So government control over a sector of the economy isn't necessarily bad if it's managed well and to a particular purpose.
PENNER: Okay. So, basically, Bob Kittle, what's he's saying, we shouldn't make blanket statements about the government coming in and managing.
KITTLE: Well, the government – the defense industry, those are companies that are customers – I mean, you know, the government buys their products and pays them. The government doesn't run those companies. Now, obviously, the government helps manage weapons development programs, etcetera, but the private sector decisions are made by the companies and there is still competition among the defense industry, among various companies competing for government contracts. That is a far more efficient way to do business than to have the government deciding how much the CEO makes and who the CEO is and what color cars the company will make. But let me say also, the defense industry shed hundreds of thousands of jobs after the end of the cold war because the government cut back defense spending, and rightly so. We here in San Diego bore the brunt of those cutbacks in the early nineties. So, you know, there's no guarantee. If the government owned those companies, as it now owns GM, it probably would never have scaled back defense spending as conditions in the world demanded.
PENNER: I'm going to carry it one step further because the defense industry kind of collapsed in San Diego. A lot of very talented, gifted people were sort of let loose, and out of that came all the wonderful entrepreneurial small business development, in some cases new biotech, new biomed, and it really turned out to be quite a good thing for San Diego, didn't it?
KITTLE: I believe so.
PENNER: Yeah. Okay. Rob in Coronado is with us now. Hi, Rob, you're on with the editors.
ROB (Caller, Coronado): Well, hi. Thank you, Gloria. I enjoy your show.
PENNER: Thank you.
ROB: I have a question for Mr. Kittle. He seems to resent that the government is intervening in the private sector but he seems to forget that the private sector failed of its own doing. And I was wondering what he would do with General Motors, given that—excuse me, I'm working here—that management sort of blew it, sort of drove it into the ground. So I was wondering what he would do, if he would intervene and try and save what's worth saving? Thank you.
PENNER: Thank you very much. Bob, you're on the hotseat again.
KITTLE: Well, let me say GM is hardly the first corporation in America to go bankrupt. It happens all the time. That's the way the free market works, the creative destruction that occurs as companies try to respond to the markets. Some do respond and flourish and some do not. I could give you a long list of companies that have gone bankrupt because they could not compete. Let's start with Pan Am or F.W. Woolworth, those were thousands and thousands of jobs that I think are just as important as jobs at GM. So what should've happened here, in my view, is that GM should've gone into bankruptcy under the court system as other corporations do, addressed its creditors as best it could in the bankruptcy process without the taxpayers throwing in $50 billion that is likely to be lost, and to reemerge, as other companies have by going through bankruptcy, as a much leaner, reorganized company under new leadership.
PENNER: Tim, will the taxpayers get back any of that money, do you think?
MCCLAIN: Well, you get – they're getting it back in shares. They own the company. The end game is, you know, if you want to look at it on a success story, is that eventually the government starts disgorging its ownership back into the public sector, or private sector so that you and I can start buying up shares of a newly reinvigorated GM, and the government is the seller of those shares and its ownership stake goes down. It's similar, you know, to the money that's been invested with a lot of the banks. You know, it'll be paid back. GM wants to -- You know, ultimately, if you're running GM, you don't want this, you know, gorilla sitting there, you know, telling you how much you can make.
PENNER: John, you wanted to answer Bob Kittle on his last comment.
WARREN: Well, I wanted to make a couple of observations because, as we talk about GM, we forget some very basic things in terms of corporate law in America. There are provisions for malfeasance in office, actions against directors and CEOs and we see right now with the case of Countrywide where their leadership is being charged with civil fraud. We didn't rise to the level of legal action against GM because we were more concerned about the collateral damage. But, ultimately, GM can become strong enough, as Tim alluded to, to purchase back shares of stock from the government and so, from that standpoint, it's not just a doling out. We privatized the postal service, we privatized Amtrak, we privatized a number of entities. We look at Freddie Mac and Fannie Mae, the way they're structured, and so all of these things have major government involvement and they have worked well, so we should give this an opportunity to work as opposed to just assuming it won't and hitting a panic button.
KITTLE: I'm going to remember that John cites Amtrak as the corporate model of success…
KITTLE: …because I don't view it that way.
WARREN: …no, it's a corporate model of being privatized. I never said it was successful.
PENNER: Yeah, that – No, I'm here to testify, he didn't say success, he said privatize.
WARREN: Yeah. Yeah.
PENNER: Okay. We'll all testify to that. All right, so finally, I want to get back to San Diego as we have to wrap up this discussion. If dealerships close in San Diego, what does it mean for people that, say, who have GM cars in terms of their warranties, in terms of repairs? Or even if they ever thought about buying a GM car in San Diego.
MCCLAIN: A couple of things. For some people, it means they're going to have to drive farther to get their service, to get their warranty taken care of. The government is going to back all the warranties; that's one of the big things that the government has said, and that's giving people comfort that you can still buy a car. Ultimately, the success of GM is going to be dictated whether they can produce cars that people will buy and that they can make money off of. That's one way to really worry about the interference of the government. Bob Lutz, vice chair of GM, who I would actually leave there, a very smart guy, a car guy -- You know, Americans, we talk about one thing, we talk about wanting fuel economy, we talk about small cars, and what have we been buying since gas came down under three dollars a gallon? We've been buying V-6s and V-8s that get poor gas mileage because that's still the kind of car that we want. Maybe not quite as big, but we don't want the hybrids, we don't want these cars. And the government is going to – if the government forces GM to build only high mileage cars, you will see GM completely fail. But if they're allowed to get a good mix out there and their product quality comes up, then you'll see people going to lots and buying GM cars again.
PENNER: Isn't the government going to force people to transition to cars that get better mileage?
MCCLAIN: Well, they've – they're forcing up the overall mileage…
MCCLAIN: …and that will affect all car dealers. But will they make GM, you know, live to a higher standard? And if they do, it'll be very unfortunate and it will mean that they'll go away.
PENNER: Okay, well thank you. I'm sorry we didn't get to all of the calls that came in on this one but I have a feeling a story like this has legs and we'll probably return to trot it out again somewhere down the line.
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