psci 3325 - substantive memo
TRANSCRIPT
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PSCI3325 - Grading Coversheet- Substantive Memo
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Abstract (150 words) [10] L/f- to& Overall impression ..
1. Problem to be addressed [ 10 ] 'V faJ.-7 Persons affected V e-70bjective evidence of severity V-7How problem got on policymaking
~agenda
-7 Why appropriate/not appropriate for V/'government action
2. Various alternatives considered (pros&cons) V- 10[10] V3. How well action addresses problem [ 10 ] l,../'
If time has passed ID(/'
-70bjective evidence conditions have
improved or worsened?
If decision was to take no action
-7Evidence indicating this is still a problem rJlArequiring some kind of action?
4. Organization, grammar and citations [10] V'"
\0TOTAL POINTS
R)COMMENTS:
Cozby 1
Christopher M. Cozby
PSCI3325
Professor Lowry
September 1,2012
The u.s. Government Bailout for General Motors and Chrysler
Abstract
This paper is about the u.S. Government bailout for General Motors (OM) and Chrysler
during the 2008 financial recession and afterwards. The main points are: why OM and Chrysler
were on the verge of bankruptcy, other options considered before the bailout decision was made,
who were affected by the problems (the federal government, state and local governments, OM
and Chrysler's executives and officers, the United Auto Workers trade union, assembly workers,
dealership owners, dealership repair mechanics, and auto fmance companies); the way General
Motors and Chrysler were able to restructure and emerge from bankruptancy; what
advancements the North American (United States and Canada) OM and Chrysler brand names
have made in the post-bankruptcy period.
Introduction
In 2008, during the economic recession, the U.S. auto industry was in serious fmancial- ----------trouble, and two of the three automobile manufacturing companies faced bankruptcy, General
.. . .' .-'.- ---.--..---~ .i.>:Motors and Chrysler. The third automo15i1ecompany, Fora, had enough money to restructure on
its own without any federal bailout money, but initially asked for financial assistance in case the
economy got worse during the recession. Assembly Plants from both OM and Chrysler were
being shut down, therefore leaving workers without jobs, and also adversely affecting the
suppliers of the automobile industry (spare-part manufacturers, the steel industry, etc). The big
three's problems have several main sources, among others: high labor costs (for every United
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Auto Worker member working at a car manufacturer, three collect generous retirement benefits
["America's Other Auto Industry"2008]); poor quality, whether perceived or real; inefficiency
(in 1995, for example, a General Motors [GM] automobile required forty-six hours to build,
whereas a Toyota required 29.4 ["America's Other Auto Industry" 2008]); and relatively low
resale value (Couch et al. 2011 ). Additionally, they were spending more money than what they
made in vehicle sale profits. At that time, GM had eight brand names: Chevrolet, GMC, Pontiac,
Buick, Cadillac, Saab, Saturn and Hummer. Chrysler had three brand names: Chrysler, Dodge
(which made cars, trucks and car and truck-based SUVs), and Jeep, and was owned by Cerberus
Capital Management before the recession struck (Green 2010).
There was a lot of debate over what to do before a decision was made to help the Big
Three. Some politicians, particularly conservative Southern Republicans, said just let the
companies go bankrupt, which would have made our recession a lot worse by shrinking our
manufacturing sector of our workforce and our nation's Gross Domestic Product (GDP) by a
very substantial percentage. The liberals and moderates of the U.S. Congress eventually
prevailed with a rescue plan to help General Motors and Chrysler during the recession of2008.
The Bush Bailouts for GM and Chrysler
The federal government decided to give bailout money to General Motors and Chrysler,
while Ford managed to restructure on its own without any bailout money. If the U.S. auto
industry were to fail, it would have plunged our nation into a deeper recession. "The OM bailout
began, not with the Obama Administration, but with the lame-duck presidency of George W.
Bush" (Horton 2010). "In the fall of 2008, GM sought financial assistance from the federal
government" (Horton 2010). "GM CEO Rick Wagner testified before Congress ''that without
federal assistance, [OM would] not have the cash necessary to continue operations" (Horton
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2010). There were was opposition from Conservative Southern Republicans, such as Senator
Richard Shelby (R-AL), who scorned the U.S. auto industry as "dinosaurs" (Cohn 2008). For the
liberals and moderates who supported a rescue, like Senator Christopher Dodd (D-CT), Detroit
remains an embarrassment (Cohn 2008). Dodd said "I wish that these companies had not gotten
themselves into this situation," and that they would need to make "painful, fundamental changes
if they are going to be competitive internationally and viable in the long term" (Cohn 2008).
"The House of Representatives was open to the request, concluding that "action in the form of
financial aid to the domestic automobile industry is necessary to stabilize the economy" (Horton
2010). However, the Bush administration and Congressional Democrats disagreed on where the
money should come from (Haldis 2008a). Then House Speaker Nancy Pelosi (D-CA) said, "The
appropriate source of funding for this short-term assistance is the Troubled Assets Relief
Program (TARP) recently authorized by Congress" (Haldis 2008a). However, President Bush
and the White House thought differently. "The White House says the $700 billion should be used
for the financial sector and the $25 billion should instead come from funding Congress passed
earlier this year to fund the development of more fuel-efficient vehicles" (Haldis 2008a).
However, Bush defended his action by saying: "In the midst of a financial crisis and a recession,
allowing the U.S. auto industry to collapse is not a responsible course of action" (Couch et al. -- ....•.
2011). Meanwhile, the Associated Press said that OM would sell its 3% stake in Japanese
automaker Suzuki to Suzuki for about $230 million, or less than 10% of what it [OM], Ford and
Chrysler sought from the government (Haldis 2008a). Then Bush's term would expire in January
2009.
The Obama Bailouts for GM and Chrysler
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Then after the November 2008 presidential election, we elected Senator Barack Obama
(D-IL) to be the President of the United States, but President-Elect Obama could only think of
what he could do about this crisis until President Blbh left office in January 2009. Then, theI
Obama Administration compounded the Bush Administration's mistake by expanding the use of
TARP funds to fundamentally restructure OM and Chrysler (Horton 2010). "President Obama
doubled the amount of cash available to OM and directed the Treasury Department to provide
"$30.1 billion under a debtor-in-possession financing agreement to assist GM through [a]
restructuring period" (Horton 2010). With those commitments in place, at the direction of the
Obama Administration OM drafted a Chapter 11 plan of reorganization and filed for bankruptcy
on June 1,2009 (Horton 2010). On July 10,2009, New OM acquired substantially all of Old
OM's assets (Horton 2010). Presently, the Treasury now owns 60.8 percent of New OM (Horton
20 I0). OM also had to reduce its brand name load from eight brands to four brands. The North
American brands OM retained were Chevrolet, OMC, Buick and Cadillac. The other four OM
brands: Pontiac, Hummer, Saab and Saturn were all phased out. Many Americans were surprised
to learn that Buick had been retained instead of Pontiac. The reason Buick had been retained is
because Buick is a very popular OM brand in China and other foreign markets, whereas Pontiac
did not do so well at all in the global and domestic markets.
As for Chrysler, it was forced to merge with Italian Automaker Fiat in 2009 which gives
the Italian carmaker a 35% stake in Chrysler (Welch et al. 2009). "Fiat will give Chrysler some
small and midsize cars while Fiat gets access to the North American market" (Welch et al. 2009).
They also divested Dodge of its Ram full-size pickup trucks and made it a separate branch called
Ram Trucks (Ram Trucks 2012). As of now, Dodge only makes cars and crossover SUV's,like
Chrysler (Dodge 2012). "While Chrysler gets about 95% of its sales in North America, the
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automaker is strong only in the minivan, SUY, and pickup markets, and it needs the technology
to make smaller cars, which Fiat has" (Welch et al. 2009). However, there are some immediate
problems for both Chrysler and Fiat. For example, retrOling a Chrysler-owned factory to make
Chrysler versions of Fiat passenger cars could take three or four years per factory and also cost
hundreds of millions of dollars per model (Welch et al. 2009).
Also, Washington mandated higher fuel economy standards for American-made
automobiles with corporate average fuel economy at 35.5 mpg for the 2016 model year
(Automotive News 2009). In 2009, the u.s. fleet averaged 25.3 mpg (Automotive News 2009).
To meet the target, V-8's will be limited, vehicles will lose weight, and automakers will add
fuel-saving equipment, such as turbochargers and hybrid powertrains (Automotive News 2009).
"But there's reason to worry that the government's current approach to the problems of General
Motors (OM) and Chrysler remains too conventional" (Helper and Collopy 2009). In this
instance, we may be better served by a "design attitude," which assumes that new alternatives
may need to be invented (Helper and Collopy 2009). In this case, we would have to reconsider
the entire u.s. Transportation system itself (Helper and Collopy 2009). "In this instance, a
reframing could position automakers as part of the ground transportation system because they are
members of a long supply chain that starts with minerals being extracted from the earth and ends
with people being moved from place to place" (Helper and Collopy 2009). They are also part of
the research and development infrastructure of the u.s.; as well as part of the labor movement in
the United States (Helper and Collopy 2009). For example, consider the supply chain, which
accounts for 70% of the cost of a car (Helper and Collopy 2009). "In the past, each U.S.
automaker has tried to cut costs with suppliers by squeezing their margins, as if the suppliers
were outside of its boundaries" (Helper and Collopy 2009). A design attitude therefore
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challenges us to do better by inviting us to come up with new alternatives to engage in
conversations that bring unlikely partners to the table, and to revel in surprise (Helper and
Collopy 2009).
Individuals and Groups affected by the Problem
There were numerous people and agencies besides the federal government affected by
both OM and Chrysler declaring bankruptcy in 2009. After nearly nine years as OM's CEO and
nearly six years as the company's chairman, Rick Wagner resigned from both positions, at the
request of the White House (Haldis 2009). Wagner was replaced by CEO Fritz Henderson
(Horton 2010). Wagner was not alone, as the Treasury Department moved to replace a Ilarge
portion of the OM board of directors (Horton 2010). The Treasury Department named Edward
Whitacre chairman of the board on June 9, 2009 (Horton 2010). In December 2009j Whitacre
pushed out Fritz Henderson and the board appointed Whitacre as interim CEO (Automotive
News 2009). Also the United Auto Workers (UA W) trade union, and assembly plant workers
themselves expressed concern about keeping their jobs. However, the UA W was not treated like
any other creditor during this time period (Gantert 2012). "If the United Auto Workers union had
been treated like any other creditor during the General Motors and Chrysler bankruptcy, the cost
to taxpayers would have been $26.5 billion less" (Gantert 2012). "Instead, the federal
government favored the UAW and the union recovered most of the money owed to its benefit
funds" (Gantert 2012). In the Dallas-Fort Worth area, North Texans feared that the OM
Assembly Plant in Arlington, IX would be shut down. However, it was not shut down and it is
still producing the full-size pickup trucks and SUVs made by OM. Also, OM's fmancing
subsidiary, once called GMAC, was renamed Ally Financial during the bankruptcy period
(Welch and Campbell 2011). Then GM broke away from Ally Financial and absorbed
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AmeriCredit into GM Financial in July 2009 (Welch and Campbell 2011). In addition, several
GM and Chrysler dealerships had to close down, therefore leaving dealership workers and repair
mechanics without jobs.
Progress made by GM since downsizing its brand names
The "new" OM has made very significant progress in creating more fuel-efficient and
technologically advanced vehicles in the North American market. For example, Chevrolet
introduced a new compact car called the Cruze, with a 1.4 liter turbocharged 4-cylinder engine
on most trim levels, which allows the vehicle to perform like a vehicle with a larger engine
without sacrificing fuel efficiency; then Chevrolet made a Cruze variant called the Cruze Eco,
which had more features to raise fuel economy to an EPA estimated 42 mpg highway (Chevrolet
2012). Chevrolet also took their Aveo subcompact car, gave it a more fuel-efficient engine, a
new fascia and other features and renamed the car the Chevy Sonic for North America
(Chevrolet 2012). Also, Chevrolet created the Volt, a lithium-ion battery powered plug-in hybrid
with a gas generator to extend the electrical range of the vehicle (Chevrolet 2012) For the 2013
model year, Chevrolet is currently redesigning the full gasoline-powered Malibu mid-size car
and introduced the new Malibu Eco, a mid-size car built on the same principles as the Cruze Eco
and equipped with an available 2.0 liter turbocharged 4-cylinder engine; in addition, Chevrolet is
introducing a new mini-car called the Chevy Spark, which has a 1.2 liter 4-cylinder engine with
Variable Valve Timing, or VVT (Chevrolet 2012). Currently, Chevrolet is redesigning the
Traverse full-size crossover for the 2013 model year (Chevrolet 2012). Cadillac has also made
extensive progress as well. For example, Cadillac has a Volt-based vehicle in the works called
the ELR coupe (Cadillac 2012). Currently, Cadillac has a Cruze-based luxury variant called the
ATS sedan, and a midsize coupe, sedan and sport wagon called the CTS (Cadillac 2012).
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Cadillac also has a new full-size car for the 2013 model year called the XTS, in which a
Chevrolet variant called the Impala will be based on for the 2014 model year (Cadillac 2012).
Buick has a Cruze variant called the Verano, a Malibu variant called the Lacrosse, an Opel-
designed vehicle from GM Europe called the Regal, a Traverse variant currently being
redesigned called the Enclave, and a new 5-passenger crossover for the 2013 model year called
the Encore (Buick 2012). GMC has a full-size crossover being redesigned for 2013 called the
Acadia, based on the Chevy Traverse and Buick Enclave; as well as a Chevy Equinox/Cadillac
SRX variant called the Terrain to carry over the now-defunct Pontiac Torrent (GMC 2012). As
for pickup trucks, GMC and Chevrolet both have a midsize pickup called the Chevy
Colorado/GMC Canyon, respectively; along with full-size pickup trucks called the Chevy
Silverado/GMC Sierra 1500 Yz ton, 2500HD % ton, and 3500HD 1 ton dually variants (GMC
2012). Chevrolet, GMC, and Cadillac have GM's full-size SUV's: the Chevy Tahoe/GMC
Yukon/Cadillac Escalade, and the extended wheelbase Chevy SuburbanlOMC Yukon
XUCadillac Escalade ESV, all of which come with available hybrid powertrains (OMC 2012).
Also, GM has 2 SUVlPickup hybrids being phased out after 2013, the Chevrolet
Avalanche/Cadillac Escalade EXT (Chevrolet 2012). Despite all this progress, OM still has a
long way to go before it can become globally competitive.
Progress made by Chrysler since merging with Fiat
Chrysler has also made a lot of progress since the bailouts occurred. For example,
Chrysler also merged with Italian automaker Fiat, who also owns Alfa Romeo, Maserati and
Ferrari, and they brought an Alfa Romeo compact car to America renamed the Dodge Dart in
North America(Dodge 2012). Chrysler made the Dodge Trucks and SUV's a separate branch
called Ram Trucks (named for the former Dodge Ram full-size pickup trucks) and have
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produced several trim levels aside from the standard 1500 half-ton, 2500 %-ton, and 3500 l-ton
models with their own attributes, like the Ram Laramie Limited and Ram Laramie Longhorn,
two luxury Ram pickup trucks (Ram Trucks 2012). There is a Ram variant called the Ram Big
Horn Edition in most States, but called the Ram Lone Star Edition in Texas (Ram Trucks 2012).
There is also a Ram Outdoorsman (for outdoor enthusiasts), and a powerful %-ton heavy duty
pickup called the Ram Power Wagon. Dodge also made a new Dodge Durango, which unlike the
old Dakota pickup truck-based SUV of the same name, this new Dodge Durango is a Jeep Grand
Cherokee-based crossover with 3 rows of seats (Dodge 2012). As of2011, Jeep will be the only
globally sold Chrysler brand, as Fiat plans to rebrand other Chrysler models as the new Lancia
brand-name in Europe (Green 2010). Also, Jeep has made improvements on its line of vehicles,
such as the Jeep Wrangler and Wrangler Unlimited (an extended wheelbase 4-door Wrangler
variant), the Jeep Patriot and the Jeep Grand Cherokee (Jeep 2012). Chrysler has improved the
Chrysler 300lDodge Charger full-size car and the Dodge Challenger muscle car and introduced a
more fuel-efficient midsize car named the Chrysler 200IDodge Avenger (Chrysler 2012). Also,
Chrysler stopped manufacturing the Dodge Dakota mid-size pickup truck and Dodge Nitro/Jeep
Liberty compact SUV when Dodge Trucks became Ram Trucks (Ram Trucks 2012). Also, Fiat
started selling its 500 mini-car in the United States and Canada under its alliance with Chrysler.
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References
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2012 [cited October 2 2012]. Available from http://www.cadillac.comfflash.html
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2012 [cited October 162012]. Available from http://www.chrysler.comfen!.
2012 [cited October 162012]. Available from http://www.dodge.com/en!.
2012 [cited October 162012]. Available from http://www.gmc.comfflash.html.
2012 [cited October 162012]. Available from http://www.jeep.comfen!.
2012 [cited October 162012]. Available from http://www.ramtrucks.com/eni.
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