Here is the brilliant Keith Hennessey looking at the sprawling problems of the US motor industry and the Obama Administration’s moves to try to keep General Motors alive, inlcuding praise for parts of the package.

A senior American economist told me the other day that the problems of the US auto giants date back to WW2 price and wage controls. Because the companies were not allowed to give pay rises, they created generous ‘other benefits’ packages. These over the years have grown massively and unaffordably, to the point of making these corporations more like social security factories for their workers with some incidental car manufacturing added on.

Which is why at the heart of these new plans lies a Question: what will happen to those unionised workers benefits packages? Any serious reorganisation has to give them a serious haircut if the reformed corporation is to succeed.

Keith Hennessey is not convinced that Democrat Obama has grasped this one:

I have seen no evidence that compensation of current workers has been changed.  UAW Chief Ron Gettelfinger claimed in a message to his members, “For our active members these tentative changes mean no loss in your base hourly pay, no reduction in your health care, and no reduction in pensions.”  Maybe there’s a distinction between this statement and “total compensation.”  If so, it would be great if someone could help me understand this. 

His conclusion:

  1. I would bet in favor of GM emerging from bankruptcy, and against them surviving as an intact firm for 5 years without additional taxpayer funding.
  2. The pre-packaging deal was unfair to unsecured creditors, to the benefit of UAW retirees.  The Administration loses credibility with me by trying to argue this was a fair deal.  They would have been more credible if they had argued it was the only deal they could get.  I worry that the President’s actions create political risk and will permanently raise the cost of capital for certain U.S. firms.
  3. If a loan rather than an equity purchase had been possible, I would have preferred that – I find Judge Posner’s arguments persuasive.  Given the equity investment, I urge the Administration to divest as quickly as possible, even if it means a loss to the taxpayer.
  4. Given the undesirable situation of the U.S. government owning GM and other large firms, the Administration’s new “Principles for Managing Ownership Stake” are solid.  They need to lock them in, and corral or beat back all those people who work in the Executive Branch and Congress who have other goals in mind for GM and will be tempted to exert some leverage.

Sounds good to me. A pleasure to see such elegant work which balances practice with principle.