~l~A\Name: ~fzplu1.4JahTotal Available points -50

PSCI3325 - Grading Coversheet- Substantive Memo

(Penalties- 5 pts for each page below required length)

Points Awarded:

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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

2012 [cited October 22012]. Available from http://www.buick.comfflash.html

2012 [cited October 2 2012]. Available from http://www.cadillac.comfflash.html

2012 [cited October 22012]. Available from http://www.chevrolet.comlflash.html

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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