Paper 2 / Uncategorized

From Big Three to Detroit Three- Was the Government Bailout the Answer for the Auto Industry?

 From Big Three to Detroit Three                                                                                                                                                                                      Was the Government Bailout the Answer for the Auto Industry?

            The collapse of Detroit’s auto industry, specifically Chrysler LCC, General Motors Corporation and Ford Motor Company, caused a tremendous ripple effect throughout the region and it stretched all the way to D.C.  The Big Three’s efforts were too little too late.  Crippled by “declining sales, high structural costs and high levels of debt” Chrysler and GM went to the government to bail them out (Klier and Rubenstein 35).  Still these two companies ended up filing for bankruptcy in the spring of 2009.  The unprecedented government bailout that ensued inspires a lot of questions.  This paper will give a brief background on the decline of Big Three, and then address the actions the government took to help the Detroit auto industry and whether those actions were ethically justifiable through the deontological and consequential lenses.

The Big Three automakers faced spurts of instability from the 1950’s until they went bankrupt The success of “Chrysler, Ford, and GM in the U.S. automobile market peaked in 1955, when their market share reached 94.5 percent” (Klier 4).  The three companies felt the small car industry was too small for all three of them to be profitable in.  This allowed foreign companies to steps in and other competitors to import more compact cars that were designed for Europe’s smaller roads.  Detroit ultimately did not have the science down and the cars were too big and heavy to be more desirable then the sleek competition (See Figure 1). The Iran oil embargo of 1979 further shifted consumers away from the large Detroit automakers (See Figure 2).  The companies received assistance in the 80’s, Chrysler from the government, and GM and Ford from a trade safeguard (Klier 8).  Again they were on the defensive with the rise of gas prices, pro-environment regulations and another shift away from large cars in the 2000s (Klier 13).  Management’s decisions also proved to be part of the Big Three’s decline.

Structural labor costs resulted in repercussions too large for GM, Chrysler and Ford to handle.  “After years of shedding workers, the carmakers were left with a work force of long tenure as well as a large number of retirees who were able to draw on benefits negotiated during their active employment” and the companies couldn’t cover all their obligations due to their unfortunate history (Klier 13).  On top of that, the Big Three was paying workers 50-80% higher wages than other competitors in the industry (Sherk, 2012).  In fact, the “total labor cost of a Toyota worker in the United States [was] roughly $35 an hour [and] the figure is $59 an hour for the Big Three due to pension and health obligations” stemming from contracts with the United Auto Workers union. (Brunel and Hufbauer 1). This needed to change for Detroit to have a future.

In 2007 the Detroit carmakers were able to renegotiate a new labor agreement with the union attempting to prevent high future obligations especially for health care costs.  The new contract established “VEBAs (voluntary employees’ beneficiary associations), which are independently administered trusts that are established with funds from the Detroit carmakers…designed to take responsibility for retiree health care liabilities starting in 2010” and second tier wages for new hires (Klier 13).  The companies did not have the ability to hire in the down market though.  This kept labor costs high and the Big Three suffered further.  GM and Chrysler went to the Federal Government to ask for aid in 2008.  In the spring of 2009 they filed for bankruptcy and the government chose to act.

On November 18, 2008 the Big Three’s CEOs, and the UAW president went before the Senate Committee on Banking, Housing and Urban Affairs.  The                  next day they made the same presentation to the House Committee on Financial Affairs.  The case made by Chrysler and GM was not well received.  Their “too big to fail” argument was not enough.  Although at the time, “parts makers [were] struggling to stay afloat and [had] laid off thousands of workers (77,000 between November 2007 and November 2008, or 13 percent of the total auto-parts manufacturing workforce)” (Brunel and Hufbauer 4).  A domino effect was bound to occur down the automaker supply chain, and the Center for Automotive Research predicted a loss of three million jobs if just one of the Big Three were to go out of business (Ikenson 1).   After a second plea of the committees and a failed bill, GM and Chrysler were finding themselves unable to function on a daily operations scale.  GM and Chrysler were forced to close plants.  Ford did not ask for government aid and was not short on cash due to a large loan they secured in 2006 (Klier and Rubenstein 38). At this point the president took action in light of the crisis that was eminently likely to occur as he closed out his term.

Due to the failure of the suggested bill and President Obama’s nearing succession, President Bush issued an executive order.  The order was issued “on December 19, 2008, permitting the Treasury Department to utilize the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act (EESA) of 2008” (Klier and Rubenstein 38). These loans came with many regulations including the companies had to pay back the loan, place restrictions on executives and prevent excess risk taking, reduce union compensation and pay pension plans with company stock holdings, end dividend distribution until the loan was repaid and negotiate lower costs and capacities with suppliers and dealers. GM received $13.4 billion and Chrysler received a $4 billion, promising they would submit restructuring plans in the spring. This plan and the loans were to see them through to the Obama administration.

When President Obama took Office, he created a presidential task force to over see the auto industry to help make plans for Chrysler and GM. The members appointed were not directly from the auto industry, but rather from banking and legal backgrounds. “the task force considered three policy options: 1) no further government assistance beyond TARP loans; 2) additional loans with no strings attached; or 3) additional financial resources tied to restructuring” (Klier and Rubenstein 39). The task force evaluated both Chrysler and GM’s restructuring plans that were due by mid February 2009. Both companies were not up to par according to the task force.

Both companies had made slightly different errors. Chrysler’s plans were not thorough enough and, GM was overly optimistic about future growth and markets. Both companies decided to file for Chapter 11 bankruptcies.  The task force chose to use this section of the U.S. Bankruptcy Code known as Section 363(b) of Chapter 11. This meant that a “new” version of the companies’ desirable assets from the “old” version of the company. The new company absorbs the desirable assets and the other assets are written-off through bankruptcy laws. GM received over 50 billion dollars from the government in total, 30 million of which were TARP funds and Chrysler received over 10 billion from TARP. Whether the government bailout was successful or not it is its own debate but, was ethical or not?

The deontological perspective establishes a solid basis for the beginning of an ethical analysis of the bailout. “Deontologists base their decisions about what’s right on broad, abstract ethical principles or values” and what duties are held by the decision maker (Trevino and Nelson 42). The government did not have the duty to bail out the Big Three. The American taxpayers did not have the duty to bail out the Big Three. Arguably the companies should have gone straight to filing Chapter 11. Another large decision about what is “right” was the decision to use the TARP funds (See Figure 3). The TARP funds were only supposed to “be authorized to establish the Troubled Asset Relief Program (or ‘‘TARP’’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution” (Horton 243). Both President Bush Jr. and President Obama did not do what was right according to this view because the auto-industry did not meet those specifications. But in terms of other views, the TARP decision was more appropriate.

Consequentialists “want to identify all those stakeholders who are going to experience harm and benefits” so all the consequences of a decision can be explored (Trevino and Nelson 53). Although the stakeholders who would have be negatively impacted by the default and collapse of the Detroit auto-industry, like employees and citizens in the area, were large in number, the entire nation’s taxpayers were the ones who partially paid to clean up the mess Detroit was in. President Bush’s authorization of loans from the TARP of $9.4 billion to GM and $4.0 billion to Chrysler was attempt to reduce as much suffering as possible. The consequences of using the TARP fund were not as great as not bailing out the auto-industry in both Presidents’ opinions. Obama stated in his 2012 State of the Union address that he was not willing to let 1 million jobs be lost. The decision to use TARP funds was one to reduce consequences for all the stakeholders involved. But there is another side to the story.

The government bailout of the Detroit auto-industry may have reduced consequences but it also supported Barack Obama’s personal agenda for the country. As a presidential candidate he expressed he support of unions and also sent union “friendly signals: supporting a factory takeover by pink-slipped glass workers in Chicago and tapping Representative Hilda Solis as labor secretary” (Kaplan 3). Also President Obama also wanted to support his environmental platforms. By restructuring the auto industry and using the Big Three to set a standard, he was able to enforce new regulations that would support his endeavors. The ethics behind these decisions are more questions.

President Obama seemed to have violated some of these ethical ideas. His decision to let the taxpayers pay over 26 billion dollars to support the over compensated union members was not deontologically or consequentially beneficial (Sherk, 2012). The larger numbers of stakeholders, the taxpayers, were more significantly impacted than the members of the Detroit community. Supporting his own environmental plans was a personal agenda and not duty he had to do (Horton 237). Consequentially the auto industry could be more competitive in the long run, according to Obama. This may have been true but the ethics behind promoting these policies was unsound.

In conclusion, the Big Three quickly became the Detroit Three as their market share declined, their completive edge was erased and their need for government assistance was too great to put off any longer. The Detroit Three was support by deontological and consequential decisions made by both Bush Jr. and Obama. However, the true ethics behind their decisions varied. The TARP fund was misused by both, but only Obama had his personal interests in mind rather than the general stakeholders.  The Detroit auto bailout was debatably unnecessary and ethically questionable.

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Works Cited

Brunel, C., & , G. C. (2009). Money for the auto industry: consistent with WTO rules?

(No. PB09-4). Peterson Institute for International Economics.

Horton, B. J. (2009). TARP Bailout of GM: A Legal, Historical, and Literary Critique,

The. Tex. Rev. L. & Pol., 14, 217.

Ikenson, Daniel J. (2009). Hard Lessons for the Auto Bailout. Cato Policy Report. Cato

Institute, Web. <;.

“James Sherk on the Auto Bailout.” Interview. Audio blog post. Heritage Foundation

Podcasts. The Heritage Foundation, 18 June 2012. Web. <;.

Kaplan, E. (2009). Can Labor Revive the American Dream?. The Nation, 11-16.

Klier, Thomas H. “From Tail Fins to Hybrids: How Detroit Lost Its Dominance.” Chicago

Fed News Release RSS. Federal Reserve Bank of Chicago, 07 May 2009. Web. 19 Nov. 2013. <;.

Klier, T., & Rubenstein, J. (2012). Detroit back from the brink? Auto industry crisis and restructuring, 2008-11. Economic Perspectives, 36(2).

Singh, A. (2012). Bankrupt: An Ethical Analysis of the 2009 Auto Bailout. Intersect: The

            Stanford Journal Of Science, Technology And Society, 5. Retrieved from

Trevino, Linda K., and Katherine Nelson. “Prescriptive Approaches to Ethical Decision

Making in Business.” 3rd ed.John Wiley and Sons, 2004. 89. Print.

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