Lessons from Leyland Bailout

I have stated in this blog that while I was sympathetic to the decision by the US congress to support existing financial institutions in order to strengthen the finabcial system, I feared that over time, that it would be difficult to draw a firm line on who is allowed to fail. Indeed, the US congress, the outgoing administration and the incumbent administration are debating whether GM, Ford and Chrysler qualify to be supported now.

My inclination is not to spend public funds to support these firms for the reasons stated in this blog post. I stated then that there are arguments for supporting the Detroit automobile manufacturers for the reason that they are intertwined with other industries and are also sizable employers. Having reviewed the posts and other debates, I conclude that most of the debates have been entirely from an ideological standpoint.

Reading this piece by Nelson Schwartz in the NYT today, I have been reminded that bailouts of this nature and size for automobile firms is not a new thing. Schwartz looks back on the difficult decision by the British Government during the 1980s in attempting to rescue Leyland. As he states, the same reason as a are given today were stated in justification for the bailout. As he states, this lesson is critical because the corporation was so poorly and its management so utterly incompetent that they failed to realize that some exported models lost the equivalent of US$ 2000 each. In spite of the very best efforts and large financial resources by Thatcher’s team, the corporation was not saved. On the other hand, the French government took a different direction regarding Renault and managed to preserve its existence after infusing cash and replacing its management.

Chris Kelly’s piece in the Huffington Post here argues against the bailout entirely on grounds of principle. In his view, the inclination to bailout the firms is unconvincing because they are not the only firms in the US automobile industry today. Given that Honda has been based in the US for almost 25 years now, the quest to rescue the Detroit three is about nostalgia and nativism. Chrysler is also a private equity firm with other properties and should consider disposing of those instead of seeking public financing while it has cash rich assets.

In sum, there’s a good chance that in spite of what congress and the new administration does, the bailout may come too late and result in the waste of public money. On the other hand, the automobile industry is perhaps already different and the dominance of the Detroit three may have reached its zenith a long time ago. The rescue of any among them could still occur but they would probably never acquire industry leadership status. Given the very real possibility of throwing good money after bad, the bailout should not go ahead and the firms should seek Chapter 11protection or infusion of private cash.