Is General Motors Worth Saving?

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A carefully planned, prepackaged bankruptcy would still be troublesome, she says. Throwing 479,000 GM retirees onto the rolls of the Pension Benefit Guaranty Corp., for instance, could overwhelm it. And GM's agreement to fund the United Auto Workers' voluntary employee beneficiary association (VEBA) — thus getting a $50 billion unfunded liability off its books — might then be in jeopardy, as would the union's health benefits. The VEBA has already saved GM nearly $5 billion in the past quarter, and still greater benefits lie ahead.

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A bailout won't spare GM or its workers pain. Assuming the government bridges GM to the future — or provides debtor-in-possession financing in a bankruptcy — there is still a ton of restructuring to do. The company operates 21 plants in North America and has three more that are scheduled to close. But Grant Thornton's Rodriguez says that still leaves five to go to match demand. "They still need to take structural steps: reduce suppliers, reduce the number of plants, reduce the cost structure and get rid of excessive debt." Most analysts say GM has to dump underperforming brands too.

Shutting down plants and cutting labor are costly — it's one of the ironies of the auto business. Deutsche Bank estimates that GM would have to spend $12 billion to chop labor costs and compensate dealers who lose their franchises. That would lower GM's North American operating costs from the current $31 billion to $25 billion annually, says Deutsche Bank. (See pictures of the global financial crisis.)

None of this can happen without the cooperation of the UAW, which is probably feeling better knowing that Obama is on his way to Washington. Although it hasn't shown its hand, the UAW may try to mitigate job losses in the U.S. by pushing GM and Ford to build fewer vehicles in Mexico, according to Sean McAlinden, chief economist at CAR. Obama might be sympathetic to that argument; he said during the campaign that NAFTA needed to be re-examined. The carrot for GM is that any new workers it hires in the U.S. will make $13 to $14 an hour and collect limited benefits rather than work for $29 an hour and get full benefits — the old UAW wage.

There's also a legitimate question as to who would do the restructuring. GM CEO Rick Wagoner has made the case that his crew is best placed to run the turnaround since it knows where the cost buttons are. But critics like Jim Schrager at the University of Chicago Booth School of Business say the wrong people are in charge: "I think you would only put money in GM if you had a complete change in the board and the current management. They are diligent. They worked very hard, but it just hasn't worked." In Schrager's view, GM is a strategic failure. It can manufacture high-quality cars, but it neither makes the right kind nor markets them effectively. He'd bust the company up into three independent firms: Chevy, Buick-Pontiac-GMC and Cadillac-Saab-Saturn.

If that's ultimately where Detroit ends up, is it worth the price to get there? Put another way, does GM deserve to be bailed out or left at the mercy of the market and almost certain death? "The University of Chicago training in me says the market should prevail," says Schrager. "But the Chrysler bailout was a success, and, gosh, I'd love to save it." That sentiment is not shared by everyone, and it goes to the heart of the central economic debate facing the country — between hard-nosed capitalists, who believe the market should decide, and public-policy types who view the economy as something far more organic than a balance sheet. But ultimately, whether GM is dead or alive, the taxpayers are on the hook for billions, for everything from lost tax revenues to higher unemployment costs to taking over GM's pension obligations. The decision that Washington has to make is whether we pay for GM's survival or for its funeral.

— With reporting by Joseph R. Szczesny / Detroit

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