RIGONOMICS:

Ultimate investor Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.” As the economic tide goes out, we are seeing a lot of organizations that were swimming naked. It is not unusual for an organization to get fat and lazy during good economic times. Spending all that you bring in is human nature, and when revenues increase, many organizations just spend it.

To say the tide has gone out for the Big Three automakers — General Motors, Ford and Chrysler — would be an understatement. All three, under a threat of strike, agreed not only to wages, healthcare and retirement benefits of more than they could afford, they also agreed to operational issues not to close certain factories and keep paying for workers they no longer needed. On top of all that, they have 50 states and the federal government trying to mandate what kind of cars are built, regardless if anyone wants to buy them.

It is no wonder that with those types of agreements in place it is almost impossible, just short of bankruptcy, to restructure these companies in any meaningful way to bring them back to profitability. This morning President Bush, with the help of potentially $17.4 billion taxpayer dollars, is trying to, just short of bankruptcy, restructure these companies back to profitability. In reality, he’s just kicking the can down the road to President–elect Barack Obama.

The terms of this bailout are pure Alice in Wonderland. Look no further than the “Viability Requirement,” which would require the companies to return $13.4 billion back to the Treasury “if the firms have not attained viability by March 31, 2009.” Not looking to rain on anyone’s bailout parade, but if the companies are not “viable” in the next three months they will not have the $13.4 billion to pay back. The money will already have been spent. Bush is making $13.4 billion available this month and next, and the companies can get the rest if Congress allows the president to tap into the $350 billion that’s left in the financial industry bailout fund.

Another “target” of the agreement is to convert two-thirds of non-pension debt to GM stock. That means that if you were among the lenders who gave GM the $37 billion they borrowed, instead of getting it paid back in cash you will get most of it in worthless stock. I do not see many lenders getting in line for that deal.

There is also a “target” that the United Auto Workers union’s wages and work rules are competitive with transplant auto manufacturers by the end of next year. Being competitive is in the eyes of the beholder. By then the more labor-friendly Obama administration will be fully in charge. Do not expect them to go against the unions that got them in office. The Obama administration’s definition of “competitive” will have more variations than Bill Clinton’s definition of what “is” is.

Lastly, they must also conclude new agreements with dealers. Part of what they must do is get thousands of their existing dealerships to quietly agree to go out of business. I do not see to many dealers agreeing to commit financial suicide and close.

Bottom line is most everything that the Bush administration is asking for can only happen with a judge in a Chapter 11 reorganizational bankruptcy. In bankruptcy court you do not have to get any agreements from anyone. Judges can cancel leases, franchise agreements (dealerships), convert debt to equity and so on. Whatever it takes to get a company back to profitability a bankruptcy judge can do. In the legal world they are just a few steps below God.

I can understand people not wanting to let these companies go into bankruptcy. Thousands of people will lose their jobs, but if a company is not profitable, it will cease to exist. In many ways these jobs are already gone. Chrysler just shut down all their plants for 30 days. Some may never reopen. The reality is that the seeds to the Big Three bankruptcies were planted years ago when parties agreed to things that just did not make sense over the long run. But just like President Bush, they chose to “kick the can down the road,” to the next chief executive or pro-union President.

Now that Bush opened the door and used the Troubled Assets Relief Program, or TARP, funds for a company bailout without the approval of Congress, I expect Obama will spend many billions more out of that same fund before 2009 is over. The $13.4 billion is just a down payment. Total bailout will be closer to $50 billion. You will also start to hear a lot of talk about nationalized healthcare. Dumping healthcare costs on the taxpayer will save GM alone $33 billion.

An economist, whose name I cannot remember, once said, “What cannot continue won’t.” The Big Three cannot continue without a Chapter 11 reorganization bankruptcy. The sooner we accept that, the better. I am sure we can find something better to do with the $50 billion.

JIM RIGHEIMER is a Costa Mesa planning commissioner, a local developer and a GOP activist. He may be reached at jim@rigonomics.com.