The Obama Dilema

"Be careful what you wish for" - The Monkey's Paw

By Alberto Marrero Salas
Published on LatinoLA: November 24, 2008

The Obama Dilema

I believe that it is safe to say the no president since Harry Truman has come into a more difficult situation than president-elect Obama.

The one great crisis that President Elect Obama will be facing is the economy.

Just recently the Big 3 auto makers have come to the bail out window and ask for loan guarantees in excess of 25 Billion dollars. GM alone is going through 2 billion dollars a month. The government has already approved a 25 billion dollar package in order to retool.

The problem is that the business model of the big three is broken. Toyota, Nissan and Honda start out with a $2,600 dollar advantage on most vehicles.

Jim Cramer host of Mad Money stated tha,t "GM is a health care and pension plan company that happens to build cars."

The problem is that the big three spend $73 per hour per employee for salaries, health care and pensions.

The average cost of an employee at U.S. manufacturing plants of the big three Japanese auto makers is $48 per hour.

It is interesting to note that all Japanese U.S.-made cars are made in states with right to work laws. In states with right to work laws workers are free to join or not join a union.

Thus if the loan guarantees are granted the US taxpayers, who by and large make a lot less than $73 per hour, would be victims of ill conceived and ill negotiated contracts between Detroit and the United Auto Workers.

These union contracts are from a time long ago when the only worthwhile cars were built in Detroit. What was good for GM was good for America and the UAW.

With basically no competition the UAW and the Big Three signed agreement after agreement guarantying high salaries, great benefits and generous pension plans.

Japanese cars were looked down upon and it was said that they were manufactured out of Japanese beer cans.

But the Japanese caught up and some say they passed the Big 3 in terms of quality and value.

So if the situation remains the same. We will lend the Big 3 between 25 and 50 billion dollars. If no concessions are forthcoming from the UAW, the Big 3 will continue to lose money as their cost structure is no longer viable.

Therein lies the Obama Dilemma. The unions and their members contributed over $48,000,000 dollars to the recent political campaign. Over 91% went to the Democrats.

President Elect Obama is committed to passing the Employee Freedom to Get Beat Up by Union Organizers Ac . This is a new law that would eliminate secret ballots when choosing whether or not to have a union.

The UAW has announced that it will make no more concessions in future negotiations.

So the choices that our President Elect is facing are the following:

Do nothing and allow GM Ford and Chrysler to file for bankruptcy. This would allow the Big Three to invalidate all previous contracts.

This includes any and all agreements made with the UAW and allow the automakers to go back to UAW and come up with an agreement that will put the automakers in a competitive position visa vi the Japanese and the Korean manufacturers.

This will insure that the automakers (if they survive) will be at least competitive with Toyota, Nissan and Honda.

If this takes place the unions are not going to be happy with the President Elect.

Another alternative would be to grant the bailout without conditions. This will guarantee that in a year or two the Big 3 will be back with hat in hand as continued losses are guaranteed under the present union contracts.

I believe that Solomon would have said the UAW has to concede to wages and benefits that are competitive with the Japanese automakers.

Workers would take a 29% cut in wages and benefits and managers and executives would do the same.

In the case of the mindless CEOs who took private planes to the meeting with Congressional members, the haircut should include the sale of all private jets and elimination of all perks and bonuses.

If the Big 3 become profitable again in the near future and all of the loans are repaid the conditions could be removed.

So President Elect Obama has a choice. As Abraham Lincoln said, " A statesman is he who thinks of future generations. A politician is he who thinks of the next election."

It will be interesting to see which option the President Elect takes. Hopefully President Elect Obama is a statesman and not a politician.

About Alberto Marrero Salas:
Worked on Wall St. retired and now a Partner practicing immigration law in Los Angeles.
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