Much of the Big Three’s problems have been self-inflicted, but failing to act now could be robbing Peter to pay Paul.

The Ford Fiesta is one of the products that could boost domestic sales among the Big Three--if they can hold on long enough. Photo courtesy Ford Motor Co.

This week, we ought to hear more from the Big Three on just how they plan to use the $25 billion in federal loans they want from Congress. I bet a lot of unhappy underlings missed out on Thanksgiving turkey getting their corporate ducks in a row.

Just two weeks ago, Democratic leaders in Congress sidetracked legislation to bail out the auto industry and demanded that the Big Three develop a plan assuring the money would make them economically viable. “Until they show us the plan, we cannot show them the money,” said Speaker Nancy Pelosi, D-CA.

GM, Ford and Chrysler must show that they have a plan for “viability and accountability.” They have to spell out how the money would be used, and they have to outline how they expect to be more competitive.

Whatever the Big Three come up with, Congress will likely put numerous conditions on any loans. Congress might seek a partial ownership of the companies, limit the salaries of top executives, or prohibit use of the funds for lobbying.

Should the federal government bail out the Big Three? There’s certainly no shortage of opinions. Opponents decry a bailout as nothing less than communism. They are loath to correct the mistakes of greedy, inept executives compounded by greedy, obstructionist unions. “Let the free market run it’s course,” they say. “Let dinosaurs go extinct.”

Others oppose a bailout on the grounds of fairness. Congressmen from Southern states-where the Big Three’s Asian and European competitors have set up shop-wonder why their constituents should help companies in Northern states like Michigan, Ohio and Illinois. Similarly, representatives of nonautomotive businesses that are also feeling the effects of the recession question why the Big Three deserve special treatment, when they do not.

“I cannot imagine [why] a worker in Alabama who does not have any health insurance at his company [should] be taxed to maintain a Cadillac health care plan for somebody in Detroit,” says Sen. Jeff Sessions, R-AL. He makes a good point.

Proponents of a bailout argue that failing to help the automakers will result in the loss of millions of jobs. According to the Center for Automotive Research, nearly 3 million jobs would be lost if the Big Three’s U.S. operations ceased entirely next year. That’s 239,341 jobs at the Big Three, 973,969 jobs at their suppliers, and more than 1.7 million spin-off jobs, including, perhaps, yours truly. Even if other automakers pick up the slack and dislocated workers find new employment, less than half of those jobs could be replaced by 2011.

Other bailout proponents would like to shape the debate as a class conflict. “If the G can help struggling banks, investment firms and insurance companies,” they argue, “why can’t it help autoworkers?”

Personally, I think the G should step in. To be sure, much of the Big Three’s problems have been self-inflicted, and there’s plenty of blame to go around on that score. (Read “10 Cars That Sank Detroit” for some examples of how the Big Three got where they are today.)

However, there’s more to the Big Three’s troubles than can be attributed simply to the “judgment of the marketplace.” In October, GM’s sales fell by 45 percent, Chrysler’s by 35 percent and Ford’s by 30 percent. But, Japanese automakers hardly fared better. Despite having a greater selection of small, fuel-efficient passenger cars in their product lineups-the vehicles supposedly in demand right now-Toyota’s sales dropped 23 percent, Honda’s plunged 25 percent, and Nissan’s fell by 33 percent.

In his testimony, Chrysler Chairman and CEO Robert Nardelli was on the mark when he blamed the consumer credit crisis for some of the Big Three’s problems. “Historically, over 90 percent of new vehicles were purchased or leased with financing assistance, and the lack of readily available financing has simply frozen sales,” he says. “Twenty percent of our revenue disappeared overnight when our finance company was unable to offer leases. These sales literally vanished.

“At Chrysler, 75 percent of our dealers rely on Chrysler Financial to finance their business, and 50 percent of all customers finance their vehicle purchases through Chrysler Financial. Normally, these loans and leases are securitized and sold in the secondary market to generate fresh liquidity and financing capacity. Today, there’s is virtually no secondary market, and therefore, no way to raise capital.”

(To read Ford President and CEO Alan Mulally’s testimony, click here. To read GM Chairman and CEO Rick Wagoner’s testimony, click here.)

UAW president Ron Gettelfinger and the Big Three CEOs were rebutted at the hearing by Peter Morici, an economist and business professor at the University of Maryland. Morici advised lawmakers to let the automakers go through bankruptcy. Bailing them out will just delay the inevitable. “The government should let the Big Three fail not because we no longer need an auto industry, but because we desperately do,” he says. “What we do not need is the bloated, inefficient auto industry that we have today. By allowing the Big Three to fail, their capacity will be turned over to new owners who will be able to acquire the means of production at fire-sale prices and hire workers at globally competitive wages. The result will be a more efficient auto industry making cars that people around the world actually want to buy at prices they can afford. Such automakers could conceivably be profitable and could become the cornerstone of a manufacturing renaissance in the United States. In contrast, Ford, Chrysler and GM are never ending money pits that threaten to swallow a good deal of our economy.”

Bankruptcy sounds good in principle, and maybe it would be good-if it were just one of the three and the economic climate was different. But all three? In this economy? In practice, that could be disastrous. The automotive market research firm CNW surveyed 6,000 people intending to buy a new car within six months. The survey found that more than 80 percent of respondents would switch brands if the vehicle they wanted came from an automaker that went bankrupt. The Big Three will have a hard enough time selling their way out of this mess without that albatross, too.

Here’s something else to think about. Over the past three years, as the auto industry’s fortunes darkened, big banks like Bank of America, Citigroup and JPMorgan Chase helped the automakers sell more than $56 billion of new debt securities. Most of those securities were bought by investors like insurance companies, pension funds and hedge funds, many of which have been staggered by losses on other investments. Some hedge funds already have been forced to dump investments into a falling market to meet demands. Read more about that here.

Bankruptcy might also foist the Big Three’s pension obligations onto the federal Pension Benefit Guaranty Corp. So one way or another, the G will have to step in. Failing to help the Big Three now could be robbing Peter to pay Paul.

Besides, if recent history is any indication, providing federal loans to the Big Three could work. In January 1980, President Jimmy Carter provided $1.5 billion in loan guarantees to Chrysler Corp., to the immense relief of some 100,000 workers. The law required the company to secure another $1.43 billion in private financing, concessions from banks and suppliers, and mandated $462.5 million in concessions from the company’s union employees, plus another $125 million from salaried workers. The company also sought exemptions from clean air standards that would allow them to meet the new requirements two years later than originally expected.

“While it is clear that this company needs a federal loan guarantee, the importance of the money is almost overshadowed by the importance of the government’s vote of confidence, [which is necessary] to keep our present creditors in line,” said Iacocca, in Congressional testimony at the time.

The turnaround in the company’s fortunes was dramatic. Just two years later, Chrysler CEO Lee Iacocca announced that the company had turned a profit for the second quarter. In 1983, Chrysler paid off its federally guaranteed loans seven years ahead of schedule, and it had a genuine best-seller on its hands-an entirely new and innovative vehicle, the minivan.

The Big Three do have some innovative products in the pipeline-the Chevy Volt and Ford Fiesta, for instance. And, they’ve already made substantial cuts. Between 2003 and 2010, GM will have reduced its U.S. hourly labor costs from $18 billion to $6 billion. Ford has closed 17 plants and cut its workforce by 51,000 employees. If the Big Three need federal loans to get them over the hump until the economy rebounds-and it will rebound-then they should get them.