How to Save Motor City

By Marissa Colon-Margolies, The Nation. Posted December 1, 2008.

Increased scrutiny must also be applied to the credit side of the equation. GMAC, GM's auto loan company, is the parent company of the nation's fifth-largest mortgage lender, Residential Capital, which is teetering on the brink of collapse under the weight of toxic assets and plummeting revenue because of the crippled housing market. ResCap lost $1.9 billion last quarter alone, putting significant strain on GM, which owns 49 percent of GMAC. The flailing GMAC -- majority owned by Cerberus Capital Management, John Snow and Dan Quayle's private equity firm -- has recently applied for bank holding company status. Becoming a bank holding company would provide much needed oversight and transparency, but GMAC must also be compelled to reform.

The loan company markets a high-risk investment to GM employees called Demand Notes. These offer check-writing privileges and a 5.25 percent return on investments, which are not FDIC-insured. GM workers have $3.9 billion sunk into these short-term debt obligations; should GMAC go down, they stand to lose retirement funds, college savings, the works. This dangerous arrangement deserves careful attention. As Robert Scott, an economist at the Economic Policy Institute, put it, "We cannot have another Enron." (When that energy company went bankrupt in 2001, more than 4,000 employees lost not only their jobs but also their life savings.)

In exchange for a government bailout of the auto industry as part of a broader economic revitalization program, automakers must also be required to continue research and development of cars that can compete in a gas-starved age. According to Jay Baron, director of the Manufacturing, Engineering and Technology Group at the Center for Automotive Research, engineers in Detroit are already working overtime to achieve this goal. Automakers are designing lighter-weight vehicles by experimenting with "exotic materials normally associated with aerospace," like extremely thin steel, aluminum and reinforced composites. And then there is the much-vaunted Chevy Volt, a plug-in hybrid GM engineers hope will be able to go forty miles on one charge and recharge on the road. The Volt is the hard-up company's double-down bet, a sexy, eco-friendly machine that company execs hope will be to GM what the iPod was to Apple. But it will take a quantum leap in innovation to pull this off. The Volt's lithium-ion battery is priced at $10,000-$30,000, far too costly for the car to be marketed to a broad consumer base.

A bailout could provide the funds necessary to complete research and development of the lithium-ion battery and other potentially profitable green technologies. It will take time for the battery to become viable, as issues with cooling, size and cost continue to challenge engineers. Government support could help expedite this process while paving the way for the creation of jobs in related industries. Brett Smith, also of the Center for Automotive Research, thinks the lithium-ion battery could present an opportunity not only to reduce carbon emissions but also to create the kind of green-collar jobs that could reinvigorate the slumping manufacturing sector. Currently, Smith explained, most battery cells are manufactured in Asia, but mass production of the Volt could entail opening factories on US soil. The battery could become a niche product for the United States, but only if the government ensures that American automakers, in attempting to cut costs, do not buy batteries produced abroad. "In trying to reduce our reliance on foreign oil," Smith warned, "we should not replace it with a reliance on imported batteries."

Unlike the $290 billion already thrown at overleveraged financial institutions, a bailout along these lines would yield productive results for the real economy and would initiate a broader federal commitment to reindustrializing the country through a much-needed economic recovery program. If, as a part of this recovery plan, GM is given another shot at making a product people want to buy, at again generating well-paid jobs for American workers while moving domestic industry away from its reliance on fossil fuels, then that would be a government bailout worth considering.

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Marissa Colón-Margolies, a freelance writer living in Brooklyn, is a fall 2008 Nation intern.

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