Senate's Carrot and Stick Meet UAW Stonewall

By The Greek - Economy & Markets

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After the Senate's failure to pass a package for the auto industry, Asian markets tumbled and Wall Street looked grim. A different sort of black Friday seemed surely in store for America, and especially auto related shares. However, just before the market opened the White House took to fire fighting and offered hope for Administration help. The well-timed statement served to settle near-term volatility and clear economic uncertainty. Still, the Senate's carrot and stick strategy was sure to fail as long as the UAW knew the Administration had a carrot store of its own ready to offer.

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Last evening, the Senate failed by eight votes to pass legislation that would advance an auto bailout bill. Negotiations broke down before the vote, however, and Senator Harry Reid noted that the two sides were just too far apart. The vote that ensued was a simple procedural one, meant to test real support levels.

The White House blamed Congressmen, while Congressmen blamed the UAW. The UAW in turn, argued the Senators didn't understand the situation. Meanwhile, the UAW made public appeal this morning to U.S. Treasury Secretary Henry Paulson, asking him to backstop the industry. Paulson issued a near simultaneous statement that the U.S. Treasury was prepared to preserve automakers following the failure of the Senate. Stocks stabilized by midday.

The Situation

What started out as an industry request for $25 billion, later upped to $34 billion, ended up trimmed to a $14 billion package meant to tide automakers over until the Obama administration takes office. Cutting the number was a wise decision on the politicians' part. It forces General Motors (NYSE: GM) and Chrysler to make more of the kind of hard choices Ford (NYSE: F) has made. It also raises the stakes for the UAW, that first must ensure their union workers are employed, before ensuring their contracts are honored.

While realizing the opportunity before them, Republicans in the Senate sought to offer carrot and stick to the companies and the union. Led by novice Republican Senator Corker from Tennessee, the Senate laid out an aggressive plan to ensure auto makers would emerge from this tough time more competitive and without need for further funding. Corker sought to offer incentive for the American 3 (term suggested by a US autoworker) to "cram down" two-thirds of the auto giants' debt, which would obviously make it more manageable.

Corker's rotten carrot that the UAW couldn't digest was a request for the union to help move the American 3 to a more "competitive" operating position. The term "competitive" evolved from its earlier "parity," which was completely unacceptable to Detroit. After all, they've already restructured legacy retirement costs, to be picked up by the UAW starting in 2010. Also, U.S. corporate health care expenditures do not compare with social welfare provided in rival firm home nations. But, couldn't the UAW at least cut its per hour wage average by $3.50, to bring it in line with U.S. workers employed by foreign automakers? Don't we all have to give something back for the sake of economic survival after all?

A Poor Bluff

The UAW stubbornly held, likely counting on the Administration to swoop in to the rescue. Rumors abound that the Administration would do so, so wouldn't any bargain-artist worth his blue collar play that card out before making any concession? After all, the six month crutch heading north might provide Detroit the buffer it needs to find other means towards survival. I can't blame the UAW chieftains for doing exactly what any negotiator with sense would do. Its role is to protect the interests of its members, and so anything less would be a failure of its responsibility. So, as long as there was hope the Administration would provide safety net, the UAW had room to maneuver.

The only question that remains now falls to the Administration. Do Bush and Paulson carry a stick in their back pocket, and if not, how many carrots can one TARP farm produce?


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