The 7 Worst Ways to Rescue Detroit

Commence Kabuki.

With the Detroit automakers in the late stages of supplication, a predictable ritual will now take place. The CEOs of GM, Ford, and Chrysler will do as instructed: travel like common men from Detroit to Washington and present the government with new-and-improved restructuring plans showing that this time, they really are serious about slaughtering sacred cows and right-sizing their businesses. Members of Congress will deliver a few lashings about overpaid CEOs and overentitled union workers. Then, in the end, the feds will pony up at least $25 billion—and maybe $50 billion or more, eventually—to help stave off automotive Armageddon.

There are many routes to a Detroit bailout, however, and some go straight through Follyville. Here's how the feds could mishandle the automaker rescue package:

Treat the Detroit 3 all the same. They're not, and an up-or-down vote on GM, Ford, and Chrysler as one monolith would be a clumsy way to spend taxpayer dollars. Chrysler, the smallest of the Detroit 3, appears to be in the worst financial shape, with a thin margin of cash to see it through the rest of the year. It also has the weakest lineup of cars and few announced future products—a sign that management is hunkering down and preparing for some kind of merger or maybe even liquidation.

In other words, Chrysler isn't cutting it as a stand-alone automaker. "Chrysler is the only one of the three that could go out of business without having a huge domino effect," says analyst David Silver of the research firm Wall Street Strategies. It's also owned by a private-equity firm, Cerberus Capital Management, that's run by billionaire Stephen Feinberg.

GM and Ford are both public companies committed to long-range plans, but their needs are different. GM is desperate for cash and says it needs help now. Ford is further along in its turnaround plan, and CEO Alan Mulally says it doesn't need any federal loans at the moment. An across-the-board bailout of all three would commit taxpayer money to at least one company, Ford, which might do OK without it. And it would represent another unprecedented move—the bailout of a private-equity firm—whose principals earn way more than an overpaid CEO.

Better: Establish standardized ground rules that treat each automaker according to its business prospects, not its political connections or some dubious place in American lore. If it turns out that GM is a good risk but Chrysler isn't, then let Chrysler go. The government may have to pick winners and losers.

[See one way for Chrysler to exit the scene.]

Force them to build "green vehicles." There's already a strong incentive for automakers to build hybrids and other high-mileage cars: People buy them. If the government has to "incentivize" a company to build the kinds of products that customers want, maybe it should incentivize the top executives to get lost.

Besides, Detroit isn't as backward as the lampoonery suggests. There are already a few domestic hybrids, with more on the way. The Detroit 3 sell economy cars, too. They're just not as good as a Honda Civic or Toyota Corolla. But all three say better models are on the way—because their survival depends on it. If that's the case, let them prove it.

Better: In exchange for government largess, simply set tough payback terms and deadlines that require the companies to become profitable, fast. But don't dictate the products they should sell.

[See if the Chevy Volt can survive GM.]

Pre-empt the possibility of bankruptcy. One of the best incentives for an underperforming CEO is the threat that a bankruptcy judge and team of turnaround wizards will seize control of his company and give him the boot. If the government indemnifies failing automakers against bankruptcy, it will rubber-stamp business as usual and let the automakers slow-roll their way into even deeper losses.

Better: Consider a plan to aid the automakers but only as part of a bankruptcy filing.

[See how bankruptcy would benefit GM.]

Appoint a federal car czar. Pleeeeeaaaaase, Mr. Obama: Don't let the government get into the car business! The automakers already build enough lousy cars on their own.

Better: Acknowledge that there's vast overcapacity in the car industry and that the Detroit automakers are too big. Commit to helping solve that problem—or letting it solve itself.

[See 10 cars that sank Detroit.]

Place the whole restructuring burden on Detroit. They've got plenty of their own problems, but it's not their fault that state and local laws protect inefficient dealers and weaken the automakers' ability to distribute their products as efficiently as possible. A restructuring package that orders reforms by the automakers but takes a pass on protectionist state franchise laws would be a half measure.

Better: Find a way to release the automakers from dealer obligations that don't make business sense. This could make it easier to kill overlapping divisions like Mercury, Pontiac, and Saturn, one thing many analysts feel is necessary for the Detroit 3 to slim down.

[Discover 6 myths about GM, Ford, and Chrysler.]

Subsidize cars. There's some talk in Congress of offering new tax breaks for certain kinds of cars (in addition to existing tax incentives for hybrids) or even a temporary tax break for buying any car. The idea is that such incentives would boost sales at the domestics and help them climb out of their hole. But that wouldn't do anything to lower fixed costs that are too high or correct other inefficiencies that would still exist after the tax subsidies expired.

Better: Gradually raise the federal gasoline tax, as a way to encourage buyers to purchase the most efficient car that meets their needs (and help the government raise badly needed revenue, today).

[See 10 cars that could salvage Detroit.]

Penalize their competitors. As the Detroit automakers have been complaining about everything that's wrong, a new Detroit has been taking root, mostly in an arc of the South that ranges from South Carolina to Texas. Virtually all of those plants belong to foreign automakers like Toyota, BMW, and Nissan—but they employ thousands of Americans as executives, managers, and blue-collar workers. They're also some of the most efficient auto factories in the nation, often able to switch from one model to another based on what products are most popular. And they buy lots of made-in-America parts. Any incentives or other policies that stifle demand for cars from such "transplant" factories would undermine one of the healthiest parts of the U.S. manufacturing base.

Better: Consider more incentives to lure foreign automakers to the United States, and make the New Detroit even stronger. Sooner or later, it might be the only Detroit we have left.