Thursday, December 04, 2008

Conrail Them

We’ve been here before; the auto industry is not the first industry “too big to be allowed to fail.” In early the 1970’s our railroad industry was crumbling; tracks in disrepair, rolling stock crumbling, and operations outmoded beyond comprehension. They claimed their problems were due to competition factors beyond their control, and to some extent that was true. The Interstate Highway System had moved freight into trucks and the airlines had moved passengers into the air. Still, there were clearly management issues which exacerbated the problems and they were functionally bankrupt and on the verge of closing down operations.

Rather than throwing huge amounts of money at those who owned and mis-managed the railroads (Republicans weren’t in power yet), the government took steps to actually solve the problem.

First, the government nationalized passenger operation under Amtrak in 1971, since airline travel had impacted that business such that even profitable railroads in the West were losing money on it. Amtrak remains a government sponsored entity today.

As to the failing Eastern railroads, the government formed a national, government owned and funded corporation to take over the failed railroads. Consolidated Rail Corporation, known as Conrail, absorbed selected failed and failing railroads and began operation in 1974, operating as a private company, but owned by the US taxpayers.

Initial investment was minimal; the railroads voluntarily moved themselves into Conrail since the alternative was simply closing down and selling their equipment as scrap.

Conrail operated at a loss for quite a few years, losses which the taxpayers absorbed, but almost immediate improvement was seen in its operations. Infrastructure repairs were undertaken, new locomotives and rolling stock began to make appearance, and trains began rolling at higher speeds and with improved safety records, all within a very short time of Conrail’s beginning.

By the late 1990’s Conrail was operating at an excellent profit, and the system was broken up and sold off to private railroads, mostly Norfolk Southern and CSX. Exact figures are hard to come by, but as best I can tell, taxpayers absorbed $2.2 billion in operating losses, realized something in operations revenue for about ten years, and then received $1.9 billion when Conrail was sold off.

As a net result of the Conrail enterprise, the taxpayer is out very little (if any) money, and we have today a modern, thriving and profitable railroad industry built on the ashes of a failed and crumbling predecessor.

General Motors has a negative net worth of $60 billion and it cannot meet its financial obligations this month. This company is not going to go bankrupt, it is there already. This company is not sinking, it is resting solidly on the bottom. With all this negative worth, and stock value totaling an absurd $3 billion, it expects the taxpayer to lend it $18 billion. That is madness.

We should do a Conrail on the auto industry. Form a government owned corporation, staff it with competent management (from Japan maybe), and fold all three big automakers into it. Run it until it is making money at a level sufficient to have returned the taxpayer losses, and then sell it to the highest bidder.

It worked for the railroads. It saved railroads and saved railroad jobs.

4 comments:

  1. Anonymous12:31 PM

    A curious situation - if you don't buy a car, we'll take the money you *would* have spent on a car and give it to them directly. The solution seems simple - the government should buy everyone a new car! The industry gets cash, the workers get to build new cars and we each get a car... admittedly a gas guzzling, breakdown prone, uncomfortable car, but it beats the alternative.

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  2. Anonymous11:05 PM

    interesting (possible) solution. I don't buy the argument that bankruptcy is "not an option". It's always an option, but maybe not the preferred one. That is... preferred by the Big 3, the unions and dealers. There are ways of making a Chapter 11 work even at that level.

    Buy everyone a car? yeah.. $34B will buy 17 million cars. I don;t know if that's any kind or realistic solution, but I don;t want to see that.

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  3. Anonymous4:35 PM

    Hmmm... $700 billion, lets be really, really conservative and say the average outstanding debt on a mortgage is $100,000... That's 7 million mortgages that could be completely paid off.

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  4. Anonymous12:39 AM

    Fine idea, except that it isn't fair to Ford, since Ford is NOT bankrupt. And we do have some fine managers, we must, since Japan learned their much-vaunted management style from us. We just don't use what we got.

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