The American steel industry has prospered since emerging from bankruptcy.

DAVID STREITFELD ESSAY

A FEW YEARS AGO, an industry whose history and mythology were indelible parts of the American identity was dying. The great steel mills of Pennsylvania and the Midwest had literally built the United States, but the twin burdens of competition and self-inflicted wounds had brought them to the edge of extinction.
If they were allowed to go under, their partisans warned, the consequences would ripple through the economy at a cost too high to bear. The old saying, “As steel goes, so goes the nation,” was as much a threat as a boast.
Automakers, traditional symbols of national economic strength, are using the same argument as they seek government assistance in several countries. Germany is considering a request from Opel, the German subsidiary of General Motors, for 1 billion euros in credit guarantees. In China, slowing car sales have prompted auto executives to ask Beijing for help. (Page 4.) And in Detroit, automakers are seeking a $25 billion bailout from Congress.
“What happens in the automotive industry affects each and every one of us,” a General Motors Web site declares, warning that the consequences of a shutdown would be “devastating.”
But for the American steel industry, salvation eventually came from what it so long tried to avoid: bankruptcy. Only when the companies failed were they successfully retooled into smaller but profitable ventures. As debate continues over what, if anything, should be done for automakers, the steel industry may offer a model.
The steel and auto industries are both capital-intensive enterprises that peaked a half-century ago and have been intermittently embattled ever since. Both secured peace with their unions by vastly expanding benefits, a bargain that eventually hobbled them. Both had entrenched layers of management that believed - despite all evidence - they could wish away change.
The steel industry was beginning its long stumble when it turned to Washington for help in the late 1970s. The Carter administration responded by committing $300 million in loan guarantees to five struggling companies. Nearly a third of the funds went to help Wisconsin Steel, a company that had been around since the previous century. Thanks to a strike at a key customer, Wisconsin Steel promptly collapsed.
Despite this fiasco, Jimmy Carter’s successors tried to deliver on demands for relief. In 1984, Ronald Reagan imposed import quotas to stem the tide of cheap foreign steel. In 1999, Bill Clinton guaranteed $1 billion in loans to beleaguered producers, and the following year imposed punitive tariffs on some imports.
It was never enough. Bethlehem Steel, whose steel was used in the Hoover Dam, the Chrysler building and the George Washington Bridge in New York City, filed for bankruptcy in October 2001. It was followed by National Steel, Weirton Steel, Georgetown Steel and many others. The pain was great.
And necessary, some say. “If the steel companies had gotten all they wanted in terms of loan guarantees and import quotas, they would never have gotten better,” said Richard Fruehan, director of the Sloan Study on Competitiveness in the Steel Industry. “The bankruptcies forced their hand.”
Over the decades the companies had shed employees to stay afloat. Soon retirees greatly outnumbered the actual workers. At Bethlehem, the ratio was six retirees for every worker. All these retirees had good pensions and good health care plans .
Bankruptcy changed the rules, allowing the steel makers to unload billions of dollars in pension obligations onto the government’s Pension Benefit Guaranty Corporation and to cut more than 200,000 workers from their supposedly guaranteed medical care.
The failures also allowed for the renegotiation of labor contracts, something Wilbur L. Ross Jr., a specialist in distressed assets, realized when he began looking at the moribund industry. The only bidder for the bankrupt LTV Steel, he proceeded to buy Bethlehem and other old-line companies, putting them together as International Steel Group. He cut more employees and revamped work rules .
Steel’s turn-around was dramatic. The 17 leading companies went from a combined loss of $1.1 billion in 2003 to an after-tax profit of $6.6 billion in 2004, according to an analysis done for an industry trade group. Ross sold International Steel to the Indian entrepreneur Lakshmi Mittal for $4.5 billion in 2005, earning a tremendous return.
Thanks to all of steel’s tribulations and consolidations, the industry is relatively healthy.
If only the car companies could get to this point. In a G.M. bankruptcy, the number of product lines would be reduced, the management replaced and the investors wiped out. The enormous costs of its retirees could be off-loaded. It would be painful, just as it was with steel, but in the end someone could come in and pick up the pieces. Perhaps it would be one of the foreign carmakers, looking to expand. Perhaps it would be a distressed assets specialist, like Wilbur Ross.
Not so fast, said Mr. Ross. The investor who made a fortune off steel companies that were not bailed out is in favor of a G.M. bailout.
Mr. Ross doesn’t dispute that the auto companies are as bloated as the steel companies were, and certainly doesn’t think they should get a blank check. But he thinks the consequences of what he calls free-fall bankruptcies - ones without any government role - could be disastrous. G.M. would drag hundreds of suppliers down with it, and they would all have trouble getting back up again.
“Bankruptcy will be a total mess, and may not produce anything of value at the end of it,” Mr. Ross said. Instead, he would like to see a 90- day government loan to keep G.M. afloat on the condition that all the stakeholders - including employees, management, bond-holders - agree on a restructuring.
This, however, would give the government ultimate responsibility for the death of G.M., should that come to pass. “The government would have to have the fortitude to say, ‘We’re not going to keep pumping in money,’ and mean it,” Mr. Ross said.