News released late Sunday night that Rick Wagoner, chief executive officer (CEO) of General Motors (GM), was going to resign at the behest of no one less than the leader of the free world, President Barack Obama. Jennifer Granholm, governor of Michigan, accurately characterized Wagoner as a sacrificial lamb. Were it not for her political affiliations, she may have gone a step further and pointed out it is empty symbolism and cunning misdirection.

You need not look any further than the fact Wagoner is being replaced by the Fritz Henderson, who previously held the position of chief financial officer (CFO). Wagoner and Henderson have virtually identical resumes; both have been with GM since they each got an MBA from Harvard, started in the company's treasury department, rose through the ranks in Brazil, returned to the United States and became CFO being appointed to CEO. They've removed one Wagoner and replaced him with a clone. Furthermore, Wagoner may be the longest tenured CEO of the Big Three-General Motors, Ford and Chrysler-but making the case that he is more culpable for the woes of the auto industry than his peers is futile.

Regardless, the auto industry isn't facing a crisis of leadership; it's facing a crisis of contracts. I'll spare you the math lesson on how detrimental the United Auto Workers (UAW) contracts have been to the financial performance of the industry. Apologists for auto industry management have beaten us over the head with these statistics. While it is certain the UAW has become the scapegoat of the auto industry, we can all agree the contracts are onerous, and the Big Three can't get rid of them unless they declare bankruptcy. 

Too little attention is given to the contracts the auto industry, especially GM, has with its dealerships. First of all, there are just too many of them. It's simple supply and demand. The auto industry has contracted with too many dealerships, creating a hyper competitive marketplace that drives down prices within each brand, and the Big Three can't get rid of them unless they declare bankruptcy.

To make matters worse, the dealership network sells many brands that offer subtle variations on the same vehicle, cannibalizing sales among brands. These brands are vestiges of the auto industry 50 years ago, the auto industry in the U.S. merged without ever consolidating. Eliminating the brand redundancy to two or three brands per company-consider Toyota-would encourage production efficiency and prevent inter-brand competition. However, dealership contracts require brands to be sustained, and the Big Three cannot get rid of them unless they declare bankruptcy. 

By now you probably get the idea that the only way the American auto industry is going to turn around is by declaring bankruptcy. Ideally the auto companies could simultaneously prune back the UAW, the dealership network and brand lineup, but their contracts prohibit them from doing any of them. It is only in bankruptcy that the Big Three will legally be able to restructure their contracts. 

The sooner Barack Obama and the U.S. government recognize and respect the role of the free markets, the sooner we recover. It may not be easy, but it's inevitable.