Thursday, November 20, 2008

Bankruptcy is looking ever more likely for one of the Big 3

The possibility of any kind of large-scale bailout of the U.S. automobile industry has been pushed back to December, according to this article from The Wall Street Journal, and may not happen before the Obama Administration comes into power on January 20th. Earlier today, it looked as though members of the Senate had crafted a compromise plan to use the $25 billion already allocated for the development of fuel-efficient vehicles for the bailout, but both Democrats and Republicans in the House of Representatives rejected the idea. It now appears that the U.S. automakers will have to come to the Congress with business plans that explain how they'll work themselves out of the situation they're now in before they can get the money.

Of the Big 3, GM appears to be the likeliest to fail, and Ford is the strongest, having borrowed a huge amount of money before the credit markets closed down. Chrysler is the hardest one to read, since it's a private company owned by Cerberus Capital Management. Of course, it's not clear that any of them will actually declare bankruptcy; GM's management still shuns the use of the word.

From everything I can see, legislators and their constituents who are opposed to a bailout believe some or all of the following:
  • The automakers don't deserve the money because their senior managers are incompetent, or because the union jobs that would be preserved pay so much more than what many other workers make
  • The automakers would waste the money
  • The automakers will soon be back with demands for more money
  • The banking bailout has turned out to be much less effective than originally advertised, so why should be believe that an auto industry bailout would be any different?
  • The ripple effects of one or more bankruptcies won't be as bad as the companies and their supporters are saying
  • The companies can survive bankruptcy, and will emerge stronger and more competitive
What these arguments miss, of course, is that once a company files for bankruptcy, its pension liabilities will be transferred to the Federal Government. The workers that were getting health care from their employers will have to get health care somewhere, and will overload already overburdened emergency rooms and hospitals. The ripple effect is quite real--as I wrote about in an earlier post, I saw it when the U.S. steel industry collapsed in the 1980s. Finally, given the frozen credit market, the risk is extremely high that any Chapter 11 bankruptcy would quickly degenerate into a Chapter 7 liquidation. In this market, who would, or could, acquire the assets of GM, Chrysler or Ford? In a growing market, you could argue that a Japanese, Korean, Chinese, Indian or European company might swoop in and buy them "on the cheap" for a quick foothold in the U.S. market, but we're in a worldwide recession, and everyone is hurting.

So everyone now waits as the Congress and automakers play a dangerous game of "Chicken."
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