Saturday, November 15, 2008

Bailing Out GM

I wrote earlier in my How To Fix A Flat posting that I didn't think bailing out the ailing automakers was a prudent move, opining that other car manufacturers seemed to be able to make a profit building vehicles that people wanted to buy.

Jonathan Cohn has some interesting downstream implications of that approach that frankly I had not been wise enough to consider. For example:

One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, "Bankruptcy need not mean that the company disappears." But, while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's?assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.

Talk about being between a rock and a hard place. So what's the right answer? Should we throw them a rope that's tied to a requirement for draconian changes in their business model? Is this the right time to launch a Manhattan Project-style effort for alternative energy powered transportation, funded initially by our tax dollars? Do we all become part-owners of these dinosaur companies, the same way we are on the hook for a piece of AIG, Freddie, Fannie, and others?

Tell me what you think.
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