Thursday, November 20, 2008

No good options for Detroit

I am of the opinion that while the executives at GM, Ford and Chrysler are total jackasses and short-sighted morons, it's quite necessary that some type of bailout take place.

In more normal times, the answer may be different. Chapter 11 bankruptcy would be a credible option. Unfortunately, these are not normal times. Chapter 11 is simply not a realistic option right now. GM is literally on its last legs. Who would run the company while things were being settled in court, and how would they keep it running with no cash, no credit, and absolutely no one willing to lend them the billions of dollars necessary to keep making and selling cars? Here's Jonathan Cohn , making this precise point:

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.
And for that matter, who would buy a car from a bankrupt manufacturer? What about warranty/service coverage? It's not like buying an airline ticket, which is a one-time thing; you use it to get from one place to another, and that's it. But a car is a long term investment. You don't want the maker of your new Cadillac to go out of business next week.

What would happen to the Big 3 instead is Chapter 7: total liquidation, and millions of people suddenly without jobs, health insurance, or pensions. Millions of people newly dependent on social assistance from the government, which would itself cost billions and billions of dollars. The repercussions for an already sinking economy would be devastating. Stock markets went into another tailspin today, partly because of uncertainty on this very issue. If these companies actually went under, it just might be what turns this nasty recession into a longer-term depression.

As unpalatable as it is, I think a bailout is the only option, provided that it has serious strings attached, as President-elect Obama seems to be in favor of. If American taxpayers are going to bail out these failing companies, Detroit must be given some real shock treatment, forcing them to start making cars for the 21st century. Take it or leave it.

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