(Bow to Movie Guy)
Apparently, GM may have to file Chapter 7 bankruptcy, meaning that it will be forced into liquidation, not reorganization. GM is asking for a government for loan of $25 billion to see them through “its worst sales slump in more than 25 years.” According to Bloomberg, if GM fails, Ford and Chrysler will quickly be next. Again, according to Bloomberg, total loans are in the neighborhood of $50 billion.
To understand the gravity of the problem, we should ask a number of questions.
What are the consequences of GM–or the Big Three– being forced into liquidation?
The collapse of the big three would eliminate three million jobs. For the sake of argument, let’s say the loss of just GM means the loss of one million jobs. The repercussion to the economy are incalculable. Are we willing to lose that many jobs suddenly, within the space of one or two years?
Can GM and the Big Three be helped? If they have enough time, yes. Even if they have to shrink and retool, they can do so gradually.
Who is opposed to helping them and why? As far as I can tell, opponents fall into categories:
- Those who are simply angry. These include those who have had enough of bailouts, those who are angry with the auto industry for its SUV’s….
- Republicans who argue that the financial package was not intended for the likes of GM
- Those who argue that bailouts breed more bailouts, rewarding poor management and worse.
Who is in favor of helping them and why?
Obama and many Democrats argue that the collapse of GM would wreck almost irreparable harm to the economy. The problem, they say, is time. The longer we wait–even if until January–, the more intractable and more costly the problem will become.
Obama aides are reported to have said that one condition of any loans will be the appointment of an auto czar to oversee the companies. Such a move now requires the approval of President Bush. (Bush recently offered to support the plan if Democrats would support a free trade agreement with Columbia. That kind of horse trading boggles the mind.)
I leave you with one quotation and one comment:
GM has said Chapter 11 bankruptcy — under which the automaker would continue to operate while holding its creditors at bay and overhauling its finances — is not an option because that would scare away customers.
Some industry analysts say doubts about the company’s chances of survival already are driving away would-be buyers, who worry that their warranties might not be honored or that they might not be able to get replacement parts.
Chapter 11 bankruptcy may be of little use anyway, Baird said, since GM may not be able to get the necessary financing to reorganize itself. That could lead to Chapter 7 liquidation, in which the automaker’s assets would be sold off piecemeal.
Much anger and passion surrounds these kinds of discussions. What is necessary is that we clearly frame the problem, its gravity, and then take a position.