Bankruptcy not an option

So says GM CEO Rick Wagoner, who told lawmakers today that rather than trying to reorganize the company, which is what usually happens in a bankruptcy filing, there would be no choice but to liquidate. As a result, Wagoner added, GM has "concluded it should put virtually all effort into avoiding" bankruptcy and hasn't worked out a detailed contingency plan. Ford CEO Alan Mulally said much the same thing. Sounds like an ultimatum, but the question is how seriously Congress should take the threat? From the WSJ:

Mr. Wagoner said in prepared remarks that if "domestic industry were allowed to fail, the societal costs would be catastrophic." He joined the chief executives of his Detroit rivals in pleading for $25 billion in low-cost "bridge" loans to help the companies weather the economic downturn. The money would be on top of the $25 billion loan package Congress approved this fall to help the auto makers modernize plants.

There's a lot about this bailout request that, well, stinks. Liquidation? I mean, shouldn't there be efforts at restructuring or merger? And what’s so magical about the $25 billion being sought? It’s just another number. Best not to jump to conclusions - as reported by the NYT, the oft-cited statistic about the industry supporting one in 10 jobs overestimates the effect a collapse of one or more carmakers would have on the economy.

The figure appears to come from a 2003 study conducted by the Center for Automotive Research on the “economic contributions of the motor vehicle to the U.S. economy, to a multitude of U.S. industries in retail, manufacturing and service sectors, and to individual Americans.” The center is a nonprofit research organization with ties to labor and government. The study was commissioned by the Alliance of Automobile Manufacturers, an industry group.

[CUT]

The study has two drawbacks in addressing the question of how many jobs are at risk if the Detroit automakers go bankrupt. First, the study uses data from 1998 to 2001, and the industry has changed significantly since then. Employment in the motor vehicles and parts-manufacturing sector has fallen, for example. Second, the auto-related jobs covered in the report include more than those dependent on the Detroit automakers; they are related to cars sold by any manufacturer in the American market. In other words, the loss of a single United States car company would not necessarily dissolve all those jobs that the entire auto industry supports.

Not helping matters are Democrats in the House and Senate who seem intent on turning the bailout plan into a political issue instead of an economic one. (Barney Frank is sounding more and more like a hack.) This could be Obama's first serious misstep.


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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
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