The next near-term support area for SPDR S&P 500 ETF Trust (SPY)—a good area for writing c...
Bailout or Bankruptcy for GM?
12/11/2008 11:05 am EST
Michael Brush of MSN Money lists the pros and cons of letting the Big Three go bankrupt as Congress tries to wrap up a rescue package.
It's almost unthinkable that General Motors (NYSE: GM), a century-old industrial giant, could go the way of the DeLorean. But the maker of Chevys, Buicks, and Caddies has been driven to the brink by lousy management, intransigent labor unions, and an economic slump that has kept Americans off showroom floors.
The government is [close to hammering out] a bailout for GM and its Detroit brethren. But cash alone wouldn't save GM, Ford Motor (NYSE: F), or Chrysler, a trio that can only facetiously be called the Big Three anymore.
The alternative, using bankruptcy to slough off lenders and reorganize the way airlines have done, might not keep automakers alive, either.
Imagine the potential ramifications of losing just GM, the biggest of the Big Three.
"If General Motors goes down, their supply base will go down," [says] Brett Smith of the Center for Automotive Research (CAR). That might disrupt production at Ford and Chrysler enough that those two car companies would fail as well.
In this disaster scenario, the upper Midwest could lose nearly three million jobs. CAR estimates the Big Three automakers employ about 240,000 workers. The car business supports an additional 974,000 jobs among suppliers and related companies, and 1.7 million jobs are created by all the money all those people spend.
Lost jobs and lower wages mean lost tax revenue. Federal, state, and local governments would lose more than $156 billion in the three years after a failure of the Big Three in Detroit. That's money that other taxpayers—or their children—would have to make up.
The demand for government services would likely rise as well, as many of the best-paid blue-collar workers in America started job hunting in a weak economy. And both autoworkers and the automakers' retirees would likely need help with health care.
In bankruptcy, GM could offload its pension obligations to the Pension Benefit Guaranty Corp., which would pay employees only a fraction of their expected benefits. And if both management and unions bargained in good faith but hit an impasse, a court could force big changes on the union, including lower wages and a streamlining of workplace rules, says Stephen Selbst, a bankruptcy expert with the New York-based law firm Herrick, Feinstein.
But in the end, GM may wind up doing what Chrysler did in the 1980s: sell off foreign divisions while leaning on the government for financial support.
No, that bailout didn't fix Chrysler forever. Like GM today, it's teetering on the brink of failure, and it's looking for a handout again.
This time, we can only hope the government pushes for a real solution, instead of just handing out cash. If I had to bet, I'd bet on a bailout. But let's hope real change comes with it.
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