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Yes, there is a role for the federal government in aiding Detroit, but not the one the industry has requested in its lobbying and public relations blitz. This option is not being considered because interested parties such as the powerful United Auto Workers union and large shareholders such as Cerberus would have to take a hit, as would the personal wealth of management and state coffers in Michigan and elsewhere.
The ill-considered $25bn lifeline being debated might merely buy a few extra months for the most distressed manufacturers such as General Motors and Chrysler at their recent rate of cash burn. But a lasting turnround could be achieved in the bankruptcy courts. The only hitch is the dysfunctional state of financial markets. Normally, a bankrupt company can attract low-cost “debtor-in-possession” financing senior to existing claims. Such loans are in short-supply today, as some retailers are discovering. But the federal government could guarantee this funding to the Big Three and their key suppliers at little taxpayer risk.
Under Chapter 11, unionised auto workers who receive the equivalent of more than $70 an hour in wages and benefits could see contracts torn up. So would dealerships currently protected by state franchise laws. Shareholders would be wiped out. Lenders would suffer haircuts in exchange for equity in the reorganised companies. Managers would see their wealth and careers evaporate.
Arguments such as the UAW’s that consumers would never buy a car from a bankrupt manufacturer or that of industry-funded studies showing that 3m or even 14m jobs would be lost are nonsensical. Similarly, anti-bail-out politicians crying for the scalps of senior executives ignore their impressive cost-cutting efforts even before this unforeseen financial crisis. The US auto industry is viable with much lower costs, capacity and debts. But taxpayer cash should only be spent after existing stakeholders swallow some bitter medicine.
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