Sanity Injection

Injecting a dose of sanity into your day’s news and current events.

Details of the final auto bailout

Posted by sanityinjection on December 19, 2008

This one comes from the Bush Administration and does not have to be approved by Congress. It consists of $9.4 billion in emergency loans for GM and $4 billion for Chrysler. The companies will have to meet the same conditions specified in the Congressional plan that failed to pass – submit acceptable restructuring plans by March 31 or repay the loans immediately.

President Bush explained his rationale for approving the loans this way:

“If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers. Under ordinary economic circumstances, I would say this is the price that failed companies must pay. And I would not favor intervening to prevent the automakers from going out of business. But these are not ordinary circumstances.  In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action.”

The problem with this is that there is no way that GM and Chrysler are going to meet that March 31 deadline. The biggest reason is that without bankruptcy protection, they will be unable to get relief from their creditors and they will be unable to force renegotiation with the auto workers, whom you will recall have refused to discuss changes to their contract which extends through 2011. I don’t see how they can become solvent without these steps.

That is the difference between this plan and the Congressional plan, which in its final form would have required the creditors and the UAW to come to the table. The Bush Administration can’t make that happen by itself. Therefore, while I sympathize with what the President is trying to do, I think it’s misguided and will fail. April Fools will be on the taxpayer when GM and Chrysler default on their loans and go into bankruptcy. With no Congressional law requiring the government to be paid before other creditors, we’ll be lucky to get half of that money back.

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