A Bad Auto Bailout Is Cheaper Than Any Bank Bailout

By Nomi Prins, AlterNet. Posted December 9, 2008.

The numbers the automakers want are big to be sure, but not compared to those of the banking industry. Ford wants $9 billion, as a standby credit line that it promises not to use unless the rest of the auto industry deteriorates. Which it will. Chrysler wants $7 billion by year's end to keep its doors open. GM needs a $4 billion shot in the arm to keep breathing until the end of January, although with its stock in free fall, January might be wishful thinking. The total that GM has requested has already increased by 50 percent, from $12 billion to $18 billion, in two weeks.

Why the increase? Because none of the automakers has enough cash flow. And, unless the economy turns around within the next three months, or Americans spend their last bits of credit on D-3 cars, merely getting government loans and cutting expenses won't be enough to stave off the next request for dough.

So the question that the committee's top ranking Republican, Sen. Richard Shelby of Alabama, asked the execs, "How are you going to pay it back?" was spot-on. So was the one about why only $34 billion was being requested rather than the $75 billion to $125 billion that the automakers said they'd ultimately need to avoid bankruptcy. It's a valid query. The Band-Aid approach has produced spectacularly bad results with the finance industry.

Moody's chief economist, Mark Zandi, who thought $34 billion was just the beginning of future bailout requests told the committee, "A restructuring outside of bankruptcy is preferable to bankruptcy. Bankruptcy would be cataclysmic for the economy."

That's a scary thought. But there's a scarier one: That dreaded, risky, murky, unregulated financial instrument -- credit default swaps. When GM CEO Rick Wagoner said, "There's a significant amount of credit default swaps that would be triggered in a bankruptcy, in addition to credit lines with major institutions," eyebrows raised.

The credit default swap argument did the trick for AIG. Fear of the ripple effect of automakers defaulting on their debt, pulsing through nontransparent chains of international finance may cause a few committee members to lose some sleep, beyond the worry of all those job losses.

Still, the only thing that will fix a cash flow problem -- is cash flow. So, maybe the conversation in Congress should have centered on trying to figure out a way to make money out of existing inventory. True, languishing vehicles are part of the problem, but ignoring them isn’t a solution.  Ignoring home foreclosures rather than restructuring loans made a bad situation much worse.

Subsidizing low-cost consumer-driven purchases with the money would move current inventory and pre-establish a set of buyers to switch into the new lines of more fuel-efficient cars when they come about. This would ensure present and future cash flow. Otherwise, UAW concessions, cutting jobs, not funding off-book health care plans, closing plants and the fire sale of brands just won’t plug the dam of losses. That said, trillions of dollars hasn’t stopped the fallout from Wall Street, either.

See more stories tagged with: economy, ford, gm, uaw, chrysler, bailout, financial crisis

Nomi Prins is a senior fellow at the public policy center Demos and author of Other People's Money and Jacked: How "Conservatives" are Picking Your Pocket (Whether You Voted for Them or Not)

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