The US Won't Let GM (GM) Go Bankrupt

General Motors (GM) will not file Chapter 11. The government cannot afford to see a large portion of the job creation benefits of the stimulus package destroyed by having the big car company’s fate decided in court.

Depending on which forecasts is right, the bankruptcies of GM and Chrysler could cause the loss of between one 1 million and 2 million jobs at the car companies, their suppliers, and other firms that rely on Detroit for a large portion of their sales. A judge could void all or part of the UAW contracts with the companies, pushing tens of thousands of auto workers onto the streets.  If a significant portion of the auto industry’s suppliers disappear, Ford’s (F) future would also be threatened because it would not have access to parts.

GM will bring its restructuring plan to Congress next week. According to The Wall Street Journal, “Negotiations with GM’s unions and bondholders haven’t yet produced commitments to concrete concessions as required by terms of the federal loans.”  Those talks are now coming down to the wire and GM and the UAW fight over retirement payments and benefits.The Administration has appointed some of it senior financial officials to a committee to help in the restructuring of the industry. It is hard to see how they can break the deadlocks which are hurting the bargaining. Thye new “committee” to be the car industry watch dog won’t been in place fast enough.

It is not clear how much money GM needs for the balance of the year to stay afloat because domestic car sales are dropping so fast. In 2008, GM had some months when it burned thought over $2 billion.  It is probably safe to guess that the No.1 American car company will need at least $25 billion to get into early 2010.

The UAW and creditors may successfully take advantage of the government and gamble that GM will have to remain viable to keep the economy out of a depression. But, putting another $25 billion in GM and perhaps as much as $10 billion into Chrysler buys a cheap insurance policy as business activity in almost every other sector continues to contract at an accelerating pace.

Douglas A. McIntyre