Creditors Obstruct GM Rescue: Detroit Becomes Too Big To Fail

The UAW and GM’s (GM) creditors are making the great auto company bailout a process that will funnel money into Detroit for years beyond the March 31 deadline which has been set for restructuring plans to be in place. Congress had assumed that GM and Chrysler would cut labor costs and debt enough to create viable companies, even with a domestic vehicle market which may only produce 12 million car sales this year.

The UAW has been dragging its feet, assuming that a Democrat-controlled federal government will not eat its own by abandoning labor. GM’s creditors are making sure that the restructuring of the auto companies will fail. They are doing so by ignoring the mandate from Congress to take less than $1-for-$1 on the debt obligations of The Big Three.

According to the FT, "General Motors has signaled it might be unable to meet a key condition of the $13.4bn lifeline extended by the US Treasury requiring a two-thirds reduction in the carmaker’s unsecured debt."

The intransigence of the UAW and GM bond-holders could put both the company and the new administration in a position to make good on their threat of throwing the corporations into bankruptcy court by violating their agreement to have cost cuts in place by the end of March. But, that won’t happen.

Yesterday, Circuit City, Pfizer, Wellpoint, Hertz, AMD, and Pfizer fired a total of 40,000 people. The media reported that GE may restructure its financial arm which would including firing up to 11,000 employees. These numbers do not include all of the layoffs that are happening at small and medium sized companies, layoffs which don’t get mentioned in the morning paper.

The economy is floundering at a rate that will make monthly job losses of 500,000 or more commonplace. This is at the same time when the new government is promising a stimulus package to increase employment by over three million jobs. The hole that has been created by the recession will make fulfilling that promise nearly impossible.

This brings the subject of joblessness back around to Detroit. Several Wall St firms and car company consultants project over one million layoffs at The Big Three and their suppliers if both GM and Chrysler go into bankruptcy. The picture becomes one of greater than 10% unemployment by the second half of this year when the growing catastrophe of unemployment in the rest of the economy is added. These unemployment levels will rapidly compound trouble in the real estate markets and increase consumer credit write-offs at banks, making the government’s rescue of the financial industry all the more difficult.

The administration and Congress will not let Detroit fail. The UAW and creditors are counting on that. They have made a safe bet and the broader job market has insured that they will be successful.

Douglas A. McIntyre