One of the major fallacies of the public perception of a ‘Detroit’ auto crisis is based on simple lack of information. The public doesn’t understand that this is global crisis with, just in the US, 3 million direct jobs at stake and millions of other indirect jobs at stake, and having global bailout requests.
Just in the Euorpean Union the automakers there, including Toyota, have asked for $56 Billion in assistance. The average American citizen doesn’t know that reality and they surely don’t know that Toyota is part of the package. Like the US millions of jobs are at stake in the EU as well.
Potential U.S. consequences of simply having GM alone filing bankruptcy?
A report by IHS Global Insight Inc., a financial forecasting group, predicted that the bankruptcy of General Motors could push the U.S. unemployment rate as high as 9.5 percent from the current 6.5 percent, which might cost taxpayers an additional $200 billion in jobless benefits and other costs.
A reorganization bankruptcy is a viable alternative when your financial partners and suppliers agree to stay on board. A normal element of a reorganization bankruptcy is for the court to approve working capital.
Working capital is exactly what Detroit is unable to acquire. What happens without working capital? Lines shut down for lack of parts because parts suppliers won’t work on a wish and a guess. They begin to lay off their workers. Automaker payroll may not be met because the company may simply not have the cash, What are the consequences? To avoid criminal liability the workers are laid off. Period.
All of this danger exists, just from a potential GM bankruptcy, without a government guarantee or loan of working capital. Does it make sense to even think about taking the risk? Shall we put at risk millions of jobs just when jobs are scarce?
$25 billion, even if it is a gamble, is a cheap bet compared to the consequences of failure. Citi Group is getting $20 billion cash and $306 billion is guarantees. If that action is absolutely necessary, and it is, then why isn’t a $25 billion dollar loan for Detroit with millions upon millions of jobs at risk even a debate?