I’m not looking forward to this

I’m not looking forward to this

Current Status: Dodd is leading negotiations with Corker (who is in favor of a deal) to try and get a deal which can pass.  If they make it, the vote will happen tonight, if not they’ll probably take up the House Bill tomorrow morning.

Looks like the Senate Republicans are serious about killing the auto deal.  Here’s the bottom line, if GM goes down, it will take Ford and Chrysler with it, because the three of them share suppliers.  Losing GM’s business will put most of them into the red.  80% of American consumers will not buy a car from a company in bankruptcy, so the idea that going bankrupt is the solution to the auto companies woes is nonsense. 

What comes out of any bankruptcy, even if they have the names GM, Ford and Chrysler, will be a shadow of what went into bankruptcy—assuming anything comes out at all.  More likely would be that big chunks would be gobbled up by foreign car companies, especially by the Chinese, who want expertise, but not to make cars in the US.

We can expect, then, to lose most of the three million jobs related to the auto industry if the Big 2 1/2 go under.  To put this in perspective, in the last year the US has lost 2.7 million jobs.  This would be more than the job losses for an entire (lousy) year.  The US lost half a million jobs last month, and almost every economic forecaster expects the US to lose even more jobs in January, when retailers go fish-belly up due to an abysmal Christmas retail season.

Economic contractions of this sort are self-reinforcing.  The more people who lose their jobs, the less consumer spending there is.  The less consumer spending there is, the less money businesses make.  The less money businesses make, the more they have to lay off people.  The more people who lose their jobs, the less consumer spending there is.  The less… but why go on, you get the point.

Nor will the meltdown be limited to just job losses.  There are billions of dollars of outstanding Credit Default Swaps on Big 3 debt.  When they go under, those will be called.  Such defaults are precisely why letting Lehman Brothers go under turned out to be such a big mistake, and precisely why the Fed has refused to allow AIG to go under.  Granted, the Big 3 don’t appear to have nearly as much exposure, nonetheless, the nominal amounts are not the point. 

When the market knows that even companies this integral to the US economy will be allowed to die for crass political reasons (I can read the Republican refusal in no other way, given the consequences), once again premiums for default swaps will go up, and those companies who have issued CDS’s will have to revalue them once again to much higher valuations.  That will mean that they will be forced to put even more red ink on their books, which the Fed and Treasury will have to then bail out, or allow them to borrow against, at a cost of much for that 15 billion dollars.

Likewise there are plenty of collateralized debt obligations (CDOs) outstanding on Big 3 paper, both their own debt, and on auto, consumer and real estate loans made by them (yes, GMAC was foolish enough to be in the real estate business).  The Big 2 1/2 going under will cause problems with regards to a lot of these loans as well.

There is a strong argument to be made that auto manufacturing in the US is in a long term decline.  However, it is also true that just because I’m going to die eventually doesn’t mean that I should just get it over with today.  The auto companies would not be in any danger of going out of business if it were not for both the general economic downturn and the financial crisis, which has made it nearly impossible for GM, for example, to finance new cars.  People want to buy them, those people have good credit, GM cannot sell them.  

This is not the time to allow the Big 3 to go under.  The cascading financial and economic effect will make the oncoming economic storm far, far worse.  If 700 billion was ok to use to save Wall Street, whose business model was probably even worse than Detroit’s (add up their losses and most of Wall Street didn’t actually make any money for the last ten years), then 15 or 25 billion to save Detroit is peanuts.

Or we can make sure this turns into a Depression.  Guess the Republicans playing Scrooge this Christmas prefer that.  I expect they don’t know any of the normal people who will lose their jobs because of Republican stupidity, heartlessness and union hatred.

I’d say that you get the government you deserve, except Americans voted for a different government.  Unfortunately, Janaury may come too late for both the auto companies and the economy.

Depression, ho!