What about bankruptcy option?

WASHINGTON — To hear the chief executive officers of Detroit automakers and union leaders tell it, bankruptcy and economic hellfire await if lawmakers don't craft a government bailout for them soon.

Probably not, according to legal and economic experts who warn that what's ailing Detroit isn't fixable with $25 billion.

Government aid of the sort that's being debated might allow U.S. automakers to survive a bit longer in their current form, but even supporters acknowledge it's unlikely to make them thrive.

For now, their fallback argument is that not helping them could be the worse of two bad options.

"If one of the companies was to go into bankruptcy, I would almost bet it would take another one with it, and possibly all three of them," Ron Gettelfinger, president of the United Auto Workers (UAW), told the Senate Banking Committee late Tuesday.

To get back on the road to viability, experts said, Detroit's Big Three are going to need more than government money. They're likely to need the government taking over their "legacy costs," the pensions and health-care benefits they made to generations of workers during better times.

"This is not a bailout of the auto industry. The U.S. auto industry is doing just fine," said Michael Hicks, an economist at Ball State University's Center for Business and Economic Research. "It is a bailout of the United Auto Workers, and regardless of what happens to the bailout, it will simply prolong a period of poor performance."

The "legacy" problem

Hicks describes himself as a middle-of-the-road, nonideological economist. He carries weight on auto issues, however, because Indiana is, along with Michigan and Ohio, home to a large swath of auto and auto-parts manufacturers for Detroit vehicle makers and so-called transplants, the foreign automakers that build cars in America.

"It's not really the wages of the guys at the factory that are the problem. It's the legacy costs — and the other union or labor costs — that are so damaging," Hicks said, noting items such as full pay for idled UAW workers and janitorial staff receiving union wages that saddle manufacturers with higher costs than the transplants.

General Motors' sales plunged 45 percent in October, and its market capitalization is around World War II levels. GM last year reached an agreement with the UAW to establish a health-care trust fund called a Voluntary Employee Beneficiary Association.

The association allowed GM to transfer off its balance sheet — effective Jan. 1, 2010 — some $51 billion in promised health benefits. The money will go into a UAW managed fund that will invest the money to help pay for the legacy costs.

During the current downturn, however, the UAW fears GM won't fund this. UAW chief lobbyist Alan Reuther said bailout money should be directed to ensuring that these promises to the now-retired are kept through the association.

"We think then it would free up financing assistance from the private sector for the rest of their operations," he said in an interview.

The absence of private-sector lending has GM, Ford and Chrysler warning of looming disaster.

Chrysler Chairman Robert Nardelli told lawmakers Tuesday his company would be unable to meet the roughly $3 billion it faces monthly in cash obligations. "Therefore, without immediate bridge-financing support, Chrysler's liquidity could fall below the level necessary to sustain operations," he said.

GM's boss, Richard Wagoner, used more forceful terms such as "catastrophic" costs and "economic devastation" should automakers go bankrupt.

Some experts think a GM or Chrysler bankruptcy wouldn't be much different from, say, steelmakers, which emerged more competitive, or United Airlines, which emerged from bankruptcy in 2006 as a leaner, more efficient company.

"Yes, GM is big and complex and has many stakeholders, but I think it is a lot better" to let it fail than provide a bailout, said Edward Altman, a professor at New York University's Stern School of Business and an expert on corporate bankruptcies.

Bankruptcy would allow GM or Chrysler to seek a kind of funding that lets new lenders gain priority status over prior lenders. So, beyond helping to reduce structural costs, bankruptcy could give automakers a new and better source of financing, said Edward Altman, a professor at New York University's Stern School of Business and an expert on corporate bankruptcies. The government also could encourage banks that have received bailout money to lend to a vehicle maker emerging from bankruptcy.

Those who argue for a bailout warn a bankruptcy filing brings collateral damage that could harm thousands of suppliers to the automotive sector.

"Traditionally, we're not necessarily in favor of intervention in business. However, these are not traditional times, and this is the time when the companies need help," said Rebecca Lindland, an automotive analyst for forecaster IHS Global Insight in Lexington, Mass. "The reason it's so important ... is that Main Street in all 50 states will be impacted."

The "multipliers"

A Nov. 4 report by the nonprofit Center for Automotive Research said the motor-vehicle and parts industry employed 732,800 workers directly as of September, and the Detroit Three employed 239,341 hourly and salaried workers. The international producers, or transplants, employed an additional 113,000 workers in the United States.

"The auto industry has one of the largest economic multipliers of any sector of the U.S. economy, and is sufficiently large that its growth or contraction can be detected in changes in the U.S. gross domestic product," the center wrote.

The center concluded a 50 percent reduction in operations by the Big Three — possible if GM and Chrysler both file for bankruptcy protection — would result in 2.5 million jobs lost at plants run by the vehicle makers or their suppliers.

More importantly to the broader economy, these jobs lost would reduce personal income by $125 billion in the first year and $275 billion over three years. That would add to the personal-wealth destruction from falling home and stock prices.