Republicans Begin To Turn Against Detroit Bailout, Increases Chances of Bankruptcies

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With the Fed and Treasury apparently willing to sit on the sidelines while GM (GM) and Chrysler run low on money and head toward possible bankruptcies, it has been left to Congress to put together a bailout package, probably $25 billion in loans.

For the legislative route to be successful, Senate Republicans would have to back that financial rescue in fairly large numbers to get the bill to the president’s desk. That is now less likely to happen than it appeared at the end of last week.

According to Reuters, "A top Republican senator says he will fight a Democratic plan to bail out U.S. automakers. The opposition by Sen. Richard Shelby and other GOP lawmakers raises doubts about whether the plan will pass in this week’s postelection session."

That leave the issue to the new president and the new Congress.

Many analysts believe that GM will be too low on money by the time that Barack Obama is sworn to have adequate cash to be able to pay key suppliers. That will leave auto parts companies with the choice of extending credit at a substantial risk or letting GM shut down operations, further hurting its chances of surviving. One argument is that the supply companies will bet that GM will be bailed out and that it will continue to pay its bills.

If GM fails and it not immediately sold to a healthy firm like Toyota (TM) or VW, there is a very reasonable chance that it will take a number of auto suppliers who rely on it for most of their revenue under as well. A lack of supply of essential parts could cripple manufacturing at the production facilities of Ford (F) and other firms that assemble vehicles in the US.

In other words, it would be a game of dominoes from hell.

Douglas A. McIntyre