Car Company Chapter 11 Still Not An Option For Government

The US car companies still have an ace in the hole. The Administration cannot take Chrysler and GM (GM) into bankruptcy without the probability that it will severely undermine stimulus plans meant to save or create 3.5 million jobs over the next year-and-a-half to two years.

There is a range of numbers about how many people would become unemployed if the two car companies go into a structured Chapter 11, of worse, a  Chapter 7 liquidation.

At GM and Chrysler alone, nearly 200,000 jobs are at risk. If the bankruptcies ripple out to suppliers in the event that a judge voids some of their receivables, another several thousand jobs could be at stake. Then there are several amorphous estimates about people who work in fields related to the car companies. That could be industries as diverse as restaurants in Detroit and airline that fly there. It is probably safe to say that close to a million jobs are in jeopardy if the two car companies lose their independence.

The Administration is already suggesting that its stimulus package, aid to banks, and budget will stretch the Treasury to raise hundreds of billions of dollars to cover a deficit that will be well over one trillion dollars in the next federal fiscal year. Bringing in that money is already projected to raise interest rates on Treasuries. That will ripple out to business and consumer loans including mortgages. The idea the rates will fall further is bogus.

A million jobs lost in Detroit would also cut deeply into the receipts that the IRS is forecasting over the next year. That puts the revenue projections in the budget at real risk.

The government wants the car companies to believe that it has put a Sword of Damocles over the head of the industry. If GM and Chrysler look up, they will see it is not really there at all.

Douglas A. McIntyre