The Big Three bailout debate
Letting a major automaker fail would be costly. But some argue that they aren't worth saving.
NEW YORK (CNNMoney.com) -- Are General Motors, Ford Motor and Chrysler LLC too big to fail? Or just too powerful?
Those are key questions being weighed this week as Treasury Department officials and executives at the troubled automakers discuss whether the Big Three might be the next corporate icons to get a federal bailout.
Sales at GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler are down 20% this year and are likely to fall further. The losses that have dogged their core North American automotive operations for years are poised to climb higher.
Despite their problems, the Detroit automakers continue to employ hundreds of thousands of well-paid workers and support far more retirees and their families with health care and other benefits.
In addition, dozens of suppliers and thousands of dealerships depend on the Big Three.
All told, about 2 million Americans work in the industry. Banks, Wall Street firms and other investment funds hold tens of billions of the companies' high-interest debt.
White House Press Secretary Dana Perino spoke of that impact at a press briefing Tuesday. She said the Bush administration isn't committing yet to an industry bailout, but added that the issue is under serious consideration.
"No doubt that the automakers are big, important companies - important to a lot of families, and important to a lot of regions in this country," she said.
She conceded the automakers are dealing with the consequences of their past decisions, but added they are also facing some problems not of their own making.
"We are capable of competing at a level where these companies can succeed; they might just need a little bit of help," she said.
Perino said discussions are focused on whether the Big Three could get help for their financing arms as part of the $700 billion bank bailout plan or through an earlier program in which the Energy Department will loan up to $25 billion to help automakers convert plants to make more fuel efficient vehicles. The establishment of a new rescue program altogether isn't being ruled out either.
Some industry critics argue the automakers would be better off going through bankruptcy to shed costs and labor contracts they can not afford, rather than struggle along with the help of federal dollars.
But other experts say there is too great a risk that consumers would refuse to buy a car from a bankrupt automaker because of concerns about warranties and resale value.
"The conventional wisdom has always seemed to be that if an auto company declares bankruptcy, it's effectively out of business," said Bob Schnorbus, chief economist for J.D. Power & Associates.
David Cole, chairman of the Michigan think tank Center for Automotive Research, estimates that the failure of either GM or Ford could cause a $100 billion hit to the economy. Suppliers, dealers and the retail base in cities and towns that depend on auto plants would feel the pain.
As many as 10 jobs depend on each job on an auto assembly line, Cole said, adding that the risks of a failure are too great to risk.
"Whether it's $100 billion, $80 billion, $200 billion, we really don't know," he said. "But whatever it is, it's a much larger number than the cost of keeping these guys in the game."
Other economists argue that as large as the automakers are, they don't pose nearly the risk to the economy as does Wall Street and the nation's banks.
Together, the Big Three automakers have about $75 billion in debt related to their automotive operations, with just less than $60 billion in unsecured debt, according to figures from credit rating agency Standard & Poor's.
That's only a fraction of the value of the mortgage backed securities, credit default swaps and other damaged financial assets that prompted the Wall Street bailout package.
"It's not a systemic risk with the automakers," said David Wyss, chief economist with Standard & Poor's. "It's a big problem if you live in Michigan. But there isn't going to be a shortage of automobiles or even auto parts if one of them goes out of business. It's fundamentally different from the financial markets. When financial markets go, they affect everybody else."
Finally, there is increased speculation that a bailout may be the only way that GM and Chrysler, which are in talks about a possible merger, may actually be able to afford such a deal.
Many experts think a merger would be beneficial since it would allow a combined company to cut additional billions of dollars in costs. GM and Chrysler would be able to shed additional factories and dealer networks and cut tens of thousands of additional hourly jobs.
But taking all those steps will cost billions of dollars for buyout packages for workers and dealers - billions that they don't have. Auto experts say that with private investors and lenders shunning the industry, some sort of federal assistance will likely be needed to pull off such a deal.
"They're not getting the money from any place else," said Kevin Tynan, auto analyst with Argus Research.
And that's the problem with a federal bailout in the eyes of Tynan and other critics.
The automakers still face many competitive problems. It's expensive for them to raise funds because their credit ratings deep into junk bond status. Demand for cars and trucks are likely to be weak for the foreseeable future. And their cost structure still puts them at a disadvantage with Japanese rivals even after winning cost savings from the United Auto Workers union in 2007.
None of this will change overnight, even if GM and Chrysler merge or receive government funds. That mean that they could run out of cash long before any benefits are seen a merger or other turnaround efforts.
"I think the issue you're looking at, with their cash burn rate, they're running out of money by 2010 or the end of next year," said Tynan.
Still, Tynan said that given the recent rash of bailouts, he wouldn't be surprised to see the federal government break down and provide some kind of assistance.
"In the government's eyes today, you can screw things up royally and we're obligated to do something about it," said Tynan. 
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