Soon it will be the moment of truth.
Members of Congress, who met General Motors, Ford, and Chrysler last week and debated about their fate over the weekend, will have to stand up and take a stand on how much aid, if any, they plan to loan the Detroit Three.
Before becoming President of the United States, John Kennedy wrote a book called “Profiles In Courage.” The book consisted of little stories about members of Congress who took a stand on an issue that was contrary to the public will at the time but proved to be right. Well, we guess it is time to see some profiles over this issue.
The latest polls seem to say that the country as a whole is against the so-called bailout. This was the same for Wall Street. So members of Congress who vote for it will have to do so against the tide. Wall Street all over again.
That’s not to say that they won’t feel some pressure from constituents who favor a bailout. Of course, the Congressional delegations from states that host domestic automakers’ plants and other facilities with people who will lose their jobs if the automakers are not helped, will be pressed to vote yes for the loan. And owners of dealerships and their employees who reside in every state of the country will be on their phones, at their computers or blackberries or simply writing snail mail to inform their reps to vote in favor of assistance. Still, if the polls are right, there will be a tidal wave of constituents that will be flooding their reps with all sorts of messages whether by phone, mail, e-mail or blackberry texting to vote no. If there is no stories of courage, then the wimps in Congress will follow the whims of voters and vote no.
Then what? What will happen after the stock market tanks? Where can the automakers go? They can go back to the Treasury Department and plead with Henry Paulson, the Secretary of the Treasury, once again to include them in the Wall Street bailout. They can go to the Federal Reserve for a loan. They can feel the urgency and once again seriously try and put their own house in order with the help of concessions from the UAW. They can accept bankruptcy and restructure. Or they can continue to sell assets and somehow get enough cash to limp along for a while until the economy comes back and people buy cars again.
Our two cents? Well, the automakers have already admitted that they just don’t have the cash to make it through this year or the first quarter of next year. And this recession is expected to last for a whole lot longer than that. So don’t expect the economy to come back before the money runs out. The Treasury Department or the Federal Reserve has been saying no to the automakers attempts to get money from them already. What would change their minds now? So, what’s left is bankruptcy.
Yes, bankruptcy is a viable alternative. And if there is nothing else then maybe the automakers can save themselves under it. But it would be more painful than most people apparently know. First, the companies are going to need money during the bankruptcy. That means they will have to borrow money. Credit is tight right now. Who will lend money to a company in bankruptcy? Next, bankruptcy will not avoid the need for the automakers to lay off workers and the multiplier effect here means that we will see millions, not thousands or hundreds of thousands, but millions of people lose their jobs. I’ve already discussed the snow ball effect if this were to happen. And then it is said that people won’t buy products from a company in bankruptcy so sales won’t be going up any time soon. Finally, there is the warranty question. A company under bankruptcy is obligated to honor warranties on their products. But if the company does not get through bankruptcy and has to dissolve itself, then obviously they don’t have any obligations toward those warranties. That serves as an encouragement for people not to buy cars from GM, Ford and Chrysler if in bankruptcy because the warranties of those cars are under some doubt.
So, as we see it, there is no other alternative than members of Congress showing some courage and bucking the tide.