Jeremy Warner: After the car-makers, what next for state rescue? Disneyland?

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The Independent Online

Outlook: It seems almost impertinent for a British columnist to be arguing the rights and wrongs of bailing out the US car industry. This is an American matter and it is for Americans to decide what to do. Yet whatever its motives, the Senate was right to have turned down the proposed $14bn rescue package, and the White House is wrong to be dipping its hand into the Troubled Asset Relief Programme (Tarp) to provide alternative funding.

By so doing, the administration saves the outgoing President, George Bush, from the humiliation of presiding over the collapse of the US auto industry in his dying days in the job, but it also only shifts the problem on to the next guy, President-elect Barack Obama.

The immediate infusion of $14bn offers no kind of a long-term solution to the problems of General Motors and Chrysler, for this is in effect little more than a bridging loan which will soon get eaten up by wages and other working capital requirements. By March, General Motors and Chrysler will be back with the begging bowl, by which time they will have been joined in the queue of destitutes by Ford.

By all accounts, the Senate came quite close to a deal. The necessary dilution had been agreed in terms of equity and bond holders, and the legacy healthcare liabilities had also taken the required haircut. There remained only the matter of pay.

Use of the Tarp to bail out the car- makers will nonetheless have many Senators spitting tacks. One of the reasons there has been resistance to the auto bailout is that the Tarp relief is widely thought to have been ineffective. Already its use has drifted a long way from the original purpose of buying up the impaired mortgage assets of banks. Now it is to be applied to the car-makers. What next? Bailing out Disneyland?

But let's just consider what happens if there were to be no rescue. America has a perfectly good way of dealing with corporate insolvency which stops short of the brutality imposed by the British system of administration, where closure and firesale are the order of the day. It's called Chapter 11, and it allows companies to seek protection from their creditors while an orderly workout takes place and consideration is given to whether anything can be salvaged from the wreckage.

Equity holders lose everything, and regrettably so do some suppliers, but that is as it should be for companies which have self-evidently failed. The current distress of US auto-makers is about much more than the immediate credit crunch. They pay themselves too much, they've failed to modernise, and they no longer produce the sort of cars that anyone wants to buy. Like a receding tide, an economic downturn exposes the wrecks that lie beneath.

That said, immediate closure of the US auto manufacturers would undoubtedly have had catastrophic consequences for an economy already reeling from the effects of the banking crisis and the gathering recession. Perhaps as many as 1 million would join the ranks of the unemployed, including suppliers, and maybe many more taking into account the myriad other services and businesses that the industry supports.

Yet despite what the car-makers say, Chapter 11 doesn't mean immediate closure. What it does is allow a cooling-off period during which companies can restructure free from the pressures of creditors. Lots of companies emerge from Chapter 11, much slimmed, but intact and freed from previous liabilities.

The car-makers argue that, in their case, Chapter 11 is a death warrant, as no one is going to buy a car from a company they can't be sure will be around to pay out on the warranty. What's more, unpaid suppliers would go bust, which in turn would make car manufacturing impossible. There would be a domino effect of multiple bankruptcies through the US economy.

These sound suspiciously like the arguments used to justify bailing out the banks. General Motors, it is contended, may be a busted flush, but it is also too big, too pivotal to the US economy, to be allowed to fail. Well, maybe, but there is something to be said for the short, sharp shock, and I fear the Americans are condemning themselves to the slow death by a thousand cuts suffered by the British car industry 30 years ago. Huge amounts of taxpayers' money were spent propping up this dying industry. There was very little to show for it by the end.

If you bail out Wall Street, you must also be prepared to bail out manufacturing-industry and blue-collar jobs, n'est pas? That regrettably is the logic the politicians have condemned themselves to. Governments are on a treadmill of ever- growing amounts of state aid, with no obvious way of getting off.

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