High Stakes Poker With the Automakers

TW: I suspect this week's drama with the automakers is merely another inning in the on-going fandango with the automaker bondholders (the bondholders hold tens of billions of notes on the automakers, they must take significant haircuts if the automakers are to have viable recovery plans, the stocks are toast except for casino playing traders). Below Smith outlines the downside of the hardball Obama is playing this week. While at a certain level the bigwigs being held to the fire is enjoyable, the risks are considerable. Ultimately I strongly doubt Obama wants any of the Big Three in Chapter 11, naturally the bondholders know this hence the need for the game of chicken. The southern Republicans may relish the world auto industry losing American based manufacturers, I am not convinced the rest of the American public is ready for that step.

From Yves Smith at Naked Capitalism:
"It would be better if we were wrong, but we are of the school that putting the big automakers into bankruptcy, despite its attractions (being able to restructure debt and dealer networks; the UAW contracts are far less significant economically than the media makes them out to be) misses out on one crucial element: you don't have a business if you don't have customers. And a GM bankruptcy would be a protracted affair. Even if consumers believe the company will make it, what about their local dealer? If they worry they might have to schlepp to get their car serviced, is it worth it?

In typical backwards American deal and contract focused thinking, the officialdom has not spent enough time assessing the single most important issue: how would customers react? If GM and Chrysler were to lose as many as 20% of sales they'd otherwise get as a result of a bankruptcy filing, that it is a very big change in outcomes. And the drop could be considerably higher than that.

I worry that this punitive move will wind up being Lehman redux. Recall that bailout disgust was running high post Bear and Fannie and Freddie, and Someone Had to Suffer to show the Administration was made of real men. Now since no one even dares bitch slap a bank (the bonus stuff is mere Punch and Judy), all the hostility is channeled at Big Auto. And the danger is going into overkill literally, not just figuratively, to make up for being too easy on the financiers. And if GM or Chrysler were to be liquidated, the knock-on effects would be grim. They are important to quite a few parts suppliers. If those suppliers fail, it threatens the viability of the foreign transplants."
http://www.nakedcapitalism.com/2009/03/auto-company-plans-rejected-by-task.html