In calling for an emergency aid plan yesterday, Pelosi rejected calls to let GM collapse and sided with the largest U.S. automaker and its allies in trying to prevent a "devastating" domino effect that would cost millions of jobs.
"Trying to reorganize the auto industry in bankruptcy would be as close to reorganizing the whole U.S. economy as you could get," said Alan Gover, a bankruptcy lawyer with White & Case LLP in New York. ``The vast supply chain involves thousands of businesses, millions of existing jobs and just as many retirees, as well as whole communities and states.''
Passage of an industry bailout plan may keep GM from running out of operating cash by year's end, which it says may happen without U.S. help. GM is the second-biggest provider of private health-care benefits and was the third-biggest advertiser in this year's first half.
``It's truly one of those companies that's too big to fail, and everybody understands that,'' said Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. ``If it does collapse, it could make the recession deeper and longer.''
Recession Fallout
Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from October's 14-year high of 6.5 percent, and produce a recession as long as that of 1980-82. Ford Motor Co. and Chrysler LLC also might be at risk.
GM climbed 24 cents, or 8.2 percent, to $3.16 at 11:20 a.m. in New York Stock Exchange composite trading after yesterday's fall to a 65-year low. Ford rose 11 cents, or 6.1 percent, to $1.92.
While Pelosi, a California Democrat, didn't cite GM by name in her statement endorsing a bailout, she said an automaker collapse would have a ``devastating impact on our economy.''
She also didn't specify the size or the rules for the package she is seeking for the industry, whose 2008 U.S. sales are headed toward a 17-year low. That slump is overwhelming cost-cutting efforts including elimination of 46,000 U.S. jobs at GM since 2004, when the company last posted an annual profit.
Bush, Obama
President George W. Bush hasn't said whether he supports more aid. The administration is awaiting details of Pelosi's plan before responding, White House spokesman Tony Fratto said. President-elect Barack Obama talked with Bush on Nov. 10 about the urgency for an assistance package.
The U.S. automakers want $25 billion in new federal loans to help cover operating expenses, Ken Cole, GM's chief lobbyist, said in a Nov. 10 letter to Congress. Separately, the United Auto Workers says it wants $25 billion to help fund the union- run retiree health-care trusts being started in 2010.
Should GM fail, Ford and Chrysler both likely would be forced into bankruptcy eventually, Mark Oline, a Fitch Inc. credit analyst, said in an interview.
U.S. employment for the trio is 240,000, or 70 percent of the nation's auto workers, according to the Automotive Trade Policy Council, their Washington-based industry group. Health insurance for 2 million people is tied to auto workers' jobs.
Job Losses
Another 5 million jobs at dealerships, suppliers and service providers are supported by the automakers, the council estimated. The companies spent $156 billion on auto parts in the U.S. in 2007.
Job losses would total 2.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 study by the Center for Automotive Research in Ann Arbor, Michigan.
Those disruptions would cost $125.1 billion in lost personal income in the first year, and $275.7 billion over three years, the study concluded.
Treasury Secretary Henry Paulson has resisted a proposal by Pelosi and Senate Majority Leader Harry Reid to tap the $700 billion bank-rescue fund to help automakers, and investors including New York-based hedge-fund manager Bill Ackman have said GM should reorganize in bankruptcy, not receive a bailout.
``Let the company default, maybe manage the process a little,'' said Martin Fridson, chief executive officer of investment firm Fridson Investment Advisors in New York. ``There's no reason for taxpayer dollars.''
Such an approach is too risky, said Gary Hindes, managing director of distressed investments at Deltec Asset Management in New York. His firm doesn't own GM bonds.
`Real World'
``With all due respect to the free-market, or moral-hazard types out there, it's all wonderful in a textbook,'' Hindes said. ``But in a real world this would be disastrous.''
GM's 8.375 percent bond due in July 2033 fell 2.75 cents to 23 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond yielded 36 percent.
Credit-default swaps on GM bonds rose 2 percentage points to 70 percent upfront and 5 percent a year, CMA Datavision prices show. That means it costs $7 million in advance and $500,000 annually to protect $10 million of GM bonds from default for five years.
Contracts on Ford bonds rose 1 percentage point to 65 percent upfront and 5 percent a year, CMA prices show.
A GM failure would ravage an auto-supply base battered by bankruptcies or companies nearing failure, said Maryann Keller, an automotive consultant in Greenwich, Connecticut.
Delphi Corp., GM's largest supplier and former parts unit, has been in court protection since 2005. Automakers and suppliers cut 140,000 jobs in the past 12 months, according to the U.S. Labor Department.
`Nobody's Healthy'
``At the current level of production nobody's healthy, nobody's making money, and many are running out of working capital just like GM,'' Keller said.
Suppliers such as American Axle Manufacturing Holdings Inc. and Lear Corp. would suffer the most in a failure at GM, because it's their largest customer. They also make parts for automakers including Ford, Chrysler and Japan's Toyota Motor Corp.
``We're worried. We're concerned about it,'' said Mike Goss, a spokesman for Toyota's North American manufacturing unit in Erlanger, Kentucky. ``The vehicles we build in North America use about 75 percent local content, and much of that is coming from the same companies that supply the Detroit Three.''
To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net or Alex Ortolani in Southfield, Michigan, at aortolani1@1bloomberg.net
By Mike Ramsey and Alex Ortolani
Passage of an industry bailout plan may keep GM from running out of operating cash by year's end, which it says may happen without U.S. help. GM is the second-biggest provider of private health-care benefits and was the third-biggest advertiser in this year's first half.
``It's truly one of those companies that's too big to fail, and everybody understands that,'' said Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. ``If it does collapse, it could make the recession deeper and longer.''
Recession Fallout
Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from October's 14-year high of 6.5 percent, and produce a recession as long as that of 1980-82. Ford Motor Co. and Chrysler LLC also might be at risk.
GM climbed 24 cents, or 8.2 percent, to $3.16 at 11:20 a.m. in New York Stock Exchange composite trading after yesterday's fall to a 65-year low. Ford rose 11 cents, or 6.1 percent, to $1.92.
While Pelosi, a California Democrat, didn't cite GM by name in her statement endorsing a bailout, she said an automaker collapse would have a ``devastating impact on our economy.''
She also didn't specify the size or the rules for the package she is seeking for the industry, whose 2008 U.S. sales are headed toward a 17-year low. That slump is overwhelming cost-cutting efforts including elimination of 46,000 U.S. jobs at GM since 2004, when the company last posted an annual profit.
Bush, Obama
President George W. Bush hasn't said whether he supports more aid. The administration is awaiting details of Pelosi's plan before responding, White House spokesman Tony Fratto said. President-elect Barack Obama talked with Bush on Nov. 10 about the urgency for an assistance package.
The U.S. automakers want $25 billion in new federal loans to help cover operating expenses, Ken Cole, GM's chief lobbyist, said in a Nov. 10 letter to Congress. Separately, the United Auto Workers says it wants $25 billion to help fund the union- run retiree health-care trusts being started in 2010.
Should GM fail, Ford and Chrysler both likely would be forced into bankruptcy eventually, Mark Oline, a Fitch Inc. credit analyst, said in an interview.
U.S. employment for the trio is 240,000, or 70 percent of the nation's auto workers, according to the Automotive Trade Policy Council, their Washington-based industry group. Health insurance for 2 million people is tied to auto workers' jobs.
Job Losses
Another 5 million jobs at dealerships, suppliers and service providers are supported by the automakers, the council estimated. The companies spent $156 billion on auto parts in the U.S. in 2007.
Job losses would total 2.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 study by the Center for Automotive Research in Ann Arbor, Michigan.
Those disruptions would cost $125.1 billion in lost personal income in the first year, and $275.7 billion over three years, the study concluded.
Treasury Secretary Henry Paulson has resisted a proposal by Pelosi and Senate Majority Leader Harry Reid to tap the $700 billion bank-rescue fund to help automakers, and investors including New York-based hedge-fund manager Bill Ackman have said GM should reorganize in bankruptcy, not receive a bailout.
``Let the company default, maybe manage the process a little,'' said Martin Fridson, chief executive officer of investment firm Fridson Investment Advisors in New York. ``There's no reason for taxpayer dollars.''
Such an approach is too risky, said Gary Hindes, managing director of distressed investments at Deltec Asset Management in New York. His firm doesn't own GM bonds.
`Real World'
``With all due respect to the free-market, or moral-hazard types out there, it's all wonderful in a textbook,'' Hindes said. ``But in a real world this would be disastrous.''
GM's 8.375 percent bond due in July 2033 fell 2.75 cents to 23 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond yielded 36 percent.
Credit-default swaps on GM bonds rose 2 percentage points to 70 percent upfront and 5 percent a year, CMA Datavision prices show. That means it costs $7 million in advance and $500,000 annually to protect $10 million of GM bonds from default for five years.
Contracts on Ford bonds rose 1 percentage point to 65 percent upfront and 5 percent a year, CMA prices show.
A GM failure would ravage an auto-supply base battered by bankruptcies or companies nearing failure, said Maryann Keller, an automotive consultant in Greenwich, Connecticut.
Delphi Corp., GM's largest supplier and former parts unit, has been in court protection since 2005. Automakers and suppliers cut 140,000 jobs in the past 12 months, according to the U.S. Labor Department.
`Nobody's Healthy'
``At the current level of production nobody's healthy, nobody's making money, and many are running out of working capital just like GM,'' Keller said.
Suppliers such as American Axle Manufacturing Holdings Inc. and Lear Corp. would suffer the most in a failure at GM, because it's their largest customer. They also make parts for automakers including Ford, Chrysler and Japan's Toyota Motor Corp.
``We're worried. We're concerned about it,'' said Mike Goss, a spokesman for Toyota's North American manufacturing unit in Erlanger, Kentucky. ``The vehicles we build in North America use about 75 percent local content, and much of that is coming from the same companies that supply the Detroit Three.''
To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net or Alex Ortolani in Southfield, Michigan, at aortolani1@1bloomberg.net
By Mike Ramsey and Alex Ortolani
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