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December 12th, 2008
09:49 AM ET

Bailout Killed: worse than it looks

Ali Velshi | Bio
CNN Chief Business Correspondent

The failure in the Senate to reach a compromise on the auto bailout could be worse than it looks. The parts network of the three automakers is so interconnected. The danger is if even ONE of them goes bankrupt, thousands of suppliers and partsmakers won't get paid, possibly sending those companies into bankruptcy.

And that means the other TWO automakers may not get the parts they need to keep their factories running. This is of particular concern to Ford, which is relatively healthy compared to GM and Chrysler. Ford is worried that a collapse of one of the other two could put Ford in danger because of how interconnected all three are.

Both companies have indicated that they are fast running out of cash. Chrysler says it can operate probably until Spring, but the much larger GM says it will likely run out of cash by the end of the year.

People who have opposed a bailout loan package say why not let the automakers go into bankruptcy and re-organize their businesses and renegotiate contracts. But both GM and Chrysler have argued that in this economic climate where even healthy companies are having trouble getting financing, its not likely that they will be able to attract lenders.

The carmarkers also argue that consumers who are already skittish are not likely to buy a new car from a company that may not be in business a year from now. As I've said before, this isn’t like buying an airline ticket from an airline in bankruptcy – where your only risk is that your particular flight may not take off. GM has made the point explicitly that IF they were to go into chapter 11, which is bankruptcy protection, they may well end up in Chapter 7 liquidation – meaning the companies would just disappear.


Filed under: Ali Velshi • Bailout Turmoil • Economy
soundoff (16 Responses)
  1. Susan

    I do not mean to pick on Chrysler, but I will. Chrysler is owned ( 80% )
    by Cerberus, one of the largeset private equity funds in the US. Cerberus executives have stated that due to its obligations to its investors and investments injecting capital into Chrysler is prohibited. If the investors do not have the confidence in the viability of Chrysler, why should the US taxpayers.

    Susan
    Phoenixville,PA

    December 12, 2008 at 2:59 pm |
  2. Vi

    the big three car company has allowed themselves to grow so big that it has to collapse sometime so that if allowed to collapse what will be left is tha stable part , car is considered as a luxury you pay for tax , interest and other expenses associated with buying car, so if i am an average Joe i will have to postpone buying a car indefinitely until it becomes a necessity for me right now or in the near future if the big three would be loaned to survive i am sure they will come back for more because majority of Americans wouldnot be buying cars in this economic crisis we the people the consumers should be in economic stability first then luxury next.

    December 12, 2008 at 2:09 pm |
  3. Michelle

    Well for once lets hope the Bush Administration does the
    right thing. Even the Japanese auto makers do not want
    the big 3 to fail. I don't think people realize what this would
    do to American manufacturing and the economy. You will
    not be the world's largest economy without a manufacturing
    base. Why do you thing China is moving up the economic
    ladder products are being made in that country.

    December 12, 2008 at 1:16 pm |
  4. Bobby C

    I applaud the senate for not pushing through the bailout measure. Companies fail everyday. Why should the UAW not be willing to give concessions to keep their people working? Would that not be better than having them unemployed?

    It is my prayer that President Bush, who I strongly support, will not cave in and give the money from the wall street bailout. If he does he will prove to be a much weaker president than I have imagined him to be.

    December 12, 2008 at 1:14 pm |
  5. Don

    I'd like to see the current auto industry simply fail and go away. They're manufacturing overpriced outdated vehicles that most cunsumers believe will create more problems than benefits for consumers in the long run.

    Compounding this problem is industry management is showing no sign that they are willing to concede to this reality and change their principles of operation towards making vehicles more in line with where the country needs to be going for the 21st century.

    This behavior simply needs to be eradicated from the auto and any other U.S. industry that refuses to innovate and keep up with the changing times in the world and if this means allowing these industries to go into bankruptcy, then, so be it. We'll be better off in the long run for it.

    We need to view, and act on, the 21st century as the century of progessive innovation and until we do this as a nation our failure to succeed will only deepen.

    December 12, 2008 at 12:47 pm |
  6. Mike

    Let's get something straight. This debate about whether to loan money to the Ameican auto industry or not is a distraction from the reality that our economy is in the tank. 25 billion dollars is the same price tag for 10 weeks in Iraq.Our pockets were picked clean by 4 dollar per gallon gas. Higher fuel prices and the ethanol mandate drove food prices through the roof , and now the same people who brought us this calamity say the answer is to cut wages for the workers on the assembly line. Eight years of this kind of thinking is nearly over. God help Barack Obama, God bless America

    December 12, 2008 at 12:40 pm |
  7. JJ

    I think UAW needs to be responsible for the failure. UAW's main bargaining power is the ability to destroy the three auto makers with strikes. Now, the auto makers are already at the blink of bankruptcy, what other power do they have now to speak up? Why they are still talking like they control the government; do they have the power to destroy the economy of the United States? It sounds that way from their recent statement. The reason why our auto makers are in such a disastrous state was mainly caused by non-competitiveness of union workers who are getting about $71 per hour per worker in average, but other non-union automakers are spending $49 per hour per worker in average. Until UAW concedes or disappears, I don't think we will ever have a strong, efficient, and effective auto industry in the US. Might as well let them die.

    December 12, 2008 at 12:31 pm |
  8. Joanne, Solvay, NY

    There are two reasons that this bailout did not pass:

    1. The UAW is demanding exponentially higher wagers than foreign automakers' workers receive in the US> It is NOT a $4 or $5 difference....benefits included....it's approximately half of the the big three payour in payroll.

    2. The automakers' inability to present a new "model" that would meet the demand and the needs , plus leave a diminished carbon footprint on the planet...and a process by which to produce the vehicle(s). The inability to develop mass transit systems affordable for cities other than the top 10. And a lack of fiscal responsibility in regard to the executive pay scale.

    December 12, 2008 at 12:25 pm |
  9. Michael Odegard

    No bridge to nowhere loan for the auto-failures? Could this be the beginning of return of "the buck stops here," sense of executive responsibility? Not if Bush has anything to say about it. Although I hope the King of American excuse makers, pretenders and fear mongers is unable to throw more good money after bad, I suspect big auto will get their corporate welfare. The sad fact is, both corporate America and the US government is drunk off the success of the greatest generation, and they won't sober up until they hit rock bottom.

    December 12, 2008 at 11:58 am |
  10. JD Cardona

    The car industry in the US needs to change. The Auto Revolution is when a car industry comes with an engine that is clean and gives good gas milage or is electric no fuel at all. Right now there are too many cars in the US and problem will not be fix by simply creating more cars. The solution is creating efficient engines or electric engines that can be install in the cars that already exists. I saw a news program that showed a not new chevy malibu with the new elctric engine from chevy. The engine will go to the volt which is estimated to cost over 40,000. Why not simply sell the engine for old malibu models and create new ones for old cobalt, old silverados and so on. I'm preaty sure that the engine alone will not cost 40,000. This has to be an Auto revolution for the many not foe the Few. Creating new cars will not fix that problem. It's all about creating new engine systems that can be exchange. The industry has to switch from building cars to building engines, they should keep building cars but not with the same pace that they are use too. It will be nice that for those that have a 4 year old car and can not afford switching the car to a more efficient beacuse it cost over 40,000 they can atleast switch the engine and get a better car. If the poor can afford that change that means that everybody will be able to afford it that means, good sales and more jobs.

    December 12, 2008 at 11:43 am |
  11. vicn

    I strongly believe that President Bush should assist the auto industry. I believe the consequences would have a dire impact on an already fragile economy.
    As an additional note. I cannot believe the unpatriotic oposition to the Senate bill by a group of southern democrats. In this time of great uncertainty they have the audacity to play politics with our economy. They supported as many did the financial bailout which has cost us over 1 trillion, with no strings attached. They spend 15 billion a month in Iraq. But for potentially putting in jeopordy over 3 milliion jobs borders on a threat to our national security.

    Finally, what happened to the Democrats? For the many years the Republicans got therir way less than a super majority.

    With kind regards,

    December 12, 2008 at 11:29 am |
  12. Rockford

    Bill Skeat...

    The Dems control both houses... blame the Republicans all you want but the eight votes you needed could have come from Dems that voted no or didn't show up... like Biden, Kerry, etc

    The fact is the majority of Americans don't want it passed... and they did what the people wanted. Until that union takes a pay cut... I'm not willing to give them a dime of my money!

    December 12, 2008 at 11:02 am |
  13. Annie Kate

    I couldn't believe the GOP Senators voted the bailout down. I thought what Jeffrey Toobin said last night made a lot of sense – that the White House in sending the mixed signal that not passing it would be a disaster but that if it wasn't passed the White House would reconsider using TARP money to bail them out. So it gave the GOP a way to vote it down yet know the companies would probably get bailed out anyway and with the White House they probably won't have any oversight at all over the money – so nothing will really change.

    I hate to think that after voting in Obama for effective good change in our country our biggest roadblock might be our congresspeople who we also voted in. Congress needs to worry less about party dogma and more about being part of a workable solution to the things that are wrong in the country now and in the future.

    December 12, 2008 at 11:02 am |
  14. Bill Skeat

    I believe the Senate Republicans are setting the tone for next year– by defeating the auto makers bail out, they are setting their goal for next year and it is to defeat Obama's economy policies and then trying to blame the Democrats for not getting anything done. But I do believe Americans will remember and in the next election, put enough Democrats in the House and Senate to stop the Republicans.

    December 12, 2008 at 10:19 am |
  15. Jay-R

    Finally the Senate gets it right. Maybe there is someone looking out for the welfare of the taxpayers.

    The bailout should not get approved unless there is a serious wage cut for the hourly workers as well as the salary cuts for execs.

    One other thing, since tax payer money is to be used the UAW needs to go away. The car "Czar" should represent the people/ workers until all loans are paid off. Then and only then should the UAW be allowed to represent the workers once again.

    December 12, 2008 at 10:08 am |
  16. Cindy

    The inability of congress to get past their partisanship ways is going to cost millions of people their jobs and maybe even their homes and livelihoods! I can't believe that even knowing the possibility of that happening that they still can't work out a deal. They are ridiculous!

    When the big 3 fail and we go into a depression we can all thank congress and show them how much we really appreciate their hard work!

    Cindy...Ga.

    December 12, 2008 at 10:04 am |