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Behind The Wheel

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Dec.11

10:00 AM ET

Thursday, 11 Dec 2008

Auto Bailout: Republicans Tap Into Worry Among Americans

Posted By:Phil LeBeau

Topics:Republicans | Congress | Economy (U.S.) | Economy (Global) | Automobile Industry

Sectors:Automobiles and Parts

Companies:General Motors Corp | Ford Motor Company

Big 3 Bailout
CNBC.com
Big 3 Bailout
You have to give it to the Senate Republicans. Senators Shelby, Corker, Ensign and their colleagues in the GOP have been loud and effective in slowing down, if not jeopardizing the $14 Billion auto bailout package.

They have clearly articulated what bothers them and others about the current effort to save Detroit automakers.

Their argument comes down to this: The bailout is not tough enough and this current bailout will only set up up the Big 3 to keep coming back for billions more as they try to restructure in the months and years ahead. Whether you agree or disagree with that premise, you have to give the Republicans credit for clearly articulating their concerns.

What is not clear is what option they would prefer for GM, Ford, and Chrysler. They say a Chapter 11 bankruptcy is a better option. They say the federal government can provide the debtor in possession financing a bankrupt company will need to restructure their companies. They say the federal government can back warranties so people will have confidence to buy a car or truck from a bankrupt company.

So are they right? In some cases yes, but in other cases no.

Could the Feds provide the DIP financing the automakers would need in a Chapter 11 bankruptcy? Yes. Heck, it is the only option since the traditional DIP financing banks don't have the funds that would be required for the Big 3. And in fact, the current bailout package is essentially the federal government providing DIP financing, even though the automakers would not be in bankruptcy.

Would the federal government backing warranties convince potential car buyers they should buy a car from a bankrupt GM or Chrysler because the warranties would be backed by Uncle Sam? No. Don't fool yourself. If the Big 3 go bankrupt, the buyers will stay away in droves.

Which Senators Have Auto Plants in Their States?

People are not going to spend $30,000 on a new car from a bankrupt company because the residual and perceptual value for that car will be a fraction of what it was. They also will steer clear of a dealer with a bankrupt auto maker because they will wonder to themselves, "How can I be sure this guy will be here to service my car in a year or two years from now?"

Do you think knowing Uncle Sam will guarantee a new car warranty will overcome those concerns? No. That said, you have to take your hat off to the Republicans. They have tapped into the real worry among Americans that the bailout passed in the House of Representatives is just the start of the Big 3 coming back for billions more in the months to come.