The bankruptcy (first Chapter 11 reorganization, then proceeding to Chapter 7 liquidation) of two of the Detroit automakers would cost US taxpayers US$65.9 billion over two years, compared to a taxpayer cost of US$16.4 billion for partially repaid bridge loans, according to a joint analysis by Anderson Economic Group (AEG) and BBK, an international business advisory firm with extensive experience in the automotive industry.
The study estimated direct taxpayer costs of two scenarios—bridge loan and bankruptcy. The bridge-loan scenario involved an outlay of $30 billion, for which the US government received interest payments and gains on warrants, but only half of which was repaid within two years. The analysis found that the losses of employment, income, and tax revenue in a bankruptcy scenario are higher than the losses from company restructuring with the help of federal bridge loans.
Under the bankruptcy scenario, which contemplates two of the three Detroit-based automakers failing, there would be more than 1.8 million one-year jobs lost, and nearly $70 billion dollars less in federal and state tax revenue over a two-year time period.
Although the scenario considers bankruptcy for only two of the three automakers, AEG and BBK said that they recognized the very real possibility that a bankruptcy by one or two OEMs could, through supplier bankruptcies and through loss of consumer confidence in all domestic automakers, pull all three into bankruptcy, along with many Tier I suppliers.
The report authors said that they avoided double-counting the potential costs or benefits, for example by excluding the earnings of unemployed workers that found new jobs, and by including income taxes paid on unemployment benefits. They also limited the additional burden to the Federal government by taking into account the existing pension fund assets available to fund retirement benefits for Detroit 3 employees.
Additional conclusions of the report included:
Credit and related markets would be further disrupted, with housing, the value of securities such as outstanding bonds of the automakers and suppliers, and a meaningful amount of commercial and automotive assets further degraded in value.
The permanent shifting of some share of manufacturing employment and technology expertise to foreign countries. Automakers assembling in Europe, Japan, China, and Korea would likely benefit from consumer buying pattern shifts that could persist for several years.
Professional fees for bankruptcy likely would be paid out of a shrinking monetary pool that would otherwise fund retirement benefits and warranty work.
In testimony before the US Senate Committee on Banking, Housing and Urban Affairs last week, Mark Zandi, Chief Economist and co-Founder of Moody’s Economy.com, said that under the most likely outlook for the economy and auto industry, the Detroit 3 will need between $75-$125 billion to avoid bankruptcy at some point in the next two years. Despite the potential quadrupling of the amount being requested now by the automakers, Zandi said that the Federal government should provide the financial help that the automakers need. (Earlier post.)