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Analysis Concludes Automaker Bankruptcy Could Cost US Taxpayers US$65.9 Billion

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.)

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Comments

HarveyD

At $66 B to let them fold forever and $125 B to keep them alive for only 2 more years, the economic choice is easy to make.

USA would not run short of vehicles. Over 15 other world class manufacturers would easily meet the chanlenge.

Most willing and able workers would find a job with other manufacturers such as Toyota, Honda, Hyaudai, WV, Nissan, Mercedes, BMW, Tata, BYD, etc etc.

Others would find jobs at the new e-vehicle and battery pack plants.

Within two years, governments related direct and indirect revenues would be back to about the same level or more.

Conclusion: Let the Big-3 fold naturally as they such in a free market environment. Use the $15B to help the workers to transition-move to other jobs.

This is a rational argument, why doesn't anyone else see this? what's in a name if it is a decent and honest company that pays well.

After all, the French that build the Yaris believe it is theirs, the Czech take the 107/C1/Aygo trio as their own, the Belgian the Volvo's they make, the Polish the fiat 500 and Ford Ka, the British the Nissan Quashqai (aka Rogue - british design team)... the list is endless, why all this nationalistic bigotry when it comes to the US, pretty much half of Toyota's made in the US are US models only anyway.

Food for thought.

underdog

this is a ridiculous article! the number of layoffs will be determined by the demand for vehicles. less demand=fewer jobs. the equation has nothing to do with whether the companies go bankrupt or not!

Andrey Levin

65.9 billion –what a precision. Only hopeless kretins could produce such exact number. US dollar along fluctuates 3% weekly.

Looks like same advisers who worked for Citigroup:

“Even after securities and brokerage firm Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO's was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.”

In couple of months, quarter –trillion Citigroup was on the brink of bankruptcy.

So yes, let Big3 fail right now, it will cost only 65.9 billions. If losses will be bigger, insure it at AIG.

fred

Looks like UAw and big 3 fear mongering. the $15 billion bridge loan fixes nothing so it cannot be a comparison basis.Two folding at the same time is also ridiculous because the failure of one increases market share for the rest.
Cerberus admitted to having $24 billion that they could support Chrysler with until they can sell them to china ( which would give chinese manufacturers a worldwide marketing network and significant instant access to the american market). So its in their best interests to avoid bankruptcy. Ford still has much of the $28 billion in loans they got in 2006 and a decent showing of new cars so they arent going bankrupt any time soon. GM is bankrupt now, and has the highest cost to keep running. Going chapter 11 then into chapter 7 was an assumption to hype the numbers, not reality. chapter 11 should be enough to fix the problems, and in a company that big, would take one to two years, reorganization would cut employment in half along with closing half the plants or cutting employment by 20% and clear cutting the uaw contracts and resetting them at 40% lower ( let the UAW kill the company and themselves over that!!!!), that would stave off chapter 7 by at least 5 or more years.

fred

the CEO's of both anderson and BBK are products of Michigan educations, with Anderson being heavily involved in many Michigan government offices before setting up his firm in 1996, so I think its fair to see some biases as they "toned" down the paper to support their clients/friends( which is actually online and the brief above just hits high points).

John Taylor

GM does not deserve one penny in help.

They are the ones who killed the EV1 and kept the technology off the market.

Let them go to Shell Oil for money.

tmo8844

Harvey:

I would pay to send you to India to work for and drive a Tata!

FYI, I would like to see the Govt with a loan on the other side of Chapter 11! Bye bye UAW.

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