The Administration is starting to face some resistance in Congress about its plan to put General Motors (GM) into Chapter 11, using Treasury money to sustain the company as it works its way back to profitability. The government put another $4 billion into the car company on Friday. In the process of a government-supported bankruptcy, $27 billion in bondholder capital will probably become worthless, GM workers will be laid off and hundreds of dealers will be closed.
Fundamentally, taxpayer money will be used to restructure GM in such a way that thousands of taxpayers will lose their jobs. (See pictures of Detroit's decline.)
According to the Financial Times, "Hopes that GM can follow a similarly rapid path through court are being dimmed by a building backlash from lawmakers, some of whom are claiming that creditors' rights are being given short shrift, while others complain about job cuts and the closure of dealerships."
The argument by members of Congress who are opposed to the process may get some traction. Blue collar workers across the country are becoming enraged at seeing their peers being thrown out of jobs with support from the Treasury. Local towns and cities will have to support workers at dealerships that close. Banking and investment firms not involved in the GM situation will have to ask themselves if their future rights could ever be undermined by a process driven by the financial might of the U.S. government. (Read "Is This Detroit's Last Winter?")
Of course, the entire GM restructuring process will raise national unemployment.
As the pockets of resistance grow, GM may not have as easy a path through a bankruptcy court as Chrysler has had. Congress may decide to have an extended debate over whether the Treasury has the right to disintermediate bondholders and union workers. If the argument goes on long enough, the auto industry's restructuring could still turn into a liquidation.
Douglas A. McIntyre
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