If the $39 billion price tag to rescue General Motors and Chrysler looks like a whopper, consider the cost of bankruptcy.
Last week, the two companies published cost estimates for a Chapter 11. The results were sobering. GM is asking for $30 billion in federal loans and lines of credit, including money already received. Chrysler says it needs a total of $9 billion to stay in business. Those are big numbers, and if the economy weakens again, each company likely would need more.
But a Chapter 11 reorganization would be even more costly, according to fresh analysis. GM says Chapter 11 would cost $9 billion more than an out-of-court restructuring if creditors and the UAW agree to a prepackaged bankruptcy.
And if the union and creditors don't play along, the cost of bankruptcy would rise astronomically. GM estimates that a traditional Chapter 11 — with no advance agreements among the stakeholders — could cost $50 billion to $60 billion more than an out-of-court deal.
Even if you dispute some of GM's estimates, the company's key assumptions seem reasonable:
-- If GM or Chrysler goes bankrupt, lenders are unlikely to offer the "debtor in possession" financing that companies use while they reorganize. Uncle Sam would have to provide that. Otherwise, both automakers would have to liquidate.
-- The federal government would be forced to pick up retirees' pensions.
-- If either company declared bankruptcy, vehicle sales would fall off a cliff. And, yes, there's a precedent. When Daewoo went bankrupt in South Korea in 2000, it lost 40 percent of its sales. Could GM or Chrysler survive that?
So a reorganization under Chapter 11 quite likely would be the medicine that killed the patient.
There is no easy way for taxpayers to duck the cost. If GM and Chrysler were to fail, suppliers and Ford Motor Co. would follow. The result would be catastrophic for the country.
Those issues doubtless will get kicked around in Washington. But the world is a messy place, and we should not lose sight of the big picture.
A federal bailout would give Chrysler and General Motors time to adjust to a brutal economic downturn that has hammered all automakers — even powerhouse Toyota. And it will save jobs. With our economy in crisis, do we really want to increase unemployment?