Friday, August 22, 2008

The Debts of the Spenders: Detroit Seeks Gov Bailout

This news is hardly surprising. The Big 3 (GM, Ford, and Chrysler) have been suffering for ages. Legacy costs stemming from unfunded liabilities to union workers, high oil prices, and faulty designs have all contributed to hem the growth of the domestic vehicle industry.

Now, executives from the 3 companies are taking a page from the banking sector in seeking federal government assistance in the form of low interest loans. They claim that their bankruptcy would result in a chain reaction of closures in auto parts suppliers as well as downwind effects in the credit markets. Why? The $45T credit default swap market would take a severe beating if GM or FORD went bankrupt.

This however is unlikely. While the banks are deemed "too big" to fail, the automakers aren't. Foreign competition in the form of Toyota, Honda, and Nissan have bit deeply into Detroit's market share. And while the CDS market might take a hit, it will continue to trudge along.

More cynically, none of the Big 3 are represented at the helm of any regulatory agencies. In contrast, Wall Street can count on the likes of such star studded alumni as Rubin (Clinton's Treasury Secretary), Paulson (current Treasury Secretary), and Fuld (current NY FRB director).


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