GM Judged Too Big to Fail as Pelosi Embraces Industry Rescue

House Speaker Nancy Pelosi has
thrown her support behind the premise that General Motors Corp.,
the largest U.S. automaker, is too big to be allowed to fail.
In urging Congress to enact emergency aid for the ailing
auto industry, Pelosi rejected calls to let GM collapse and
sided with the company and its allies in trying to prevent a
``devastating'' domino effect that would cost millions of jobs.
``Trying to reorganize the auto industry in bankruptcy
would be as close to reorganizing the whole U.S. economy as you
could get,'' said Alan Gover, a bankruptcy lawyer with White &
Case LLP in New York. ``The vast supply chain involves thousands
of businesses, millions of existing jobs and just as many
retirees, as well as whole communities and states.''
Passage of an industry bailout plan may keep GM from
running out of operating cash by year's end, which it says may
happen without U.S. help. GM is the second-biggest provider of
private health-care benefits and was the third-biggest
advertiser in this year's first half.
``It's truly one of those companies that's too big to fail,
and everybody understands that,'' said Nariman Behravesh, chief
economist at IHS Global Insight Inc. in Lexington,
Massachusetts. ``If it does collapse, it could make the
recession deeper and longer.''
Behravesh said a GM bankruptcy could send the U.S. jobless
rate as high as 9.5 percent, up from a 14-year high of 6.5
percent in October, and produce a recession comparable in length
to that of 1980-82.

Ford, Chrysler

Ford Motor Co. and Chrysler LLC both likely would be forced
into bankruptcy eventually if GM were to fail, Mark Oline, a
Fitch Inc. credit analyst, said in an interview.
GM, Ford and Chrysler want $50 billion in loans to boost
liquidity and cover union retirees' medical costs, people
familiar with the matter have said. That would be on top of $25
billion in low-interest borrowing Congress approved in September
to help retool plants to build more-efficient vehicles.
The trio employs 240,000 people in the U.S., or about 70
percent of U.S. auto workers, according to the Automotive Trade
Policy Council in Washington, the industry group for the U.S.
companies. Health insurance for 2 million people is tied to auto
workers' jobs.
Another 5 million jobs at dealerships, suppliers and
service providers are supported by the automakers, the council
estimated. The companies spent $156 billion on auto parts in the
U.S. in 2007.

Job Losses

Job losses would total 2.5 million from an automaker
failure in 2009, including 1.4 million people in industries not
directly tied to manufacturing, according to a Nov. 4 study by
the Center for Automotive Research in Ann Arbor, Michigan.
Those disruptions would cost $125.1 billion in lost
personal income in the first year, and $275.7 billion over three
years, the study concluded.
While Pelosi, a California Democrat, didn't cite GM by name
in her statement yesterday, she said an automaker collapse would
have a ``devastating impact on our economy, particularly on the
men and women who work in that industry.''
She didn't specify the size or the rules for the aid
package she is seeking for the industry, whose 2008 U.S. sales
are headed toward a 17-year low. That slump is overwhelming
cost-cutting efforts including elimination of 46,000 U.S. jobs
at GM since 2004, when the company last posted an annual profit.
Treasury Secretary Henry Paulson has resisted a proposal by
Pelosi and Senate Majority Leader Harry Reid to tap the $700
billion bank-bailout fund to help automakers, and investors
including New York-based hedge-fund manager Bill Ackman have
said GM should reorganize in bankruptcy, not receive a bailout.

`Manage the Process'

``Let the company default, maybe manage the process a
little,'' said Martin Fridson, chief executive officer of
investment-and-research firm Fridson Investment Advisors in New
York. ``There's no reason for taxpayer dollars.''
Such an approach is too risky, said Gary Hindes, managing
director of distressed investments at Deltec Asset Management in
New York.
``With all due respect to the free-market, or moral-hazard
types out there, it's all wonderful in a textbook,'' Hindes
said. ``But in a real world this would be disastrous.''
A GM failure would ravage an auto-supply base battered by
bankruptcies or companies nearing failure, said Maryann Keller,
an automotive consultant in Greenwich, Connecticut.
Delphi Corp., GM's largest supplier and former parts unit,
has been in court protection since 2005. Automakers and
suppliers cut 140,000 jobs in the past 12 months, according to
the U.S. Labor Department.

`Nobody's Healthy'

``At the current level of production nobody's healthy,
nobody's making money, and many are running out of working
capital just like GM,'' Keller said.
Suppliers such as American Axle Manufacturing Holdings Inc.
and Lear Corp. would be affected the most by a failure at GM,
because it's their largest customer. They also make parts for
automakers including Ford, Chrysler and Japan's Toyota Motor
Corp.
``We're worried. We're concerned about it,'' said Mike
Goss, a spokesman for Toyota's North American manufacturing unit
in Erlanger, Kentucky. ``The vehicles we build in North America
use about 75 percent local content, and much of that is coming
from the same companies that supply the Detroit Three.''