The next bail out: the US car industry

The word in Washington is ‘we new it was bad, but we didn’t know it was that bad.’ The two giants of the US car business - Ford and General Motors - are teetering on the edge of collapse. The third largest Chrysler, is probably doomed. I was shocked too when I read about how bad the situation has become at The Economist

To see the Chief executives from Ford, GM and Chrysler – titans of American capitalism in the 20th century - asking for an urgent $25bn (£16.6bn) bail-out package as a “bridge” to help them survive is astonishing.

It will be hard to see how the Congress can ignore the cries for help, given the $700bn bail out of the financial industry. However, many politicians question whether public money should be used to help the car industry.

One idea is for the car industry to seek protection from their creditors by filing for bankruptcy. Part of the US Bankruptcy Code gives troubled firms time to reorganise themselves. Under ‘Chapter 11’ protection a bankrupt firm can carry on trading under existing management. It prevents creditors from forcing a firm into liquidation in order to sell-off its assets.

The problem with that solution could be the message it sends to consumers. Would you be keen to buy a new car from a firm that’s threatened with closure?

General Motors Chief Executive Rick Wagoner has warned that if the US car industry failed, it could lead to a loss of three million jobs within the first year and ripple throughout communities around the country. “This is all about a lot more than just Detroit (the home of the US car industry). It’s about saving the US economy from a catastrophic collapse,” he is reported as saying to the BBC.

However, critics of the US car manufacturers have argued that many of the industry’s problems have been self-made, because of their past reliance upon gas-guzzling trucks and SUVs and their opposition to tougher fuel-efficiency regulations. Do they deserve to be rescued by taxpayers for having made a catalogue of serious mistakes?

And it’s worth remembering that the car industry’s problems are not limited to the US. Toyota has said it will shut down all of its North American factories for two days next month and European car companies have asked for 40bn euros (£33.5bn; $50.6bn) of ‘soft’ loans for the industry too.