Idea of the Day: A Federal Bridge Loan for Automakers

December 4, 2008

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This week, the chief executives of General Motors Corp., Ford Motor Co., and Chrysler LLC drive back to Washington to make their case for up to $38 billion in bridge loans before a wary Congress. 

One in 10 American jobs is connected to the auto industry. Failure of any of these companies—let alone all of them—would send shock waves throughout the economy. A bankruptcy filing by any of these companies would take down other companies too, including tool and die makers, parts suppliers, and other small businesses. One study estimates that their failure could lead to 2.5 million lost jobs—double all the jobs lost in 2008 so far.

Some argue against loans and in favor of government-sponsored bankruptcy because this would enable the companies to restructure so that they emerge stronger. This ignores the impact that bankruptcy would have on their already tarnished brands. An independent consumer survey found that four out of five consumers would not buy a car from a company in bankruptcy because of their concern about the warranty, service, and availability of spare parts. Bankruptcy could destroy the companies before their rejuvenation.

To avoid the deadly consequences of bankruptcy, Congress should create a federal bridge loan program that would provide up to $38 billion in loans if the companies agree to avoid excessive executive compensation, fulfill their recently renegotiated health and pension obligations to their hourly workers and retirees, continue to implement plans to build super-efficient cars, and cease efforts to block or weaken fuel economy and greenhouse gas standards. This would stabilize the Big Three, reduce oil use, and prevent an economic catastrophe that could last for years.

For more on this topic, see:

• A Bridge Loan to the 21st Century by Daniel J. Weiss