Car Industry Bailout Update

Yesterday, the Swedish government decided to come up with its own bailout package of the Swedish car companies Volvo and Saab, who are owned by Ford and GM respectively. The package consist of SEK 25 billion in subsidized loans and SEK 3 billion in a direct hand-out to research intended to develop more "green" cars. There is no question that it will pass, as for one thing the opposition Social Democrats favor the bailout too, and for another, in Sweden, the members of parliament are expected (and almost always do) to vote as their party leader orders them. And no such thing as "filibuster" exists in the Swedish parliament.

By contrast, U.S. Senators and Representatives often vote independently of what Bush and Obama tells them to. And in the Senate there is a "filibuster" rule which requires 60 out of 100 Senators to get a vote on a certain issue, enabling a minority to block certain proposals.

A majority in the U.S. Senate do favor a bailout of Detroit car companies, but the majority is not big enough to break the "filibuster". Republicans are, sensibly enough, insisting that any loans must be coupled with demands of significant wage cuts to achieve parity with the pay level in Japanese-owned car factories, something the Democrats refuse to agree on.

The Democrats would have loved to wait until next year, after Obama and the new Congress (with a significantly enlarged Democratic majority in the Senate) are inaugurated, but GM and Chrysler are not likely to survive for six more weeks. So what will happen now? I don't know, but there appears to be three possibilities:

1) Senators get so scared by a market sell-off today and in the coming days, that enough of them change their mind to get it passed, similar to what happened to the financial company bailout earlier this year. That would likely be coupled to some concessions from Democrats with regard to reduced labor costs.

2) The White House follows the suggestion of Democrats and lets GM and Chrysler tap funds from the "Troubled Asset Relief Program" (aka the Wall Street bailout funds), something which they have been opposed to until now. This will keep them alive until the enlarged Democratic majority is inaugurated.

3) GM and Chrysler are sent into Chapter 11. That would in my view be the best solution. That would most likely not mean that all their operations would end, but shareholders would lose all their money, and creditors would lose some of what they have lent, while the excessive UAW contracts could be thrown out.

UPDATE: Scenario number 2 now looks most likely to become reality.