December 2008

Government bailout of GM, auto industry seems certain

The incoming U.S. administration will not let the country's auto industry go down, and the outgoing administration has already lent the industry $25 billion for investment purposes.

This assures that despite rising costs, a dearth of new ideas, and poor management the big three will somehow carry on. It is the concept of "too big to fail" spreading its wings.

The New York Times reported the rapidly deteriorating finances of General Motors are forcing the federal government to decide whether to bail out the largest American automaker or face the prospect that it might go bankrupt.

GM said that its cash cushion had been dwindling by more than $2 billion a month recently, and it could run short of money by mid-2009 unless it got emergency federal assistance.

It also said it had suspended merger talks with Chrysler to focus on its own increasingly urgent problems, brought on by higher gas prices, a weakening economy and tight credit-a combination afflicting the entire auto industry, but hurting GM the most.

The government faces a difficult choice. If it provides GM with a bailout, there is no guarantee the company will not need more money later to stay out of bankruptcy, particularly with the economy weakening. However, a bankruptcy by GM or any other automaker would have far-reaching consequences, given the millions of people employed by supplier companies, dealers, and other small businesses dependent on the industry.

President-elect Barack Obama signaled his intentions to help the auto industry, calling it "the backbone of American manufacturing" during his first news conference after his election.

"I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis and succeed in producing fuel-efficient cars here in the United States of America," Obama said.

Congress has already provided $25 billion in low-interest loans to help car companies build more fuel-efficient vehicles.

The Bush administration has balked at providing any additional financing.