ruxo: GM Rises After Pelosi Urges Congress to Pass Industry Aid Plan

Nov. 12 (Bloomberg) -- General Motors Corp. rose in New York trading after House Speaker Nancy Pelosi urged Congress to pass an auto-industry bailout, embracing the premise that GM is too big to be allowed to fail.

In calling for an emergency aid plan, Pelosi rejected calls to let GM collapse and sided with the largest U.S. automaker 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.''

Recession Fallout

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 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 climbed 32 cents, or 11 percent, to $3.24 at 9:40 a.m. in New York Stock Exchange composite trading. The shares tumbled to a 65-year low yesterday, extending a slide that chopped their value almost in half in the past week.

GM's 8.375 percent bond due in July 2033 fell 2.75 cents to 23 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond yielded 36 percent.

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.

Job Losses

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 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. The ``unimaginable consequence'' of a bankruptcy ``motivates us to really come up with cash in every way possible,'' GM Chief Executive Officer Rick Wagoner said in a Nov. 7 Bloomberg Television interview.

`Devastating Impact'

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.

President George W. Bush hasn't said whether he supports more automaker aid. The administration is awaiting details of Pelosi's plan before responding, White House spokesman Tony Fratto said. President-elect Barack Obama talked with Bush on Nov. 10 about the urgency for an assistance package.

Treasury Secretary Henry Paulson has resisted a proposal by Pelosi and Senate Majority Leader Harry Reid to tap the $700 billion bank-rescue 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.

``Let the company default, maybe manage the process a little,'' said Martin Fridson, chief executive officer of investment firm Fridson Investment Advisors in New York. ``There's no reason for taxpayer dollars.''

`Textbook' Versus Reality

Such an approach is too risky, said Gary Hindes, managing director of distressed investments at Deltec Asset Management in New York. His firm doesn't own GM bonds.

``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 suffer the most in 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.''

ruxo

Wednesday, November 12, 2008

GM Rises After Pelosi Urges Congress to Pass Industry Aid Plan

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