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Bailout Update: Rumors and Real Costs



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Detroit, Mich. — One of the consequences of handing over $700 billion to Henry Paulsen’s fourth branch of government is that few know what he’s planning to do with it. With no Congressional oversight, Paulsen’s plans for the auto industry are largely opaque — even as senators on both sides of the aisle try and lobby Paulsen (imagine that, senators lobbying for the expenditure of federal money they themselves appropriated!) to favor their preferred outcome. Rumors abound and Hill observers try to parse every public statement from President Bush.

“It is unprecedented,” says AEI financial expert Peter Wallison with reference to the Treasury sec’s powers. ”Nothing has ever been done like this before.”

The conventional wisdom is that Bush will revert to the deal brokered by House Democrats and Bush a week ago, the one larded with Democratic demands for greener cars, public-transit dollars, and no commitment to union concessions. Bush’s comments this morning before the American Enterprise Institute were typically opaque, even unintelligible, and did nothing to dissuade the conventional thinking.

But persistent rumors that Paulsen is weighing a publicly financed Chapter 11 filing — a move embraced by many academics but worrisome to even conservative senators — abound. If so, then Sen. Bob Corker’s alternative deal — essentially a prepackaged bankruptcy requiring debtor and union agreement on terms — is still on the table as a compromise. White House press secretary Dana Perino added fuel to this speculation Thursday morning, commenting that “there’s an orderly way to do bankruptcies that provides for more of a soft landing. I think that’s what we would be talking about.”

But as uncertain as Paulsen’s plans are, other aspects of the auto bailout have come into clear focus.

The first is that the dollar amounts are misleading. Neither the $14 billion in loans (nor the $25 billion asked for at the first Detroit hearing in November, nor the $34 billion asked for at the second hearing in December), will rescue the automakers. Industry analysts say that money is only enough to keep GM and Chrysler solvent into the new year (Ford is only asking for a line of credit).

The real cost of getting the “Detroit Two” through 2009 is somewhere in the ballpark of $60 to $125 billion. In other words, the $14 billion “bailout” isn’t a bridge to profitability — it is a bridge to more government loans.

Secondly, we would have a prepackaged bankruptcy plan today — right now — if it was not for the stubbornness of the UAW last Friday. While Democrats and their media minions try to rewrite history and claim that a cabal of southern Republicans blocked a compromise, in fact it was the UAW alone that deep-sixed a Corker plan that had been approved by all sides.

“My prediction is that had (the UAW agreed) it would have passed the Senate by 90 votes,” Corker says.

Rather than play ball and agree to cutting wages to non-union, Toyota levels (still among the richest blue-collar jobs in the U.S.) by late 2009, the UAW decided instead to play chicken with the White House over TARP dollars.

A week later, the game of chicken continues.



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