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GM, Chrysler Loans Avoid “Disorder,” Economist Says


There’s not much debate – at least, there shouldn’t be – that providing GM and Chrysler with $14 billion in bridge loans to tide them over is a better alternative than letting them go bankrupt Dec. 31, said an economist who testified before the Senate Banking Committee earlier this month.

The Senate shot down the proposed auto industry bailout, along with a “car czar” to oversee it, but it now looks like President Bush is reviving the bailout.

The economist is Mark Zandi, chief economist and co-founder of Moody’s Economy.com. In his earlier testimony, Zandi said Congress should provide U.S. automakers with help. He also estimated that the domestic automakers actually need a lot more than the $19 billion to $34 billion they had asked for, perhaps as much as $75 billion to $125 billion, to avoid going bankrupt within the next two years. Among a lot of factors, he cited the fact that delinquencies on auto loans are up (pictured).

I followed up with Zandi in a phone interview on Dec. 16. Here are edited excerpts:

BNET: In your earlier testimony, you said the car companies should get a bailout, but you also said they needed a lot more than they were asking for. I could see that as an argument either for a bailout, or against. Which one did you intend?

Zandi: It makes perfect sense to provide them with the $14 billion in bridge financing to get into next year and beyond the end of the month. I don’t think there’s much of a debate about that.

BNET: So you’re arguing for the bailout?

Zandi: For the first $14 billion, a resounding, “Yes.” It makes no sense not to. If you don’t, they will go into bankruptcy at the end of the year. That would be very disorderly, and the cost to the taxpayer will be immeasurably greater.

BNET: Is there some in-between status short of bankruptcy where the car companies can make the changes they need to make, without going bankrupt?

Zandi: Ultimately, if they go into bankruptcy now or in early 2009, it will be disorderly. If there’s government control, you can have DIP (debtor in possession) financing, you can have the government guaranteeing the warranties, that sort of thing. From a taxpayer perspective, there’s not much of a difference whether go they go into bankruptcy or go outside of bankruptcy.

BNET: Can you do all those things without bankruptcy?

Zandi: If you have a “car czar,” they can be monitoring: Are they (car companies) outside of bankruptcy making progress? Then a bailout makes more sense than a bankruptcy. Is the economy really struggling? Then maybe a bailout makes more sense than a bankruptcy. On the other hand, is the cost of a bankruptcy clearer than the cost of a bailout? Do we know what the entire impact of a bankruptcy is going to be? If we don’t, a bailout makes more sense than a bankruptcy.

BNET: And I guess it’s a point that those measures wouldn’t preclude bankruptcy later on, in some less-disorderly fashion.

Zandi: There could be some pre-packaged (bankruptcy) idea. The government has to make a lot of decisions in the next year or two.


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