Why GM, Ford and Chrysler will be bailed out?

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I’ll start this post with a multiple choice question. The government will bail out GM and the other Big 3 for which of the following reasons?

a) Because the blue collar workers of these companies are hard working Americans who need a break after seeing their home prices collapse, the values of their 401k and other savings disintegrate while expenses for everything from gas to milk has increased exponentially over the past 7 years.

b) Because the Big 3 are one of the last bastion’s of American manufacturing and after all “What is good for GM is good for America.”

c) Because politicians, especially Democrats, are concerned about any backlash from union voting constituents if the Big 3 are allowed to fail.

d) Because a bailout of GM and the others is essentially just another bailout for the banks.

For every $1 of GM debt, the banks hold $10 of CDS exposure. Ford collateralized all of its assets which have now depreciated and Cerberus may default on counterparty contracts if Chrysler’s cash flow fails. If you answered D, you are correct! If GM goes down, the impact on banks assets would be substantial. GM currently has $36B in outstanding L/T bonds. For every $1 in GM bonds, banks sold $10 of CDS nominal exposure. Therefore, if GM goes under, banks are on the hook for approximately $360B. (it could be marginally less than $360B since the 10:1 figure was from a year or so ago – the exact figure doesn’t matter, you just need to know that it is really BIG!). Furthermore, if the Big 3 go into bankruptcy, the first liability to be jettisoned with be the pensions to the PBGC. The PBGC is already severely under capitalized and taking on the pensions from the Big 3 would assure a bailout of the PBGC. As of February of this year, the PBGC was 14% underfunded when they made the ill conceived decision to move heavily into equities and away from bond investments. Since then, equities have fallen 30+%. Personally, I believe the PBGC funds were almost solely invested in financial equities in order to prop them up in the early stages of the credit crisis so it wouldn’t surprise me if the PBGC’s equity investments have fallen much, much further. It wouldn’t shock me if the PBGC is now 50% under capitalized. The impact of taking on GM’s or other large pensions would sink a ship that is already taking on water. Ford has collateralized every single asset they have down to the oval. Obviously, these assets are worth a fraction of their original collateralized amount which suggests the banks would take a pounding if Ford folded and the banks had to accept the collateral. Also, there is the impact on private equity. Cerberus used mountains of leverage to acquire Chrysler at the absolute peak of the leveraged buyout boom. If Chrysler goes, Cerberus probably will as well leaving all of their counterparties at risk. The Big 3 will be saved simply because it means saving the banks whom they are liable to or liabilities of. This is why as soon as the Republicans in the Senate shot down the deal, the White House committed to using TARP funds. I found the speed of their response rather remarkable. I thought they would let the unions sweat it out a bit so they could get more concessions from them, but it seems that Paulson and the Treasury don’t want to take any chances.