Bail-out for the Banks but not for Detroit?

If we can spend $700 billion on a bank bail-out why not spend a measly $25 billion on the auto companies?

The simple answer is that we can’t let the banks go broke. We tried it, sort of, back in September when Lehmen Brothers went belly up. The fallout from that nuclear explosion is still irradiating us.

But the bankrupty of an industrial corporation is not so bad. The railroads went in and out of bankruptcy with regularity in the 19th century. And the world didn’t end when the Penn Central went bankrupt in 1970 (in a recession, of course). Corporations go bankrupt when they run out of equity. In crude terms, the stockholders get handed their heads and the bondholders get to own the company.

When you look at the balance sheet of General Motors, today, November 18, 2008, you see Total Assets of $110 billion, Total Liabilities of $170 billion, for a Total Equity of minus $60 billion. That negative equity is mostly an Accumulated Deficit of $61 billion. No much to go on.

The best solution for General Motors is to go into bankruptcy. Then the creditors can get together and decide what to do to get something out of the wreck. And then the politicians could decide what they would be prepared to do to help out. General Motors could keep operating, of course, during all this.

A lot of people are going to have to take a haircut over the failure of General Motors. Right now, too many of them are still in denial. So they won’t agree to a haircut until General Motors actually goes broke.

The haircut can’t start until General Motors declares Chapter 11.