Big three car companies hold gun to US Congress

Dec 11 2008 By Nevill Boyd Maunsell

It used to be called demanding money with menaces, a middle-ranking offence somewhere between begging and fraud. The police rarely seem to bother with it nowadays, any more than they do with burglary.

The practice lives on, though, above all in the US Congress, where Democrat legislators are holding out the prospect of a re-play of sub-prime mortgages, plus some, unless General Motors, Ford and Chrysler get their money.

This goes way beyond the 355,000 jobs directly at stake – or, if you like, 4.5 million, depending on how far the ripple effect ripples.

Senator Carl Levin (from Michigan, as you might expect) has been talking of $1,000billion of defaults in credit default swaps, corporate bonds and what have you – another of systemic financial meltdown – if the three big car companies are denied of slug of the $700billion bail-out fund originally voted to bail out American banks.

GM and Ford are indeed colossal financial companies. Their finance offshoots exist to lend money to buyers of Ford and GM and have raised so much cash for the purpose that they are said to account for ten per cent of the entire junk bond market – linked, it is said to no less than $250billion of credit default swaps, the guarantees that have caused the havoc at AIG.

Whether that makes them banks is something else. The healing magic of the market may just this once have been working.

The credit rating agency Fitch says that some of this Motown debt changes hands at 20 or 30 cents to the dollar.

In other words, 70 or 80 per cent of the damage is already in the price.

Anyway, there is a long history of American airlines going into Chapter 11, the US mock-bankruptcy, owing monstrous sums on their planes.

In each case the headlines were worse than the reality and the financial consequences negligible, except for the creditors themselves and some pilots.

The losers were rival airlines trying to compete without going bust.

As to the United Kingdom, mercifully nobody has yet suggested that we pitch in our share of the American bail-out if we want to save Vauxhall and Ford Europe.

But we have still to see the consequences of having a 99 per cent foreign-owned motor industry.

Under stress, that could be the flip side of globalisation.

So be thankful for Morgan. Its centenary is next year.