Plan to save automaker has risks for economy

With GM and Chrysler both moving quickly to trim dealerships, states such as California, Florida and Texas may be in for some trouble. Those are the top three states for auto sales, according to the National Automobile Dealers Association. Car sales account for $190 billion in retail sales in the three states.

California already faces a severe recession, by some measures deeper than the national recession. The state is cutting back on services, cutting state workers' pay by 5%, reducing financial aid to students, slashing prison health care and threatening to shutter state parks.

Closing dealers' businesses could make things worse.

"It means Gov. Schwarzenegger has to make even more cuts," says Martin Weiss, president of Weiss Research and author of The Ultimate Depression Survival Guide.

The filing could have a broader impact on the economy. Weiss says he sees mortgage rates going up shortly, because every time the Treasury steps in to rescue another company, it damages the government's credibility in the bond market. Mortgage rates are tied to the government's long-term debt, and when investors begin demanding higher payouts on government debt, mortgage rates go up. Rates on 30-year loans rose last week and could keep going up, he says.

"It's one more poison pill the Treasury has to swallow, among many others, and it could be the straw that breaks the camel's back," says Weiss. "It could precipitate a sharper decline in the price of bonds and a deeper rise in interest rates than you would've seen otherwise."

Additionally, the way the government has gotten involved in GM and Chrysler could have a chilling effect on investments, says Peter Kaufman, president of Gordian Group's restructuring practice. The government helped negotiate a deal that got union workers a 17.5% stake in the restructured GM and bondholders a 10% stake in the company; that runs counter to bankruptcy laws, which would have treated both parties equally.

Bankruptcy laws make investments in U.S. companies seem relatively safe, Kaufman says. "Now, if you're going to be a lender here, you can no longer be certain of anything," he says.

Thomas Donohue, president of the U.S. Chamber of Commerce, says he's concerned the government's involvement could "put politics and special interests above sound business strategy and disrupt our nation's trading relationships across the world."

A quick exit?

GM and the Obama administration stressed that the bankruptcy process needs to move swiftly.

But opposition from the 46% of bondholders who didn't sign on to GM's debt deal could prolong the process, Kaufman says. Chrysler also had a deal with bondholders, but all but 30% signed on before it filed.

"Faster is always better than slower, but it's unclear how fast this is going to be able to go," Kaufman says.

Others say GM should take the time to work through bankruptcy carefully and emerge only when all of its issues are settled and the car market is showing signs of rebirth. If GM comes out of bankruptcy when buyers are still skittish, the whole process could be a failure, says Jim McTevia, principal of restructuring firm McTevia & Associates.

"They should sit there until it's safe for them to come out, so they don't come out bleeding again," McTevia says.

There are some who remain optimistic, saying GM's bankruptcy filing will put the company back on the path to success. Ray Young, the company's CFO, was smiling and upbeat.

"I feel really, really invigorated right now," he told reporters.

Once GM is smaller, and unburdened by its debt level, high labor costs and excessive number of dealers, the company has "a really good shot at a profitable industry on the other side of all of this," Marcero says. "It's just going to be a pretty difficult transition period to get through."

Contributing: Jayne O'Donnell in McLean, Va., Chris Woodyard in Los Angeles, Kevin McCoy in New York and Gannett

At work:General Motors autoworkers assemble Chevrolet Malibus and Saturn Auras at the GM Fairfax Assembly Plant in Kansas City. GM's problems have shut down plants and cost thousands of jobs.

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