Would the Treasury be Equally Impotent in the Auto Industry?

Some members of Congress are encouraging the Treasury to include automakers in the banking sector bailout plan. I don't yet know the details. But let's work through the effects of (so far, hypothetical) Treasury purchases of newly issued GM stock.

GM suspended its dividend earlier this year. But it could reinstate it, which would push some of the Treasury dollars out the door, at the rate of about $0.5 billion per year.

GM could use the cash to buy another automaker. That would put more Treasury dollars in the pockets of shareholders (of the other automaker).

GM could spin off GMAC to its shareholders. That's not cash in shareholder pockets, but some valuable shares.

Do not take for granted that (hypothetical) Treasury purchases of newly issued GM stock would significantly change the organization of the industry by reducing the probability of bankruptcy. Absent Treasury action, GM would likely end up joining with another automaker. All the Treasury action might do is let GM be the acquirer rather than the acquired.

There are fraudulent conveyance laws: GM cannot sell its valuable assets and then declare bankruptcy. Thus, Treasury cash would enable GM to spin off GMAC only if GM kept enough of the Treasury cash to avoid going bankrupt too soon after the spin off.

If bankruptcy were the only way shareholders could free themselves from obligations to unions and retirees, then bankruptcy may happen regardless of whether the Treasury gives cash.

Obviously, more analysis is needed here, but this time let's be quicker to admit that Treasury cash will not stick where it lands.