Automakers receive $17 billion in Bush bailout

Forcing bankruptcy on the automakers would have had far longer and wider-reaching consequences.

Wolkonowicz says two catastrophic reactions would have occurred had one of the carmakers been forced into bankruptcy. It would have created an unstoppable ripple effect, and it would have destroyed any remaining consumer confidence in that company.

For its part, the financial ripple effect would rumble through the entire network of businesses that rely on that carmaker, forcing each company onto the financial rocks along with it. The businesses that support the industry include parts makers, distributors, suppliers and a whole slew of other companies that serve most of the carmakers -- foreign and domestic -- operating in the United States.

That interconnection means that if Chrysler went under and was no longer able to pay those suppliers, they too would have gone out of business. Without viable suppliers, General Motors, Ford and even the North American operations of Toyota and Honda would no longer fulfill orders at their factories.

The auto industry across the entire continent could grind to a stop, Wolkonowicz says.

"If that were to happen, the consumer would have less choice in vehicles. The companies that supply half of the vehicle options would be gone, and we would pay more for vehicles," Wolkonowicz says.

The second repercussion, the destruction of consumer confidence, would be equally damaging. Because of the long-term nature of owning a vehicle, very few people would be willing to buy from a bankrupt maker, regardless of how the vehicles were priced.

"The main danger here is resale value," Wolkonowicz says. "The consumers would just walk away and buy from one of the carmakers that managed to stay standing."

You only need look as far as the failed Korean carmaker, Daewoo, for an idea of what might happen if one of the Detroit automakers was to seek bankruptcy protection, Wolkonowicz says.

In 2002, Daewoo entered into bankruptcy, and buyers fled to the hills. Within days of the announcement, the remaining inventory was selling at fractions of their sticker price, Wolkonowicz says.

"The demand for Daewoo products just evaporated," he says. "You could buy a new Daewoo with a sticker price of $14,000 for just $3,000."

The catastrophic collapse in sales meant Daewoo folded before it ever had a fighting chance to emerge from bankruptcy.

Where to now? 
Because they now do not need to declare bankruptcy, the automakers may begin selling cars again.

"To me, the thing that could make an impact on the consumer level would be confidence that the company will avoid bankruptcy," Comerica's Johnson says. Getting the influx of cash repairs some of those concerns about the companies' viability, he says.

If buyers have the money, now may be one of the best times to buy a new car. "There probably hasn't been as good a time to buy a car in recent history," Wolkonowicz says.

Show Bankrate's community sharing policy
          Connect with us


Tara Baukus Mello

4 best bits of winter driving advice

A drag racing champ offers advice if you need to get behind the wheel during blustery winter weather.  ... Read more

Connect with us