The government is in a giving mood lately, having bailed out Fanny, Freddy, AIG, and more. Even Washington elites think the commitment of over a trillion dollars is a lot of money and are wondering what they have bought into. One sure consequence of doling out free money as a reward for failure is that every pig will line up at the trough. Since the only requirement for begging in DC is to arrive on a private jet, no one was surprised to see GM, Ford, and Chrysler hat in hand.

With the floodgates of corporate welfare wide open, how can the Government say no to GM and the rest of the Detroit 3? If AIG deserved a bailout, why not GM? GM employs more Americans, and for most of the 20th century was the corporatre symbol of the US itself. GM advocates speculate that GM’s failure will dislocate a million jobs or more. Therefore, if the Government is in the bailout business, why not GM?

For starters, a GM bailout can’t work. GM is hopelessly under water, with $45 bln in unfunded retiree benefits, and an overall $60 bln accumulated deficit. In other words, if GM were to liquidate, creditors would lose $60 bln, with much of that loss falling on the shoulders of the Pension Benefit Guarantee Corporation, A.K.A. the taxpayers. A hole that deep can’t be filled with just $25 bln. Indeed, the bailout money wouldn’t even keep GM going for a year.

Unlike the $25 bln for Detroit, the $700 bln financial bailout has a reasonable chance of working. Assuming the current recession doesn’t last more than a year, taxpayers might actually earn a profit on the $700 bln thrown at struggling financiers. This is because, unlike GM, many of the financial charity cases are otherwise successful going concerns. Once asset values recover, their business models will allow them to repay the loans. GM loses money every day based on every measure of profit. Having accumulated a $60 bln loss, there is no reason to expect a quick turn-around. Over the decades, GM has proven incapable of standing up to its unions, controlling costs, or shortening its product design cycle. Free money from Uncle Sugar is hardly an incentive for GM to repent from sloth.

The financial crisis affected nearly all business that extend or receive credit. The bailout was needed to save an entire industry upon which nearly every company in the US depended. Not so with GM and the rest of the Detroit Three. Huge numbers of cars are made in the South in factories owned by foreign corporations. None of these companies have gone to DC with a sob story. These factories employ Americans, and, indeed, Americans can own as much of Toyota, Honda, and Daimler as they want. The only difference between the Detroit Three and foreign owned American operations is that their headquarters are not in the US and their leaders are paid far less. GM’s plight results not from an industry crisis, but from a bloated management that became too cozy with its unions.

A GM bailout must be rejected, but in these already shaky times, the systemic shock of a complete failure would be immense. The pension liabilities alone would heavily burden taxpayers. Given GM’s operational troubles, the necessary debtor in possession financing for GM might not be available. Therefore, if the Government must come to the aid of GM, it should be as a part of a prepackaged chapter 11 restructuring.

Because of GM’s deep troubles, both equity and debt holders will likely have to lose all of their investments. Ownership will revert to the GM pension fund, saving taxpayers tens of billions in liabilities. After that, the GM union rules will have to be reset to reflect market reality. Many union jobs pay twice their free market equivalents in the South, an operational liability no manufacturer can endure.

So, if the Government has the political will to wipe out the investors in GM, throw tens of billions of dollars into an uncertain receivership, and stare down the country’s most militant unions, a bailout might work. Fat chance. Once GM files for Chapter 11 protection, and its management, creditors and unions are on the ropes, the Government will be in a much better position to help GM’s operations and employees. The Government needs to understand which parts of GM really need help, and the best way to find out is to let GM fail.