NEW YORK (Reuters) - The U.S. government may need to lend General Motors Corp around $30 billion to help the automaker operate through a bankruptcy, or risk a systemic chain of failures in the auto industry, Bank of America said.
The Bush administration said on Friday it could be willing to provide emergency aid to the teetering U.S. auto industry, keeping open the prospects for a bailout the day after Congress failed to approve a deal.
Warning of dire consequences for the recession-hit U.S. economy if the once-mighty automakers collapsed, the White House -- in a reversal of policy -- said it was ready to consider dipping into a $700 billion Wall Street bailout fund to help keep the companies afloat.
GM may need around $30 billion in debtor-in-possession loans, which are used to pay for a company's operating expenses as it restructures under bankruptcy protection, Bank of America analysts said in a report issued late on Friday.
The $30 billion represents around two times GM's working capital, with an additional $10 billion cushion for further earnings hits and to fund suppliers, the bank said.
GM had $36 billion in long-term debt as of September 30, according to a regulatory filing.
To support GM, and the industry, the government will need to lend funds to support the company in bankruptcy rather than out of bankruptcy, as that is the only way to ensure the government has the most senior claim on the automaker's assets, the bank added.
"The alternative to attempt to legislate a senior position for the government outside of bankruptcy, as appeared in earlier versions of the auto bailout legislation, represents a violation of contract law, a dangerous precedent that all government interventions to date have sought to avoid," the bank said.
Bank of America suggests that the money from the Troubled Asset Relief Program, or TARP, could be combined with funds from section 13 of the Federal Reserve Act, which allows the Fed to lend to companies on a secured basis under "unusual and exigent conditions."
"With the DIP in place to allow fundamental cost restructuring, restoring the long-term viability of GM could mean a longer payback of government funds over a 5-10 year period and perhaps sooner through a sale or refinancing," the bank added.
SYSTEMIC RISKS
If GM fails to get funding and is forced to liquidate, it would have systemic consequences, dragging down suppliers and potentially other automakers with it, Bank of America said.
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"The systemic risk argument of a set of cascading payment defaults is borne out in the close linkages between suppliers and manufacturers," Bank of America said.
"Debtor-In-Possession financing helps to forestall such a systemic risk outcome by allowing companies to continue to operate, and in this case, to continue to make payments to their suppliers, and avoid such an event," the bank added.
(Reporting by Karen Brettell; Editing by Dan Grebler)
