Has Detroit been rescued?

Although the so-called loans by the U.S. Treasury to the Detroit car companies are now a done deal, it is not clear what that means in terms of their long-term viability. Sure, they can pay their bills for a couple more months, but even if the economy steadies, they may be even worse off in a couple of months when they have exhausted the loan funds, and it is quite debatable whether they will have completed significant restructuring within a couple of months that will be sufficient to change their cost structure in a radical enough manner to be profitable in this weakened economy. Can it be done? Sure, it can. Is it likely to be done? That questioned will be answered by the auto workers and the holders of their debt.

I suspect what will happen is that they will make a few restructuring steps, enough to convince the Obama Treasury that they are at least on a plausible path, so that they can then be "loaned" more money.

I suspect that most of the original debt holders are long gone and that most of the debt is held by hedge funds and distressed debt specialists who have bought it at the current bankruptcy price levels or moderately higher. It may be simply a question of what level of profit these speculators want on their investments. Maybe if they are paid with government-guaranteed preferred stock they will be willing to sell the debt at a reasonable price.

The basic negotiating strategy will likely be that they will offer the auto workers and debt holders a deal with the caveat that if negotiations fail, full-blown banktuptcy is the next step.

In short, the car companies have been pointed in the direction of a rescue, but whether they will continue to progress down that path is unclear.

In any case, the deal was about as good a deal as we could have asked for given the overall situation. The message is quite clear, "restructure now or die."

-- Jack Krupansky