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Detroit Feels Ripple Effects From GM’s Bankruptcy

June 3, 2009 at 6:25 PM EST
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Economics correspondent Paul Solman talks to Detroit residents about the "collateral damage," or ripple effects, from General Motors' bankruptcy filing earlier in the week.
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JIM LEHRER: Next, the many fallouts from the GM bankruptcy. NewsHour economics correspondent Paul Solman begins another of his reports from the series “Making Sense of Financial News.”

PAUL SOLMAN: Are you selling any cars? Nobody’s in there.

While shooting a GM story in Detroit last week, we heard responses to the bankruptcy and a lot about collateral damage, especially to those GM stakeholders who don’t have collateral.

VICTOR GEORGE, Chevrolet dealer: I’ve got to take care of my family.

PAUL SOLMAN: In Lapeer, Mich., for instance, Victor George is losing his Chevy dealership.

Can you afford to retire?

VICTOR GEORGE: Are you kidding? No. One in college, second one ready to enter college, and one in elementary school. So I’ve still got three good reasons to get up every morning and go to work.

PAUL SOLMAN: But work where? What work will Victor George, a car dealer all his working life, find in a downsized economy? And what about those who work for him?

The nationwide average is around 50 employees per dealership. With GM alone closing 1,100 of them, that’s at least 55,000 fewer jobs to vie for. And what about suppliers, who still employ some 300,000 workers?

SHELDON STONE, Amherst Partners: In addition to the shrinkage of the sheer number of suppliers and the people employed, there’s going to be mergers or acquisitions in the supply base of companies coming together.

PAUL SOLMAN: Consultant Sheldon Stone.

SHELDON STONE: For example, plastic injection molders, the sheer number of plastic injection molders in the supply base is — the capacity is far greater than not only GM, but the Detroit three needs at this point in time.

Fallout bankruptcies expected

PAUL SOLMAN: Or as bankruptcy expert Laura Bartell says about the suppliers...

LAURA BARTELL, professor, Wayne State University Law School: I would not be surprised at all to see many, many fallout bankruptcies, particularly here in Michigan.

PAUL SOLMAN: Supplier jobs are manufacturing jobs, fewer of those around. And if you lose one, you're unemployed for longer than the national average, now 21 weeks.

In an economy where even people with jobs are spending less because they're saving, more laid-off factory workers is no recipe for recovery.

Another group may also be spending less: GM bondholders. Some are speculators, but others just retirees, like Judy Buchholz living on what she thought was a fixed income.

JUDY BUCHHOLTZ, GM bondholder: If all of them come out with zero of their savings and everything, my husband and I don't have another 35 years to go back to work and recoup this money, and most of them do not, either.

PAUL SOLMAN: And then there are the nearly 400,000 GM retirees and spouses, their wealth trimmed two ways. First, health benefits, says Frank Warren.

FRANK WARREN, UAW-GM retiree: I find out after retiring April 1st of this year that now I'm going to lose my vision coverage and my dental coverage. I still have four kids living at home and a wife that is also a cancer survivor twice over, OK? And I myself survived nine angioplasties and a couple of heart attacks.

PAUL SOLMAN: Moreover, Warren and others here were investors in GM stock.

G.M. RETIREE: Most of us were at one time.

G.M. RETIREE: Most of us are stockholders.

G.M. RETIREE: We bought stock through our investment, 401(k)s.

PAUL SOLMAN: So retirees will spend less, too, suggesting less revenues for companies, more layoffs, even less spending. This is the "multiplier effect," operating in reverse, the downward spiral, which Jim Dollinger was trying to short-circuit in Flint by getting me to try out a new Buick.

I don't try out a new wife. I love my wife. Why would I try out a new car if I love my car?

JIM DOLLINGER, Buick salesman: Well, your wife is forever. Machines wear out. You've got to get a new one.

PAUL SOLMAN: Dollinger thinks the collateral damage in Michigan has just begun.

JIM DOLLINGER: You're going to find commercial real estate depressed. You have people without jobs, high school football teams no longer with support, centers of activities going down, tax revenues going down.

Senate hearings on dealerships

PAUL SOLMAN: But the damage extends well beyond Michigan. Dealership closings nationwide at GM and Chrysler were the subject of a Senate hearing today in Washington.

SEN. KAY BAILEY HUTCHISON, R-Texas: So could you explain how it is that you are going to take this inventory from the dealers?

JIM PRESS, president, Chrysler: We have established a program, after we learned of the bankruptcy, that would allow us to redistribute the cars from the affected dealers to those dealers that are going forward, as well as parts and their special tools.

The process will begin when two things occur. No. 1, the terminations take effect, because they're not terminations -- the effective date has not occurred yet. The cars are not ready to be taken from the inventory of the affected dealers.

And, second, a floor plan source has to be put in place for the incoming new dealers.

SEN. KAY BAILEY HUTCHISON: Do they know that? Because I'm not hearing that from one dealer, that they understand that there is a plan in place that this inventory will be taken.

JIM PRESS: The dealers do know that. It's been -- they've been called. We have a log, a phone log confirming the discussion with every dealer.

SEN. KAY BAILEY HUTCHISON: Mr. Whatley or Mr. Lopez, tell me if that's your understanding.

RUSSELL WHATLEY, Chrysler salesman: We have had no contact with the business center whatsoever until Monday, June 1, after your office had called them and kind of rattled them. I did get a call then that said, "Rest assured, we will try to come up with a plan to remove your inventory after June the 9th." I have seen no reports. I have not talked to anyone except for the one phone call that your office did seem to generate from them.

SEN. KAY BAILEY HUTCHISON: There's just a disconnect here, Mr. Press, and...

PAUL SOLMAN: Chrysler's plans to close 789 of its dealerships next week will also be the subject of a bankruptcy court hearing tomorrow in New York.