A surge for the big 3?

This provision in the reported Big 3 bailout deal-in-progress gave me deja vu:

Under the White House plan, the adviser would determine if the auto makers were sticking to their recovery plans before approving additional assistance. If the adviser determined the plan wasn't being executed, it would submit an alternative plan for the company to restructure through a Chapter 11 bankruptcy and require the firm to repay the government any bailout funds.

Remember those benchmarks upon which continuing the surge in Iraq were supposed to be contingent? And how, in September 2007, very few of those benchmarks had objectively been met, but Petraeus reported that significant progress had been made? And how events did bear him out over the next year?

It's very hard to imagine any "adviser" pulling the plug and triggering a bankruptcy plan. Still, such oversight provisions are essential politically, and perhaps generate useful pressure.

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A prior post brought together a chorus of credible voices arguing that a Big 3 bankruptcy would bring on economic catastrophe -- one of them, Wolfgang Munchau, spotlighting banks' exposure to credit default swaps purchased against a GM failure. More on that risk today--and related dominoes--from Thomas Palley, author of Post-Keynesian Economics, writing in FinancialWeek:

The Big Three and their auto finance associates (such as GMAC) are huge debtors whose liabilities are held throughout the financial system. If they go bankrupt, the insurance industry, which is likely a large holder of these debts, would quickly enter a spiral of collapse. Pension funds would also be hit, imposing further costs on the PBGC.

But the greatest damage may come from the credit default swaps market that brought down AIG. Huge bets have undoubtedly been placed on the bonds of GM, Ford, Chrysler and GMAC, and bankruptcy will be a CDS triggering event requiring repayment. Moreover, a Big Three bankruptcy will bankrupt other companies, risking a cascade of financial damage as their bonds and equities fall in value and further CDS events are triggered. This is the nightmare outcome that risks replicating the crash of 1929