"What does an auto industry default cascade look like? "

Tracy Alloway on Alphaville with a post about why the Automakers would be bailed out through TARP:

"What does an auto industry default cascade look like? Like this, from Bank of America:

And that’s the reason why the US government may well be considering bailing out the country’s flailing auto industry using Tarp funds, according to the Wall Street Journal. It may even go so far as to request the second tranche of the Tarp to do so, according to the article.

Why the desperation determination to bail out what seems like a dying industry? BoA’s Jeffrey Rosenberg explains:
A GM default with no [government] support could lead to payment defaults by GM to its suppliers. The most concentrated of these, Axle, provides little of its sales outside of GM so a default by GM likely cascades into a default at Axle, but becomes limited there. However, consider the exposure of Lear. Here, a default of GM could significantly restrict the ability of Lear to supply Ford. If a payment default from GM lead to a default of Lear and an inability to supply Ford, that could impair Ford’s ability to provide payments to other suppliers. Next, with Ford as its major supplier, Visteon could face payment difficulties.

…

The systemic risk argument of a set of cascading payment defaults is borne out in the close linkages between suppliers and manufacturers. However, as we have argued before, Debtor-In-Possession (DIP) 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.

By BoA’s reckoning, it would take about £30bn in DIP financing to save General Motors alone (about 2 times working capital plus a £10bn cushion).

Does that seem like a lot? Yes, but when you see graphs like the above you start to understand why the government is concerned about systemic risk.

Of note however, is how potential DIP financing would work. The Fed Reserve has, under “unusual and exigent conditions,” the ability to lend to corporations on a securitised basis — though the funding requires a bankruptcy so the Fed and Treasury can obtain senior claim on all assets. Back to BoA:
Repayment of the loan would contemplate a restructured GM achieving long term viability such that loan proceeds could be paid off over time, say 5-10 years, refinanced or sold to the private market under demonstrated viability several years out.

A 10-year bet that the US auto industry will recover? A rather big gamble for the government (and taxpayers) then."

The gamble that the Treasury Dept. doesn't want to take is with employment and production falling off a cliff. The actual economic sense of the bailout, without Political Economy thrown in, is minimal, and rests on a great deal of Wishful Thinking. I've given pretty stringent requirements for the bailout, which I doubt will be met, but I understand the fear underlying this bailout.

If you believe as I do, that the government not bailing out Lehman caused a crisis of faith in the government's willingness and ability to get us all out of this mess, then you can understand why this bailout is necessary. If you don't think that this is what the underlying assumption and context really is, then I can easily understand your being against this bailout.