Could The Detroit Three Become The Detroit Two?

Implications: Whenever the B-word--bankruptcy--is uttered in conversation about the Detroit Three automakers, there is a quick and predictable retort. "Bankruptcy is not an option."

Analysis:

"Bankruptcy is not an option." is quickly followed by: "because we sell a consumer product, and people won't buy cars if they  don't think we'll be around to service them or supply replacement parts."

That's a legitimate concern. But a more persuasive reason to believe that GM, Ford and Chrysler will avert Chapter 11 bankruptcy is the fallout that would decimate its component suppliers and spread chaos throughout the U.S. industrial base.

Think of it as nuclear winter.

That may sound stark, but the prospect of of an auto industry meltdown is actually a fairly routine topic of conversation among automotive analysts. That kind of talk is what happens when Ford reports an $8.7 billion, second-quarter loss, only to be dwarfed by GM's $15.5 billion collapse in the same period.

Think about the catastrophic impact on Metro Detroit if GM, Ford, or even the smaller Chrysler stopped paying for steel, for tires, for toilet paper. We're talking billions and billions of dollars.

Within 90 or 120 days, vehicle output would grind to a halt. Auto suppliers are operating on a shoestring. They have no surplus cash, no safety net that would allow them to keep supplying a bankrupt automaker if they don't get paid.

The impact would spread like wildfire across the entire economy.

That's why, no matter how much Wall Street and Washington D.C. belittle Detroit's auto companies, they will bail Detroit out if they must-just as financial basket cases Bear Sterns, Fannie Mae and Freddie Mac have been recently propped up by government intervention.

Thus, Detroit's message to Washington that they need help with "access to capital." Translation: low cost loans, assisted by either rate subsidies or loan payback guarantees.

Yes, many lawmakers and free-market purists will yelp and squeal that Detroit's management and labor unions created this mess and don't deserve a rescue. But the fallout from a major auto company failure is too grim to contemplate.