Detroit's Return on Capitol

In a classic Monty Python sketch, a shifty pet-shop owner attempts to distract John Cleese from the fact that his parrot is dead by pointing out the deceased bird's "beautiful plumage."

Similarly, the debate on bailing out Detroit's three auto makers often seems to play out in a theater of the absurd. Senior industry executives make a great show of driving down to Washington in hybrid vehicles -- "beautiful plumage" indeed, but that is all.

The threat of bankruptcy, meanwhile, is dismissed by many as untenable, despite the fact that it provides the ultimate leverage over existing shareholders.

Assume Detroit gets its bailout. An important question then is: Who sacrifices most? One answer: Who has the most to sacrifice?

General Motors, the biggest and hardest-pressed of the three, aims to roughly halve its effective debt burden to $30 billion. Currently, it owes $20 billion to a voluntary employee-benefit association in return for offloading retiree health-care obligations. Secured creditors are owed $6 billion, while another $36 billion is due to unsecured lenders.

There are infinite scenarios regarding which side takes the biggest hit, but Chris Ceraso, analyst at Credit Suisse, posits three. All assume secured creditors are made whole. Union members originally took a 28% haircut on outstanding liabilities when the VEBA was agreed. Under Mr Ceraso's central case, they would lose another $10 billion, or take it as equity, making the effective haircut 50%. That would leave unsecured lenders having to forgive almost $22 billion, giving them 41 cents on the dollar.

The challenge of getting agreement on that is why Thursday's Senate hearings were laced with talk of appointing a federal overseer. As Brian Johnson, analyst at Barclays Capital, points out, this would borrow from the 1979 Chrysler playbook. Government would be the bad cop, withholding the lifeline until stakeholders make big sacrifices.

That is why it is counter-productive for some senators to simply dismiss the bankruptcy threat. After all, fear of bankruptcy focuses minds. Union members know VEBA agreements are likely to be changed in Chapter 11. Bondholders, meanwhile, never relish working through a bankruptcy, even those that scooped up GM's debt for less than 20 cents on the dollar.

The executives, having sacrificed their salaries, have only their jobs left to give.

And shareholders? Chrysler's private-equity shareholders look exposed politically and because there is skepticism that the smallest of the Detroit three really is too big to fail.

GM's and Ford Motor's combined market value is less than $10 billion. Their shareholders have comparatively little to give. Yet they will probably have to give virtually all of it anyway in a debt-for-equity swap or dilutive equity increase. On that basis, the fact that these stocks still command several dollars each is the final absurdity.