Auto deal could avert market rout, but no cure-all

NEW YORK (Reuters) - A rescue package for U.S. automakers could well avert another stock market plunge like the one seen after Lehman Brothers' collapse, but it is highly unlikely to herald an end to the market's malaise.

Global markets are already extremely jittery and the failure of a huge U.S. employer like General Motors Corp GM.N, which has widespread exposure to the financial industry, would further roil investor confidence.

With that in mind, U.S. Democrats in Congress on Monday proposed a $25 billion loan package to help GM, Ford Motor Co (F.N) and Chrysler LLC, and hope to pass the legislation during a post-election legislative session.

The loans would have 10-year terms and be used to ensure long-term viability of the automakers, according to the proposed bill.

"I don't think there is any question there will be a negative impact on the market almost regardless of what happens this week with GM," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

"But the markets would find it unacceptable if the bondholders are not protected," he added.

Indeed, a failure of GM in which bondholders are not protected could trigger another round of credit problems, similar to, if not in the same scope, of that caused by the bankruptcy of Lehman Brothers, said Owen Fitzpatrick, head of U.S. Equity Group, Deutsche Bank Private Wealth Management.

"The lynchpin is the debtholders," Fitzpatrick said. "If it is only the equity holders that get liquidated, I don't think that would have a material impact on the market."

Lehman Brothers bankruptcy is widely blamed for the freezing up of money markets that led to the big stock market sell-offs in September and October.

Analysts said there was concern among market participants and politicians about the financial ramifications of letting GM fail, given the unknown number of credit default swap contracts on GM's debt held by banks and funds as well as the commercial paper issued by GM's finance arm, GMAC.

Not to mention the economic impact: the massive job losses that would result and the likely crippling effect on businesses linked to the auto industry, be it through proximity or through supply contracts.

GM, Ford and Chrysler have argued to Congress their health is crucial to the U.S. economy since they employ 250,000 people and affect more than four million other jobs nationwide in related industries or indirectly.

CHAPTER 11?

The "Big Three" have all said filing for Chapter 11 bankruptcy protection is not a viable option.

"The reason people think failure could be cataclysmic is that there are so many companies that are tied to the auto industry," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

"Right now, the number one concern is jobs. We can't afford to make the problems we already have worse," he said.

In a booming economy, Ch. 11 bankruptcy could have been beneficial, said Pado, as it would force the automaker, whose gas-guzzling vehicles have been steadily losing market share, to restructure and become more globally competitive.

But, he added, "at this point, the economy is too vulnerable to let another big employer go. I think the market would benefit from knowing we're not going to see a big jump in the unemployment rate."

"The real question is going to be what fraction of aid is demanded by both management and labor," said Ernie Ankrim, chief investment strategist for Russell Investment Group in Tacoma, Washington.

"But any (bailout) that happens here is going to be better than would have been otherwise the case," he noted.

(Reporting by Kristina Cooke; editing by Gary Crosse)