President Bush recently agreed to lend General Motors and Chrysler $17.4 billion (£11.8 billion) on the condition that these companies complete a financial viability plan.

The carmakers were set goals under the agreement: converting two thirds of their debt into equity; paying company stock to fund half of the Voluntary Employee Benefits Associations, which fund retiree healthcare benefits, and remove these costs from future liabilities; and aligning wages, benefits and work practices with the US operations of Nissan, Toyota or Honda.

These goals are generally consistent with the conditions I outlined as necessary for the Detroit Three when I testified before the Senate Banking Committee on November 18. For example, laid-off workers could no longer sit in the “jobs banks” collecting 90 per cent of pay and benefits indefinitely and engaging in productive activities such as pinochle.

Financial viability requires projecting a positive net present value, taking into account all current and future costs. It does not require a positive cashflow by March 31. In fact, wage and benefit cuts need be achieved only by December 31, 2009.

Given the depressed car market, GM and Chrysler will be asking for more federal loans when they table their plans by March 31. If the car market stays depressed into 2010, Ford is expected to seek assistance as well. Loans of well over $100 billion are likely to be needed. Many of them could prove to be gifts, with the loans never truly repaid.

Unless the carmakers comply with the terms of the agreement, they simply cannot hope to be profitable. Yet, they are permitted to vary from those conditions if they can still demonstrate a net positive present value. Enter the accounting magicians.

GM and its union leaders have mastered obfuscating the consequences of their pay structure and work rules. Calculations of net present value will hinge on forecasts of future car sales and wages paid by Toyota, Nissan and Honda. A few quick pen strokes and a lousy business plan can be made a winner, with costs to taxpayers becoming apparent only years later.

President-elect Obama owes organised labour a huge debt for his November victory. Ron Gettelfinger, the president of the United Auto Workers (UAW), can be expected to try to sell Obama labour agreements that appear to create more concessions than are real and leave the Detroit Three in the red.

Fooling Obama would create loans that the Detroit Three never can really repay. President Bush has punted the car mess to his successor, and one of three outcomes is possible.

First, Mr Obama can require the carmakers and the UAW to come up with a contract that ordinary mortals can understand, eliminate all the foolish job classifications and work rules, and establish pay rates that make the Detroit Three competitive.

Second, Mr Obama can push the carmakers into a pre-packaged Chapter 11, and let a bankruptcy judge impose the essential conditions of the Bush agreement.

Finally, he can let the Detroit Three continue their profligate behaviour. If the President-elect caves in to union pressures and chooses to subsidise the carmakers, other unionised industries will line up. Market discipline will not apply to the 8 per cent of the private-sector workforce represented by unions, and damn the majority that really elected him.

Peter Morici is a professor at the University of Maryland School of Business and is former chief economist at the US International Trade Commission

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