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updated 6/1/2009 1:14:08 PM ET 2009-06-01T17:14:08

Slowly, the blow-by-blow accounts of how Chrysler and General Motors ended up in bankruptcy court are beginning to emerge. It’s actually pretty simple: Wall Street screwed Motown.

OK, sure, Detroit made some bad bets on trucks and SUVs and got killed when gas prices spiked last summer. But now that executives for Chrysler, already in Chapter 11, no longer have to spin comments for public consumption, a story is taking shape. The Washington Post has a good piece on the subject, with rueful commentary from deposed CEO Robert Nardelli.

The business of selling cars can look complex from the outside, but it really boils down to a basic issue: automakers want to build vehicles at a profitable price-point and then create financing opportunities for customers. (Forget whether vehicles are good for the environment — that doesn’t enter into the analysis.) Very few people pay cash, and pay in full, for a new car. This has created, over time, a proliferation of options: sweet, short-term, low-interest financing deals can be run, incentives can be offered, special leasing offers can be set up, dealers can turn lightly used cars into “certified pre-owned” vehicles and sell them for more than regular old used cars, etc.

Credit keeps this train rolling. So when the credit markets seized up last year, the automakers couldn’t obtain operating capital (well, GM and Chrysler couldn’t — Ford secured its cash hoard earlier), customers couldn’t get loans to purchase new vehicles, couldn’t arrange lease financing, and the industry ground to a halt. Restructuring morphed into survival. And then lurched into bankruptcy.

At the core of this gruesome phenomenon was something starkly un-American. But we should have seen it coming. In the past decade, the finance industry edged closer and closer to the third rail of American life: ownership of tangible assets. This went beyond the shuffling of stocks and bonds that traditionally made up the business of Wall Street. Obviously, the big blow-up came in the housing market. But clonking the auto market didn’t do anyone any favors, either. Most Americans borrow lots of money to buy two things: houses and cars. That’s all the leverage they’re worried about.

GM's road to bankruptcyAs almost everyone knows, buying a new car is a questionable financial move. You’re purchasing a depreciating asset that depreciates in a frightful hurry: drive it off the lot and you lose 15 percent of the car’s value. But you don’t buy a new car to make money — you buy a new car because you want a new car. At a level, you suspend financial wisdom in order to obtain pleasure. And even if you go for utility, a simple A-to-B machine, well, there’s pleasure in that, too.

Can you say act of faith? Really, buying a new car, and particularly an American car, represents an investment not in yourself, but in the idea of U.S. manufacturing. You are using your credit score to borrow money from a bank to invest in the ongoing prosperity of people whose job it is to make cars. That includes UAW workers, executives, designers, parts suppliers — a whole matrix of economic roles.

The shameful shenanigans that took place in the global credit markets undermined this act of faith. And in doing so exacerbated management challenges in Detroit that were already near-insurmountable. This was deep damage. Back when buying a home was profoundly difficult and the U.S. carmakers were just beginning to establish what would become the signature industry of modern life, the extension of credit was a key business strategy.

The automakers themselves — Ford and GM — loaned people money to buy their products. In doing so they created powerful credit franchises that would endure for decades. And this was stable, flexible credit. People weren’t borrowing hundreds of thousands; initially, they were borrowing a few grand, later maybe $20-$30,000, depending on the vehicle. You could have a so-so credit score and still get a loan. Interest rates varied greatly, but they rarely approached the usurious levels we’re now seeing from the credit card issuers.

So let’s be honest: Wall Street almost killed Detroit. But Wall Street is paying the price. And still screwing Detroit to a certain extent, as we seem to have infinite patience with the profligacy of the banking sector while taking the opportunity of GM and Chrysler’s bankruptcy to vent out disgust with Motown. But think about it. If we are going to change as a society over the next 50 years, it is what we have always done well that will lead us. Making things that allow the individual American to imagine a better existence. Now, more than ever, the auto industry and the finance business need each other. It’s going to hurt, but they need to learn to love again.

Copyright Washington Post.Newsweek Interactive

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