U.S. mulls auto bankruptcy plan

The White House said Thursday that it was considering a government-supported “prepackaged” bankruptcy plan for General Motors Corp. and Chrysler instead of offering emergency loans to the auto giants. That’s a move that many congressional Republicans favor but that the carmakers and some analysts say could lead to the collapse of the companies.

Bush administration officials, while weighing their final set of options, were “very close” to a decision, White House spokeswoman Dana Perino said.

After Congress deadlocked on a bailout this month, the White House pledged to help Detroit in hopes of shielding the battered U.S. economy from damage that a meltdown of one or more of the Big Three could cause.

But time is growing short. GM, Chrysler and Ford Motor Co. have announced dramatic steps to cut costs, including idling plants and slowing production -- steps that add to the country’s immediate economic woes even though they may be necessary for the companies’ ultimate survival. Chrysler said Wednesday that it was closing its 30 factories in the U.S. and Canada for at least a month.


In an ordinary prepackaged Chapter 11 bankruptcy, companies meet with creditors and other stakeholders and work out how to restructure debt and make other changes to enable the company to survive. Only then do they head into U.S. Bankruptcy Court, where a special judge oversees the execution of the agreed-upon plan.

How that would work on the enormous scale of the U.S. auto industry -- or whether it would work at all -- is not clear. It’s unknown, for example, whether the government would provide the billions of dollars the companies would need to operate while in bankruptcy.

Moreover, large numbers of creditors, dealers, workers and retirees have a financial stake in the automakers’ future. Getting all of these parties to sign off on a restructuring plan for GM or Chrysler might be impossible without the oversight of a bankruptcy judge, said Craig Litherland, a bankruptcy specialist at law firm Gilbert Oshinsky in Austin, Texas.

“I don’t see how you can do that in a prepackaged bankruptcy,” Litherland said in a recent interview. “With their legacy costs, you have tens of thousands of people who would be affected. Outside of bankruptcy court, how do you negotiate with all of those people?”

He also noted that “prepacks” tend to be a better option when the company’s prospects are beginning to improve and creditors have a high degree of confidence that restructuring will succeed. That’s not the case with GM and Chrysler. The U.S. economy is in a deep recession, auto sales in November hit their lowest monthly level since 1982 and many analysts expect sales to continue to fall next year.

Supporters of a bankruptcy say it could force the restructuring of union contracts and other obligations because a bankruptcy judge could void existing agreements.

“Absent such restructuring, we do not believe any amount of money will succeed in saving these companies,” seven Republican senators wrote to President Bush this week.

If the federal government steps in with money to keep the companies operating through the bankruptcy proceedings -- GM and Chrysler say they are nearly out of operating cash -- taxpayers could be on the line for more than the $14 billion in short-term emergency loans GM and Chrysler had sought from Congress.


Lynn LoPucki, a UCLA law professor, said government financing would probably be needed because the credit crunch has made it difficult to get private loans.

GM could require more than $20 billion in financing to make it through bankruptcy, LoPucki estimated. However, with first claim on GM’s more than $100 billion in assets, the government would stand a good chance of getting its money back whether the automaker survives or is liquidated, he said.

One risk of bankruptcy is consumers’ fear that car warranties might not be honored by automakers. That could cause sales to plummet even more, said William Diehl, chief executive of Michigan advisory firm BBK.

“How are you going to convince the consumer to buy a product, which they expect to last for five to seven years, from a bankrupt company?” Diehl asked.


Bush said Thursday that he had not decided how to help the automakers, although he has vowed not to let them fail. Many Republicans have been pressuring Bush not to extend loans from the $700-billion Wall Street rescue fund for fear it would set a precedent for helping other troubled industries beyond the financial services sector.

Bush said that, philosophically, he would prefer that the government not get involved in helping troubled companies. But he expressed concern about the wider effect a failure in Detroit could have.

“I think, under normal circumstances, no question the Bankruptcy Court is the best way to sort through credit and debt and restructuring,” Bush told an audience at the conservative American Enterprise Institute. “These aren’t normal circumstances. That’s the problem.”

Ford has said it does not need short-term funding from the government, but the company supports a government bailout for its competitors. That’s because a failure of GM or Chrysler, or both, would endanger Ford as well because the Big Three share numerous suppliers and dealers.


The automakers, dealers and the United Auto Workers union have warned that any kind of bankruptcy could lead to total liquidation.

“Bankruptcy, whether it’s structured or not, would destroy demand for that company’s vehicles and put dealers out of business,” said Annette Sykora, chairwoman of the National Automobile Dealers Assn., which represents some 19,700 car and truck dealers in the U.S. “A bankruptcy would further threaten the availability of credit not only for consumers, but also for dealers’ financing of the vehicle inventory on their lots.”

Perino made a distinction between a bankruptcy triggered by the companies running out of money that possibly could lead to liquidation, and a prepackaged bankruptcy.

“The president is not going to allow a disorderly collapse of the companies,” she said. “There’s an orderly way to do bankruptcies that provides for more of a soft landing . . . that would be one of the options.”


A USA Today/Gallup poll released Sunday found that 82% of respondents would consider buying a Detroit-made vehicle, and that 67% would consider such a purchase even if the company were in bankruptcy.

Other research paints a different picture, however.

Art Spinella, president of CNW Marketing Research Inc., which tracks consumer buying habits, said he has found that 89% of consumers who intended to purchase a car said they would not buy from an automaker that filed for bankruptcy. However, that would drop to 50% if the government guaranteed vehicle warrantees as part of a prepackaged bankruptcy filing, he said.

“The only way they get comfortable with it is if there’s some sort of government safety net,” he said. But he added that none of the U.S. automakers could afford to lose half of an already dwindling customer base.