General Motors and Chrysler may not be asking for a federal auto bailout in order to help them avoid bankruptcy. According to press reports, the two companies may ask for a federal bailout after declaring bankruptcy.
Bloomberg reports, "General Motors Corp. and Chrysler LLC executives are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multibillion-dollar government bailout, said a person familiar with their internal discussions." Executives are reportedly worried that they could not restructure their companies enough to survive while under bankruptcy protection, and would instead be forced to liquidate. "GM Chief Executive Officer Rick Wagoner has said that bankruptcy would mean liquidation because customers would refuse to buy cars from a company that might not be able to back warranties or supply parts." Instead, the companies might accept a pre-negotiated bankruptcy, then use government funds to restructure and emerge as competitive companies.
"Less government money would be needed in a prepackaged bankruptcy," Bloomberg reports, "Which might last only two months, compared with two years or more for a regular bankruptcy." Under a prepackaged bankruptcy agreement, "An automaker would go into court after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed. Government aid might be needed only for the period when the company was gaining consent from its constituencies -- which might take as long as six to 12 months."
Reuters reports, "In response to automakers' bailout plea, staff for three members of Congress have asked restructuring experts if a pre-arranged bankruptcy -- negotiated with workers, creditors and lenders -- could be used to reorganize the sector without liquidation." Negotiations reportedly "are splintered among small groups, making it unlikely that a proposed solution such as bankruptcy would emerge until next week at the earliest."
The Reuters report adds, "Industry executives and analysts say the immediate carnage from a bankruptcy of General Motors Corp, Ford Motor Co or Chrysler would spread throughout an industry that is bleeding cash in a global slowdown." A controlled crash landing, in effect, could lessen the impact of a bankruptcy on other portions of the auto manufacturing sector.
"It's not just the congressional committees at work here," according to Jalopnik. Another unidentified source has told reporters that a representative President-Elect Barack Obama's transition team has "contacted at least one bankruptcy-law firm to say Daniel Tarullo, a professor at Georgetown University's law school who heads Obama's economic policy working group, would call to discuss the workings of a so-called prepack." Obama reportedly wants to name Tarullo as an "auto industry czar" to oversee government efforts to help the industry recover.
If the negotiated bankruptcy compromise emerges as the final plan to save the U.S. auto industry, the business plan that GM submitted to Congress yesterday may be remembered as the first signal of what was coming. While Ford and Chrysler's plans were much less extensive, GM's plan proposed shuttering underperforming brands, closing facilities, laying off tends of thousands of workers and closing thousands of dealerships - almost certainly the same steps a bankruptcy court would mandate under any restructuring agreement. GM may have been signaling this compromise before it leaked to the press.
While the bailout debate goes on, automakers are trying to sell cars as fast as possible with deep discounts. Research the best car deals with U.S. News' Car Reviews.
