Bankruptcy won’t solve automakers’ woes

Roland Jones • Profile • E-mail

With U.S. automakers asking for billions more dollars in aid from the U.S. government, it’s worth asking something that was almost unmentionable just a few months ago: Shouldn’t General Motors and Chrysler just file for bankruptcy?

On Tuesday evening, meeting a deadline to file viability plans with the U.S. Treasury Department, GM and Chrysler asked the government for up to $21.6 billion in additional government loans by March 31 to survive the current recession. The funds would come on top of the $17.4 billion allocated to the automakers in December.

The automakers’ new requests were accompanied by plans for thousands more job cuts, slashing of models and brands, union concessions and the prospect of even further expense cuts — acknowledgments that the U.S. auto industry has grown significantly worse since late December, when the Bush administration granted the automakers billions in federal loans to stay in business.

Bankruptcy is the dirty word of the automotive industry’s current dilemma. Late last year, as the automakers sought financial help from the government, some industry observers argued that a traditional bankruptcy filing — or Chapter 11 proceedings, where a company gains court protection from its creditors while it reorganizes its operations — could create a vicious cycle, pulling down other automakers like Ford and their suppliers and ultimately have a devastating impact on the broader U.S. economy.

They also argued that consumers would not want to buy vehicles from an automaker that is in bankruptcy proceedings, for fear of not having their vehicle warranties honored.

But even though GM and Chrysler are burning through hundreds of millions of taxpayers’ dollars each month, most analysts still say bankruptcy, or some form of it, would not necessarily be a good option for the struggling automakers.

Video   Wagoner on GM's future Feb. 18: CNBC's Phil LeBeau interviews GM's CEO Rick Wagoner a day after his company requested billions in new aid from the government. CNBC

“If these companies went into bankruptcy right now, in exactly the position they are in today, they would be liquidated because no one out there would supply them with the financing they need to get through bankruptcy,” Mark Zandi, chief economist with Moody’s Economy.com, told CNBC Wednesday.

That would mean a few million jobs lost, Zandi said, which would be “cataclysmic” for the U.S. economy, already shedding about a million jobs every two months. A better option would be to give the automakers the extra funding they need to stay in business until March 31. Then the government could prepare for a bankruptcy later on with provisions for securing financing to bring them through Chapter 11 and guarantee vehicle warranties.

On Tuesday afternoon, the White House said it has not closed the door to a government-backed bankruptcy for the struggling automakers. This is not a common or garden bankruptcy. In a government-run, “prepackaged” bankruptcy — one in which a company prepares its reorganization in cooperation with its creditors and implements it as soon as it enters bankruptcy — a company can keep operating while it gets relief from its obligations, including any contract with its union.

Analyst David Leiker at financial services firm Robert W Baird still sees bankruptcy as the best option for the automakers. Although it is likely to be “painful near-term, we continue to believe that the challenges to restructuring GM and Chrysler are too complicated to be met outside of a bankruptcy,” he said Wednesday.

Large U.S. companies have successfully emerged from bankruptcy in the past. In September 1983, Continental Airlines’ Chairman Frank Lorenzo put the airline into bankruptcy. He brought it out again days later as a new, restructured Continental, hiring back employees at lower salaries than the airline had originally paid.

MORE FROM THE DRIVER'S SEAT

The Driver's Seat Section Front

Auto industry turns to Europe for direction Pontiac hits end of the road Nissan hatches plan to boost battery cars At GM, down looks like up, at least for now Automakers turn to safety to sell cars CEO lays out ambitious Chrysler road map Plug-ins rev up; are consumers ready? As Toyota tips, VW steers for the top Battle of the ultrapremium automakers Toyota's reputation takes a pounding The Driver's Seat Section Front   Add The Driver's Seat headlines to your news reader: