Bankruptcy or Bailout for Automakers?

Washington confronts a choice: bailout or bankruptcy for car companies.

ByABC News
November 17, 2008, 5:06 PM

Nov. 17, 2008— -- The chorus for an auto industry bailout is building, and the Senate took up the issue of a $25 billion emergency loan for automakers, to be paid for out of the $700 billion economic rescue package.

General Motors, Ford and Chrysler, who, earlier this month, made an urgent plea to lawmakers for cash, say they need a government lifeline to survive. House Speaker Nancy Pelosi said Saturday that House leaders would secure aid for the auto industry, "to ensure their long-term economic viability."

"You've got to have this interim support, as every other country with an automobile industry is going to do. No other country with an automobile industry will allow it to go down," said Sen. Carl Levin, D-Mich., on NBC's "Meet the Press" Sunday.

But for GM and perhaps Chrysler, two of the Big Three auto companies, the possibility of bankruptcy -- a once unthinkable outcome -- is gathering steam.

"I think bankruptcy may be the only viable option," said Michael E. Levine, professor at New York University School of Law. "GM can't reduce the number of its dealers. It can't dispose of a lot of property. It can't reorganize its contracts without the protection of the bankruptcy court."

Chapter 11 of the U.S. Bankruptcy Code allows for a company "makeover" under court supervision. But it's not your grandfather's liquidation bankruptcy.

"It doesn't mean close the doors, lock it up, sell it off," said Levine. "It means reorganize, financially. Americans at this point are fairly used to dealing with companies that are in reorganization."

Bankruptcy, Levine argues, gives companies greater leeway to restructure and emerge stronger. Bankruptcy protections could, for example, let GM out of its expensive union contracts that pay $71 an hour in wages and benefits, compared to the $47 that Toyota pays.

And under bankruptcy law, the company could rewrite contracts with dealers and drop less profitable brands to concentrate on newer, more fuel efficient models, like the Chevrolet Volt.

"It's really better to focus on your most successful brands and products," said Paul Ingrassia, former Dow Jones executive and Detroit bureau chief for the Wall Street Journal. "So instead of having eight brands with 20 percent of the market, why not have two or three?"