Bankruptcy or Bailout for Automakers?

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?"

Bankruptcy Offers Chance to Restructure

Ingrassia favors a third option somewhere between bankruptcy and bailout, something akin to a U.S. receivership, like the Air Transportation Stabilization board that kept some U.S. airlines in business after Sept. 11.

"The government made money on the warrants it got in return for its assistance, and the airline industry was able to reorganize," said Ingrassia.

But the multibillion-dollar question remains: will consumers plunk down $25,000 to $50,000 for cars built by a bankrupt company when they have so many other choices?

Opponents of a bailout argue that Americans continued to fly through multiple airline bankruptcies. And while a bankrupt automaker may lead to more failures and job losses among businesses that depend on it, other companies with U.S. operations, including Toyota and Honda, might pick up the slack.

A bailout, on the other hand, could mean billions of dollars in taxpayer money that companies could pour back into failed models for the same mediocre results.

"Basically, what you'd be doing is putting the money in a failed business model, frankly," Ingrassia said. "These companies did not run into trouble just because of the mortgage meltdown and the financial crisis. They really started losing tens of billions of dollars as early as 2005."

Bankruptcy supporters say that a GM that survives Chapter 11 may emerge as a leaner, more efficient company.

"The promise of a GM down the road that can stand on its own feet, support dealers, support workers and build cars that people want to buy," said Levine.

Washington confronts a painful choice: a bailout that risks wasting taxpayer money, or a bankruptcy that offers only the hope of a fresh start, but no guarantee.