Auto bankruptcy options

In this dangerous game of chicken, Detroit’s carmakers and a divided Congress have nearly reached the point of ripping out their steering wheels and brake pedals as they hurtle towards one another. General Motors and Chrysler say they need cash now, not in 46 days when a more sympathetic group will populate Capitol Hill and the White House.

In hindsight, the carmakers made a tactical error by not considering a “prepackaged bankruptcy”, which was reportedly being studied by Barack Obama’s advisers at least two weeks ago. Congress erred as well by holding out the hope of a deal as billions of dollars of the carmakers’ cash and precious time have evaporated.

US corporations facing bankruptcy have various choices. Beneath Detroit’s bluster that bankruptcy is “not an option”, media reports suggest that carmakers may now accept a “pre-arranged” reorganisation. Many bankruptcies are involuntary and result in either Chapter 7 (liquidation) or Chapter 11 (reorganisation). The latter can be negotiated ahead of time. For example, oilfield services company Halliburton put its KBR subsidiary through a prepackaged reorganisation after being overwhelmed by asbestos litigation. This can be far cheaper and might avoid spooking customers since re-emergence is fairly quick.

But there is scant time left now for workers, bondholders, unions, dealers and suppliers to all agree on concessions. A messier, lengthier and more expensive prearranged deal is more likely without the requirement for universal agreement. Congress could remedy one pitfall of a prearranged deal, at little risk to the taxpayer, by providing “debtor-in-possession” financing to carmakers and suppliers in reorganisation. This low-cost funding is senior to all other claims and would leave taxpayers with little risk. Alternatively, an 11th-hour bail-out might still buy time for a negotiated restructuring. But Detroit’s recent hard-headed tactics suggest a bankruptcy judge would get far quicker results.

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