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GM, Chrysler 'considering bankruptcy'

(Agencies)
Updated: 2008-12-05 07:52

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.

Auto executives have warned bankruptcy would lead to liquidation as customers abandoned the companies. 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 industry without liquidation, a person familiar with that matter said.

"It's essential for Congress to do due diligence on bankruptcy as an option so it gets a clear sense from independent people what the risks and possibilities are," said Alan Gover of White & Case, who has been lead lawyer in $60 billion of corporate-debt restructurings.

Many solutions to the automakers' financial problems are on the table in discussions in Washington and around the country among company officials, lenders, union officials and other interested parties, the person briefed on internal talks said.

Negotiations are splintered among small groups, making it unlikely a proposed solution such as bankruptcy would emerge until next week at the earliest, the person said.

Publicly GM Chief Executive Officer Rick Wagoner has said 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. Bankruptcy is "way down the list of options", GM board member George Fisher said. GM spokesman Tony Cervone had no additional comment.

Chrysler spokeswoman Shawn Morgan didn't have an immediate comment.

GM and Chrysler told Congress on Dec 2 that they need $11 billion in government loans just to survive the year as the auto industry slump deepens. To get the money, the companies agreed to slash payrolls, shed brands and shrink dealerships. Bankruptcy was not part of their plans.

GM, Chrysler and Ford Motor Co asked for a $34 billion bailout package, about a third larger than the $25 billion Energy Department loan program the White House has previously supported to finance more fuel-efficient cars. Democrats in Congress, led by House Speaker Nancy Pelosi, pledged to keep carmakers out of bankruptcy.

The Democrats' goal of preserving a US auto industry is not doable without a bankruptcy, said Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles.

"A workout requires everybody's agreement," he said. "If I own bonds, GM can't force me to take less than 100 cents on the dollar outside of bankruptcy court. Bankruptcy is the only thing that can work because GM and the government need the ability to force people to go along with the plan. Paying everyone in full is prohibitively expensive."

About 77 percent of billion-dollar companies survive bankruptcy, according to LoPucki's database, while the others sell their business.

"Million-dollar companies rarely go into bankruptcy and liquidate piecemeal," he said.

The government could guarantee the warranties given to consumers on cars bought from a bankrupt automaker, said Mark Bane, a bankruptcy lawyer with Ropes & Gray in New York. Government money could also "ensure that parts suppliers will be paid", he said.

Less government money would be needed in a prepackaged bankruptcy, which might last only two months, compared with two years or more for a regular bankruptcy, according to Bane. In a prepack restructuring, 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, Bane said.

President-elect Barack Obama said lawmakers were right to demand that US automakers provide a plan to sustain their businesses before getting federal aid and that their latest efforts represent "a more serious set" of proposals than earlier ones.

Any assistance must be "based on realistic assessments of what the auto market is going to be and a realistic plan for how we're going to make these companies viable over the long term", Obama said.

A representative of Obama's team earlier 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, according to this person.