Below The Beltway

There’s an interesting report out from Bloomberg about what the incoming Obama Administration may have planned for the auto industry:

Nov. 21 (Bloomberg) — President-Elect Barack Obama’s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.

A representative of Obama’s team has already contacted at least one bankruptcy-law firm to say that 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.

U.S. lawmakers yesterday delayed until December a vote on whether to give General Motors Corp., Ford Motor Co. and Chrysler LLC a $25 billion bailout. GM today said it would idle production at four plants an extra week and return some corporate jets to conserve cash. Automakers could use a judge-supervised bankruptcy to reduce debt and reject expensive contracts.

“It creates the environment to deal with GM’s problems but limits government financial commitment,” said bankruptcy lawyer Mark Bane of Ropes & Gray in New York.

Bankruptcy is just one option being examined. Obama told CBS News’s “60 Minutes” on Nov. 16 that government aid to automakers might come in the form of a “bridge loan,” advanced if the industry could draw up plan to make itself “sustainable.” The president-elect earlier urged Congress to approve as much as $50 billion to save automakers, using the model of Chrysler’s bailout in 1979.

Tarullo referred questions on a prepack to the transition team press office. Team spokeswoman Stephanie Cutter said, “We have not put out anything specific for the auto industry except that something needs to be done immediately.”

While the details are vague, it appears that the plan would involve forcing one, if not all, of the Big Three in to Chapter 11 with the Federal Government either providing, or acting as the guarantor of last resort for, the Debtor-in-Possession financing that they would need to operate during the reorganization process.

Additionally, a true “pre-packaged” bankruptcy typically involves working out the basics of a reorganization plan prior to actually filing the action in Court. This would significantly speed-up the Chapter 11 reorganization process, since it typically takes at least 180 days for debtors to come up with what usually ends up being the first version of a Chapter 11 plan. With a prepackaged bankruptcy, that work would be done before hand and the Court would then be able to deal almost immediately with the details of the plan and the objections that might be filed to it by creditors, shareholders, and the unions.

As always, the devil is in the details, but if this really is what Obama has in mind for dealing with the problems with the Big Three, it’s not a bad idea at all and far better than most of what could come from Washington.