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Chapter 11 For Detroit: The Unthinkable Becomes Thinkable

by Doug Mataconis @ 10:18 am on December 4, 2008.

Remember those protestations from General Motors and Chrysler as recently as Monday that bankruptcy was an unthinkable option ?

Well, apparently, they’re thinking about it after all:

Dec. 4 (Bloomberg) — 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.

The arguments in favor of bankruptcy are, as I’ve said before, manifest:

The Democrats’ goal of preserving a U.S. 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.”

Bankruptcy would also allow the auto companies to close down brands and terminate unprofitable dealer relationships without having to go through the cumbersome and expensive procedure required under state franchise laws, which vary from state-to-state to begin with.

Bankruptcy would also be cheaper for the American taxpayer:

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.

That’s much better than the open-ended, incomplete plans that the Big Three submitted this week.

H/T: The Truth About Cars