Quietly, those in the know are starting to suggest that bankruptcy may be just what the auto industry needs:
At a House Committee hearing Friday about Detroit’s woes, Edward I. Altman, a professor of finance at New York University, recommended that the automakers enter bankruptcy reorganization. Through such a move, he said, the automakers could sharply cut their costs by negotiating deals with their creditors, dealers and labor unions.
Many supporters of a bailout say that filing for bankruptcy reorganization could quickly lead to liquidation because car buyers might lose faith in the companies and worry that their auto warranties would not be honored.
Professor Altman said that large-scale debtor-in-possession lending — either by the federal government or banks that would have priority over other creditors — could help keep the automakers operating (and guaranteeing their warranties) as they reorganize and reduce costs on the way to regaining their competitiveness.
He said a revamping, helped by such financing under the bankruptcy laws, could actually reassure the stock market that “the damage can be minimized with a large debtor-in-possession financing” because “there will be more assurance that G.M. will be around for a long time.”
Spencer Bachus of Alabama, the ranking Republican on the House Committee on Financial Services, which held Friday’s hearing, warned against a wholesale liquidation, saying it would jeopardize three million jobs. Yet he also opposed a federal bailout “because it’s just taking money and putting it into an inefficient operation and that money will be simply washed down the drain.”
Mr. Bachus voiced confidence that bankruptcy filings by one or more auto company would not cause markets to plunge. “I think a restructuring plan done with the protection of certain benefits of bankruptcy might be positively perceived,” he said.
Additionally, there’s substantial evidence that one of the major objections to an automaker bankruptcy — that consumers would turn away from a company that enters Chapter 11 — may not be true after all:
[The] claim that consumers won’t buy from an automaker in bankruptcy is a specious argument. Yes, some won’t, but many consumers also are not going to buy cars from companies peceived to be so weak that they have to beg for a bailout from the government. A company’s clutching to a government lifeline to keep from going bankrupt wouldn’t be that much different for many car buyers than an actual bankruptcy.
This is particularly true if the government forces the companies, as a condition of the bailout, to make “environmentally correct” cars that no one really wants. A company emerging from a Chapter 11 bankruptcy, by contrast, has a chance to win consumers back by making products that they want.
Given the bad financial news that has come out about all three of the “Big Three” over the past month or so, it’s hard to believe that the extra step of a Chapter 11 filing would really harm their reputation any more than it’s already been harmed.
