GM, Chrysler Consider Bankruptcy

After months of insisting that bankruptcy was not a viable option, GM and Chrysler are now considering a pre-arranged bankruptcy. Staff members for three unnamed members of Congress have asked restructuring experts if a pre-arranged bankruptcy, negotiated with workers, creditors, and lenders, could successfully reorganize the companies while avoiding liquidation. The two companies are considering bankruptcy as a last-resort option to get the $34 billion in loans and credit lines requested in their restructuring plans released earlier this week.

Though the White House initially distanced itself from the idea of loaning money to the domestic automotive companies-mainly out of reluctance to draw money from the $700 billion allocated to the TARP program conceived for the financial sector-they have not completely dismissed the new request for $34 billion. Several members of Congress have been urging the companies to file for bankruptcy, citing the process as the only way for the Detroit three to return to profitability. Senate Majority leader Harry Reid, House Speaker Nancy Pelosi, and President-elect Barack Obama have consistently asserted that bankruptcy for any of the three automakers would be disastrous.

Obama said yesterday that the automakers’ new restructuring plans were “more serious”. “It appears based on reports that we’ve seen that this time out the executives from these automakers are putting forward a more serious set of plans,” Obama said at a new conference. “I’m glad that they recognize the expectations of Congress, certainly, my expectations that we should maintain a viable auto industry.”

“We should also make sure that any government assistance that’s provided…is 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.

Executives from some Japanese automakers, mainly Suzuki and Honda, have said that a collapse of the domestic auto industry would hurt their own operations. Bankruptcy of the Detroit three would undoubtedly send hundreds of suppliers out of business as well, leaving the multi-tiered network-which Japanese, Korean and German automakers all use to some extent-in shambles.

November sales for the automotive sector are down over 15 percent over the last 11 months compared with last year. In November, Chrysler sales were down almost 50 percent, GM sales were down over 40 percent, and Ford sales were down over 30 percent compared to the same month last year. The carnage has not been contained to the domestic automakers, however: Honda and Toyota sales were each down more than 30 percent compared to November last year.

Sources: Automotive News, Reuters